Stock incentives

06 May, 2026

I would like to start this essay with a story. Let's imagine the idealized situation of a private company owner who built their company from the ground up. Starting from a modest enterprise and few customers, they managed to upset the odds through hard work and perseverance. Now in command of a large company with comfortable financial resources, they are faced with a choice. They can take a few short-term decisions to get an immediate payoff, at the expense of a negative impact on the business in the long run. Examples here would include delaying necessary maintenance or cutting off research and development.

We all have our own expectations as to what that person is likely to do in this situation. But rather than simply asking "what would they do?", I want to ask whether our expectations would change with a different ownership model. In particular, let's consider the same scenario where the company is no longer privately owned, but rather publicly traded, i.e. owned through shares exchanged on the stock market. The question now becomes: comparing these two scenarios, which one do we believe is most likely to end with the short term decision being taken?

I believe that most of us would expect the shareholders to have a higher likelihood to take the short term oriented decisions. Why is that? As this is a totally hypothetical situation, our decision process is guided by common representations and stereotypes. In the media, shareholders are usually represented as greedy beings with no regards to human life. We can safely say that they have very bad press these days. On the other hand, the story of the self-made entrepreneur building their own company and succeeding despite the odds is typically viewed very positively. It is a pillar of the American dream ideal and is often used to explain why market economy is a good thing.

This purely abstract story only serves to show that our assumptions about the way privately owned businesses and publicly traded ones take decisions is based on representation and stereotypes. In this writeup, I would like to go further and argue that this is not just representation. That shareholders inherently have more reasons to take the short term route. That the incentives are such that this is strictly the best strategy for them. And that these effects solely derive from the mode of company ownership.

Affect

I would argue that this difference in decision making is based on two effects that relate to how strongly the owners are bound to the company. The first such effect is affect.

Private owners that build their own company form a strong emotional bond with it.¹ Building a successful business from the ground up takes years if not decades of dedicated hard work. It requires going through tough times, working countless hours and developing an incredibly varied skillset. Private business owners realize how much work go into building a successful brand.

Building a company is also about tying the owner's personal name to the success of the company.² It's about building a brand that partly relies on the reputation of its owner. And the opposite is also true, as the quality of the company will reflect directly on its owner. This triggers a strong sense of pride, but also responsibility for the business owner.

This emotional and personal bond means that private company owners are interested in the success of their company beyond simply its financial results. They want to see the company produce high quality products with a sustained positive public opinion, as that will reflect back on themselves directly. In most cases, they also want to pass on that successful business to their children. Consequently, it does not appear in their interest to take a decision that's profitable in the short term but detrimental to the business in the long term. Even without this effect of inheritance, business owners feel for the company they built and the countless hours they invested in it, and typically don't want those years of hard work to go to waste.

On the other hand, the shareholders are playing the economic game exactly as we're told it is played. That is, they consider only their own selfish interest, which in that case is their return on investment, and optimize for that and that only. By combining these self-interested actions for all the economic actors involved, we should get to the economy's full potential. If that means taking difficult decisions that increase profits now at the expense of the future, and this personally benefits the shareholders, then it is in their best interest to do so.

Ownership ties

The non-emotional part of the ownership bond is based on how strongly the owner is tied to the company upon exit. That is, how easy it is to give up one's ownership of the company without a significant financial loss.

In the case of stocks, this is very easy. Stocks can be sold any day the stock market is open for the market price on that day. ³ On average, this represents 251 opportunities a year. Stocks are bought and sold continuously, making the process streamlined and extremely efficient. Barring exceptional cases, sale offers at the market price will always find an immediate buyer. Any number of one's owned shares can be sold at any of these opportunities, making partial disinvestment in a particular company a concrete option.

In the case of private ownership, a proper sale agreement needs to be reached. Assuming one or more buyers are found that have the ability to move the massive one-time capital required to buy a company, the process still takes months, sometimes years. If the owner instead wants to sell by introducing the company on the stock market, an initial public offering (IPO⁴) has to be made. The necessary formalities here can easily take a year. While an IPO leaves room for the previous owner to keep partial ownership of the company, private company sale rarely does. So unless the company goes public, the owner is usually selling the whole company at once.

