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Finance a la shmoop What is stock based compensation While

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investors want management with skin in the game when your

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ceo has ninety eight percent of her net worth tied

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up in the stock of the company that she's running

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well presumably she runs it better or at least in

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theory anyway So over time management has been paid in

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equity ownership grants as well as in cash that is

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company management gets paid in stock options and in stock

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or rather shares of the company simply granted to them

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in lieu of cash Why do companies not just pay

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cash while they want management toe Have that whole ownership

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thing going for them to act like owners You know

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not just like union employees They want management with direct

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stakes in how well or pa poorly the business per

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forms in the long run and think about the dynamics

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of a ceo getting paid even a relatively huge million

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dollars a year in salary and nothing else that's it

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well that ceo takes a company from four hundred million

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dollars in sales and thirty million in profits to five

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years later two billion dollars in sales and for three

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Hundred million in profits that is the ceo made the

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company at least ten times more valuable certainly ten times

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more profitable and in five years that's really good But

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that ceo just got their single million dollars a year

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each year along the way Well that ceo would not

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have financially participated personally in making shareholders so much wealthier

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and that's not fair right If management of the company

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makes huge returns for investors doesn't it seem right that

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management should have huge returns for themselves and not just

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a basic salary and male Maybe a little bit of

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a bonus there too well some companies loan money at

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low interest rates to ceos and other top execs so

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that their ableto buy shares in the company leveraged well

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Other companies just grant shares to management and still others

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just grant stock options is kind of a spiff above

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their cash compensation So yeah it's all about having skin

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in the game which if you play football without sufficient 00:02:11.45 --> [endTime] padding is a definite possibility

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