“…we misunderstand corporate managers’ incentive structure. Contrary to public perception, corporate managers are not entrepreneurs. They are not what one could call agents of capitalism. Since 2000, in the United States, the stock market has lost – depending on how one measures it – up to $2 trillion for investors.
So, one would be inclined to think that since managers’ pay is based on performance incentives, they would be incurring losses. Not at all: there is an asymmetry. Money-losing managers do not have negative compensation. There is a built-in optionality in the compensation of corporate managers that can be removed only by forcing them to eat some of the losses. Because of the embedded option, while shareholders have lost, managers have earned more than a half-trillion dollars for themselves.”