Equity-based compensation, and particularly stock options, helped to fuel the stock market bubble of the 1990s. Corporate executives were motivated to focus on stock market prices rather than long-term profitability. Corporate employees were motivated to spend their unrealized capital gains.
The use of stock options as corporate compensation was generally encouraged. Institutional investors adopted the view that equity-based compensation for managers and directors aligned the interests of these fiduciaries with the interests of shareholders. Employee stock options were touted by companies as necessary to recruit top entrepreneurial talent. The Securities and Exchange Commission (SEC) repealed a rule that previously required, as a practical matter, that shareholders vote on corporate stock option plans. Congress prevented the Financial Accounting Standards Board (FASB) from requiring that stock options be treated as an expense.
