Mba540 Case Study: Granting Stock Options

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Bobby’s Burgers is a restaurant chain with nearly 10,000 locations worldwide. The company facing incentive problems among its outlet managers. The managers are not working hard enough and are letting quality decline at their locations. CEO, Bobby Jones, is considering a stock plan where each location manager will be given 500 shares of stock in Bobby’s Burgers. Bobby Jones believes that by making the managers part owners of the company, they will be motivated to provided better service. Incentive problems exist because of conflicts of interest between employers and employees (Brickley, Smith, & Zimmerman, 2009). Incentive problems occur because the costs of exerting effort are borne by employees, whereas the gains go to the employer. To resolve discontent between employees and employers, employers can sell each employee the rights to his or her total output. When employees own their output, both the benefits and costs of exerting effort are internalized by employees and will result in better productive choices by the employees. For decades, American firms have employed a capitalistic organizational strategy—helping their employees to become partial owners in the company’s they work for with the intended outcome of increased productivity. Millions of employees participate in their employers Employee Stock Ownership Plans (ESOPs) (Francis, n.d). The growth of ESOPs in the past few decades is part of the general trend to in compensation agreements that link employee pay to company performance. Some research shows that firms with employee ownership on average match or exceed the performance of competitor firms. Some studies find higher satisfaction, commitment, and motivation among employee-owners. While others find no significant difference between employee-owners and non-owners. For example, employee ownership at United Airlines did not prevent its
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