In 2021, Bank of America earned record income. In the same year, CEO Brian Moynihan received a base salary of $1.5 million and $30.5 million in stock options. Other Bank of America employees also received stock options.—Marketwatch.com
What is a stock option?
A stock option is the right to buy a company’s stock at a specified price. For example, if Brian Moynihan has a stock option to buy 1 million Bank of America shares at $30.50 a share and he exercises that option when the shares are trading at $50, he earns a profit of ($50 – $30.50) × 1 million, which equals $19.5 million.
Who are the principals and who are the agents in this news clip?
Bank of America stockholders are principals, and Brian Moynihan is their agent. But as CEO, Moynihan is a principal, and the Bank of America executives are his agents.
How is Bank of America coping with the principal–agent problem?
Bank of America has a compensation system that incentivizes agents to work in the interests of the principals.
Employees who hold an option to buy Bank of America stock at a specified price benefit when the bank is profitable, and its stock market value rises.
Compensation with stock options, the value of which depends on future performance, incentivizes agents to act in ways that maximize profit.
Is Bank of America successfully dealing with the principal–agent problem?
Figure 1 shows Bank of America’s net profit, which increased 79 percent in 2021. One reason for this outcome is that the compensation system induces the employees to work in the best interests of their principals.
Work these questions to check your understanding and get instant feedback.