The strength of the ties between the company and its owners inform the kind of decisions that they take. If I know that I can't sell my company in less than a year, I better make sure that the situation of the company in a year remains somewhat similar to what it is today. Even more so when I must commit to sell the entire company at once. While this is true when I want to sell, it's also a factor when I don't want to. As the company owner I obviously want the state of the company to improve over time, which makes selling the business when I want to (or when I need to) that much easier and that much more profitable. This configuration has a tendency to favor medium to long term decisions over short term decisions.

Short-termism

Conversely, the ease with which shareholders can reduce their investment and risk in a company tends to reduce the impact of the long term trajectory. With an easy way out of the company, maximizing for guaranteed profits is a very reasonable strategy. And these guaranteed profits are the short-term ones, as the future cannot be known for certain. No one can tell exactly what will happen in the future. But as an investor, I do know that money that lands into my pocket today cannot be taken back from me. Once that guaranteed profit has been realized, I need to monitor the trajectory of the business, which will be impacted by these short-term decisions. The saving grace is that I always have the opportunity to sell if I believe another company has more potential.

This sounds like any "shareholders are evil" moral you've seen a million times in kid movies. So let's be more practical and take an example: reductions in force (RIF). Reductions in force are events where a company lays off a large portion of their workforce. Market-wise, this should be a negative sign: it either signals a historically bad management that consistently hired way more than needed, or a reduction in sales and thus lower expected earnings in the future. We would therefore logically expect a decrease in the stock price for that particular company. However, we regularly see the opposite happen: the annoucement and execution of RIFs in large companies can be accompanied by an increase in the stock price.⁵ This is very counter-intuitive, but can be understood through a short-term lens. Any contract the company currently has open with its customers will continue to provide revenue, as these are usually signed for long periods of times. On the other hand, production costs have just decreased by reducing personnel. This means that for the coming months, profits are expected to go up. This is despite the fact that, inevitably, the reduced production and lower quality of service will catch up to the company in the mid-term and lose some of said contracts.

Another example of this effect can be seen with buybacks. Buybacks occur when a company buys back its own stock.⁶ This basically has the effect of reducing the total amount of shares available on the market, and thus increasing the price of the stock. The company thus uses its proper funds, which it gathered through continued profits, to retribute at great expense the shareholders, rather than investing this money for the future of the company. And this is popular: for the S&P500 only, 2025 is expected to reach a total buyback announcement of 1.1 trillion dollars⁷ (aka a thousand billion, aka 10¹²), up 17% from 2024.

Owernship as an investment

So shareholders tend to over-prioritize short-term decisions because of looser ties with the company they own. But it runs much deeper than that. Company ownership as a tradeable investment induces many more consequences on decision making.

Treating company ownership as an investment also leads to the expectations that comes with it. And investors have very high expectations for their investments. These must provide the highest return on investment possible, with lowest risk and highest predictability. As these are conflicting goals, higher risk is only offset by a higher ceiling for profit.

In a publicly traded company, these criteria apply to the company's valuation. Investors will do all they can to herd the value of the stock to the highest value possible, the most steadily and with the least amount of risk involved. This translates into a focus on growth, a very strong aversion to risk, and a hyperfocus on the stock valuation.

Predictability is hard

The predictability aspect seems to be most difficult to achieve. Why?
Because of how stocks are valued.

We have to remember in this whole conversation that we are talking about the valuation of fractional ownership shares of potentially large companies. They are valued by buyers and sellers agreeing on what they each think it is worth. The buyer and the seller each has their own perception of what this fraction of this particular company's owernship is worth, and they trade accordingly. Which means that the stock price is based solely on perception. In the end, the stock price is nothing more than the aggregation of what people think it is worth.

And predicting what people think is extremely difficult. While many objective metrics are used to help value these investments, there remains a part of humanity in these valuations. These humans fear, behave irrationally, follow crowds, and generally speaking fall victim to well-known biases. Every case of a stock market bubble is an example of such irrational behavior. Bubbles happen when the very human investors over-value something. It is usually driven by unreasonably high hopes and a fear of missing out. In a perfectly rational and logical market, these bubbles could not exist. They are fueled by the humanity in the market, or whatever remains of it.

