Analyzing Managerial Decisions 1

Running head: ANALYZING MANAGERIAL DECISIONS

Analyzing Managerial Decisions: Granting Stock Options
Rodolfo Handal
MBA 540
June 22, 2014
Dr. Patrick Murphy








Analyzing Managerial Decisions 2

Analyzing Managerial Decisions: Granting Stock Options
One of the greatest challenges that managers from different levels and different industries have is
to be able to motivate people. There are many different techniques and tools that are used by
managers to motivate their employees, but problems arise as not all individuals are motivated by
the same things. In the case of Bobbys Burgers, the restaurant chain was experiencing
incentive problems among its outlet managers (Brickley, Smith & Zimmerman, 2009, p.466). In
order to resolve this issue and motivate unit managers, the CEO proposed granting 500 shares of
stock of the firm to each manager (Brickley, Smith & Zimmerman, 2009).

Brickley, Smith & Zimmerman (2009), note that incentive problems exist within firms because
owners and employees have fundamentally different objectives (p.453). According to Brickley,
Smith & Zimmeran, employers expect employees to work diligently while employees prefer to
take work at a more leisurely pace. In addition they note that the incentive problem is caused by
the fact that most of the costs of exerting effort are borne by employees, while much of the gains
go to the owner (p.456).

In the case of Bobbys Burgers, the firm could use a stock granting program as means of
motivating employees to act in the best interests of the firm. By giving managers ownership of
the firm the incentive problem is solved as employees will feel that they are not exerting efforts
for the owners, but for themselves; therefore, increasing their accountability for their actions.
Granting stock options is a strategic move by the management group in order to get managers to
take decisions and align their actions with those of other employees, as well as the stakeholders
(given that they are both).

Another reason why stock option programs are beneficial in this type of environment is because
it makes employees not only think about the short-term, but also the long-term. Many times,
employees are more focused on the short day-to-day operations and are not worried about how
their actions can affect the firm in the future. Granting stock options can be a way to resolve this
issue as they will feel that degree of accountability.

Firms have many options on how to motivate employees and managers, and certainly Bobbys
Burgers may have other incentive programs that could motivate increased efforts at the units. As
stated previously, not all employees are motivated by the same things, as such, it is important
that the CEO considers the motivators of each of the managers; however, there are general ways
in which other programs could help the firms performance.

One of the ways in which the CEO could motivate managers at local units is by establishing
programs such as bonuses for good performance, prizes for winning contests, salary revisions
based on performance, promotions and titles for good performance, profit sharing plans, among
others (Brickley, Smith & Zimmerman, 2009). Brickley, Smith & Zimmerman (2009), also note
that rewards do not have to be monetary (p.470).

One of the best ways in which the CEO could push managers at local units to exert more efforts
in their units is by introducing variable compensation. For example, 30 per cent of an managers
salary could be tied to variable compensation which would be dependent on the units
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performance. In addition, a 5 per cent could be variable based on the performance of the other
units and the business as a whole. By doing this, employees will exert more effort in order to
meet their utility or bare the cost of losing their bonus if performance is poor.











































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Reference
Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial economics and organizational
architecture (5th ed.). New York: McGraw Hill/Irwin.