A new study out of the University of Notre Dame’s Business School has linked product recalls to big stock option incentives for CEOs. The link, while not overtly exposed before, comes as no surprise to behavioral scientists who study risk-reward practices. Stock options place a premium on market penetration that drives up stock prices. That kind of market penetration often requires aggressive risk-taking by a company. Speed-to-market for a company’s products takes priority. And speed-to-market frequently means inadequate testing — no surprise there.
One problem with inadequate testing is that it often results in faulty products — and a measure of that (though hardly the only one) is product recalls. Adam Wowak, the study’s lead, reports: “Specifically, we found a positive relationship between the proportion of CEO pay consisting of stock options, measured over a two-year period, and the occurrence of product recalls in the subsequent year.” Merely correlative or causal? So many factors go into decision-making at this level it’s impossible to say. But the data make the link hard to forget.
[Here’s a link to the full study, entitled: Throwing caution to the wind: The effect of CEO stock option pay on the incidence of product safety problems]