This perception based valuation means that stock prices are highly volatile and extremely hard to predict. Case in point, the countless attempts to automate the prediction of stock prices, despite being very well-funded, all failed.⁸

This also means that stock prices are extremely hard to control. While the various metrics typically used to value stocks are well understood and easier to forecast, that's not the only thing that impacts valuation. External events and various announcements can influence these valuations massively. And company leaders do not always have control over those. At the end of the day, what matters to investors is the variation of share prices. They will therefore push for decisions that they believe will impact the stock price favorably, even though the actual price is in the end out of their control.

Risk reduction

To reduce this uncertainty, focusing on the risk reduction seems to be a safer bet. Focusing on the short term is only one possible strategy to reduce risk, by getting something certain now. Another such strategy is to stick to tried and true recipes that have historically worked. The latter seems to hit the art sector particularly hard, as successful creations are copied and redone ad nauseam in an attempt to recapture the magic of a one-hit wonder.

Risk reduction also leads to a drastic reduction in research and innovation. Why take the risk to funnel money for years into internal projects that may only bring back revenue in a decade or so, if they ever do, when startups are willing to do so on their own? It is much safer to watch from a distance as these smaller companies undergo all the risk of innovation, witness most of them inevitably fail, and only buy the few that managed to actually create a viable technology. In the technology sector, we can think here about WhatsApp releasing their now successful app in 2009, growing their userbase to hundreds of millions of users in 2013, before being bought by Meta (then Facebook) in 2014 for a staggering $19 billion. This is by no means a small price. But on that day, Facebook didn't gamble on yet another uncertain startup. They bought a full-fledged product with a strong user base ready to be turned into a profitable business. And this is not an isolated case: the total spending for mergers and acquisitions in 2025 is estimated at $4.8 trillion. It's also gaining in popularity, as this value is up 36% compared to 2024.⁹

Shifting goals

Notice that in this entire discussion about taking decisions in a business, we never really talked about the business. This is yet another consequence of stock-based company ownership: the business side of things tends to get overshadowed by the value of the stock. Investors are only interested in the health of the business insofar as it impacts the stock price. And ownership gives them the necessary leverage to take decisions in that direction. The goal of a publicly traded company is to reach the highest stock price possible, not necessarily to generate the most profits. While these targets are typically correlated, they aren't always. A decision that is good for one is not automatically good for the other. Interestingly, this swaps around the by-product and the primary goal: the stock price was intended to be a side effect of the company's primary goal, i.e. profits, but we instead see the stock price becoming the primary goal and the company's results a common by-product of this search for the highest valuation.

Together with the way stocks are valued, this means that the goal of the company is to provide a positive image to other investors, as that is what they base their valuation on. This image is eventually what decides whether the price of the stock goes up or down. This effect is at the root of the overfocus on image and perception we have seen from the largest companies in the last decades. While public relations (PR) has always been a tool at the disposal of companies to grow their customer base and keep their current customers' support, we have seen an impressive rise in these efforts in the last 20 years. This is backed by a steady annual growth in total PR spendings of 5% throughout the 2010s in the USA, as well as an estimated 7% annual growth of the global market until 2030.¹⁰

Who pays the cost?

One question that hasn't been addressed yet is: why care about any of this? Why do we care about the kind of decisions that companies take? Through consumer choices, the market will dictate which of these decisions are actually good, and companies that consistently take bad decisions are eventually expected to fail.

Well, in a business landscape that tends to be more and more consolidated, consumers end up with much less choice than would be necessary for these market effects to have a decisive impact. The few companies that form the oligopolies for many goods and services face insufficient competition, and become unavoidable actors regardless of their decisions. For example, if you like to watch movies, odds are they were produced by one of 5 companies, which together controlled 82.5% of the market share in the United States in 2024.¹¹ And if you don't like the movies produced by any of these companies, it may be extremely difficult to find alternatives, as the productions of the smaller studios aren't as widely available. This is why the decisions taken by the largest players in these markets matter so much, because there isn't much recourse for consumers.

