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Megan McArdle

Megan McArdle - Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. More

Megan was born and raised on the Upper West Side of Manhattan, and yes, she does enjoy her lattes, as well as the occasional extra-dry skim-milk cappuccino. Her checkered work history includes three start-ups, four years as a technology project manager for a boutique consulting firm, a summer as an associate at an investment bank, and a year spent as sort of an executive copy girl for one of the disaster-recovery firms at Ground Zero … all before the age of 30.

While working at Ground Zero, Megan started Live From the WTC, a blog focused on economics, business, and cooking. She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of the set. From there it was but a few steps down the slippery slope to freelance journalism. She has worked in various capacities for The Economist, where she wrote about economics and oversaw the founding of Free Exchange, the magazine's economics blog. She has also maintained her own blog, Asymmetrical Information, which moved to The Atlantic, along with its owner, in August 2007.

Megan holds a bachelor's degree in English literature from the University of Pennsylvania and an M.B.A. from the University of Chicago. After a lifetime as a New Yorker, she now resides in northwest Washington, D.C., where she is still trying to figure out what one does with an apartment larger than 400 square feet.

Risk and reward

By Megan McArdle
Mar 28 2008, 11:22 AM ET Comment

I'm going to be very interested to read this series by Marc Andreessen, but I rather strenuously disagree with this:

Overt sexism aside, from an incentive standpoint the result of shifting from stock options to restricted stock should be obvious: current employees will be incented to preserve value instead of creating value. And new hires will by definition be people who are conservative and change-averse, as the people who want to swing for the fences and get rewarded for creating something new will go somewhere else, where they will receive stock options -- in typically greater volume than anyone will ever grant restricted stock -- and have greater upside.

And sure enough, in the wake of shifting towards restricted stock and away from stock options, Microsoft's stock has been flat as a pancake. The incentive works.

Now, against that, it is true that stock options, particularly for public companies, have an often-destructive random component: they tend to increase in value in rising stock market environments and decrease in value (potentially to zero) in falling stock market environments, regardless of whether value is being created inside your particular company.

For that reason, in the long run it probably makes sense for some new approach to stock-based compensation to be developed that both preserves the motivation to create as opposed to preserve value, but factors out the environmental swings of rising and falling stock markets. Some form of indexing against market averages would probably do the trick. This has been tried from time to time, and I expect it to be tried more in the future, at least for public companies.


This is not the major problem with stock options. The major problem with stock options is twofold: out of the money options encourage managers to take excess risk, because they get nothing if they preserve value, so even a remote chance of boosting the stock price that carries a hefty risk of failure is a good idea for the managers--but a terrible idea for the shareholders.

The other problem is that they encourage short-term misinformation about a company's prospects in order to boost the price long enough to excercise your options and sell the stock. The time of option excercise is one of the few times when an executive can sell his own company's stock without triggering a market reaction.

You will notice that while Microsoft's stock price may not have done much, it also didn't go the way of Pets.com, or even Sun. No compensation system is perfect, but stock options have big problems.

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