Why stock price matters for company executives?


Companies make money by selling products and services. If they sell well, they get profit. Bang, end of story, right? Where does stock price come in and why does it matter?

I do understand that during IPO the company basically sells stock, instead of product and services, and gets profit from that. But later on, when stock is just traded between people outside of company, why does its price matter **to the company?**

In: 37

A big portion of most C-level employees’ salary is actually held in stocks and stock options. If they have low stock value, they’ve lost their own money.

At many companies, a significant portion of the executive’s pay comes in the form of options that increase in value as the stock price rises. The company might give the CEO the right to buy 100,000 shares at the current price at any point in time in the next 3 years. So, each dollar the price rises, means the CEO can exercise to gain another $100,000.

Some companies make option grants a form of pay for all employees, but it’s getting rare to see a company that doesn’t pay executives in this way. Because paying with options aligns executive interests with shareholder interests.

The stock price can make it more expensive for the company to borrow money if it is too low, it also matters for executives since part of their bonus may be in discounted company shares.

The company is owned by the shareholders, and the shareholders want to see their earnings per share go up every period. That is why they decided to buy shares, after all – to make money.

“Stock price” is just what the investment community feels the company is worth, and what a company is “worth” is really just the present value of all future earnings. So, if EPS goes up, dividends and/or share price goes up too.

The CEO is selected by the Board of Directors, who is in turn selected by the shareholders. So if the shareholders want earnings to go up, the CEO is going to make earnings go up else they be replaced by another CEO.

The owners are entitled to the earnings of the company. Everything the executives do is supposed to increase the value of the company