Short-term decisions also have the power to affect the daily lives of thousands of employees worldwide. Employees are very much tied to the company, as it provides them with their livelihood. They don't have the opportunity to diversify their activity like investors can with their portfolios, and are thus forced to place all of their eggs in one basket. As such, they inevitably face the entirety of the consequences of short term decisions, as well as their long-term negative effects. These may materialize as job loss, unrealistic productivity demands or decrease in standard of living (e.g. with a lack of raises in the face of inflation). Here too, the people who undergo these adverse effects are not provided with sufficient choice (in terms of job opportunities) to provide the market feedback that would improve the situation.

Allowing change

Is trading fractional shares of company ownership on the stock market the towering summit of economic progress? We seem collectively convinced that this is the best and only way to deal with large company owernship in the modern times. That this is somehow the inevitable conclusion to a free market economy, and that whoever stands against it is either a childish idealist or a dull regressive opposed to progress and modernity.

Before fully looking at solutions to the problems at hand, I would like to start by challenging the assumption that stocks have to be the way they are and that this is an immutable truth. That their definition somehow comes as a natural consequence of the rules of economics and that there is no other way they could be defined. In particular, the concept of "one share, one vote" seems unquestionable. If not for this rule, why would investors take a large part of investment in a company? Doesn't it seem fair that their level of investment in the business rewards them with proportional decision power?

If we actually look back to when stocks were initially introduced in the 19th century, we'd be very surprised to find that stocks were initially reined in in terms of how much control they could give to a single shareholder.¹² They acknowledged the risk that a single investor could, with sufficient resources, own most of the shares, and thus take all the decisions by themselves. They had already identified that this would defeat the purpose of company shares as a participative decision effort, at the expense of smaller investors. Consequently, most countries across Europe, as well as the United States, imposed limits during the 19th century on the maximum voting power a single shareholder could have in a company.

What I want to bring to attention here is how alien and counter-intuitive this would seem today. "Of course one share gives one vote! That's just how shares work!". And yet, we get to decide what shares are. They are only abstract human concepts after all. They are nothing by themselves. None of it is natural, it's all artificial. So we have every right to make these financial objects the way we see fit.

Unintrusive funding

To recap, what have we seen so far? We saw that stocks change the way companies take decisions, focusing on the value of the stock over all else, and that in the end, it's workers and consumers who bear the consequences of these decisions.

If we see stocks as a way for a company to get funding (either when initially becoming public, or by issuing more stocks whilst already public), then the problem seems to be that stocks, as a funding mechanism, are extremely intrusive. The company gets money, sure, but is also being sold in the process. And there are plenty of non-intrusive financing options out there. What happened to plain old loans and bonds? Aren't they a simple yet effective way for an entity to get money now so they can invest it for the future? If a company is trying to get more funding than its current reserves allow it to spend, it surely is to invest that money in longer-term projects and assets that are expected to yield a valuable return in the future. In which case, getting a loan is perfectly reasonable: the expected return on investment for the company simply needs to outweigh the interest rate offered by the loaner. That's pretty basic economics, and everyone in this trade gets an acceptable deal. And importantly, this process does not require the loaner to become an intrusive actor with decision power in the company.

For the investor, bonds¹³ even have the advantage of being tradeable on the market. This provides the opportunity to turn what would otherwise be a non-liquid¹⁴ non-transferable commitment of funds (in the form of a loan) into a practical asset that can simply be bought and sold at market value.

Non voting stocks

For investors, bonds and loans can feel pretty boring. They are highly predictable, rather safe, and consequently, provide very low return on investment. The appeal of stocks mainly comes from their insanely high potential for returns, whilst being backed by something tangible (a company, in this case). This makes them a safer choice in the extreme than something like cryptocurrencies, but with much higher potential for return on investment (ROI) than loans and bonds. Could we craft financial tools with the high ROI potential of stocks without giving up control of the company?

Well, as it turns out, a model for stocks without decision power already exists, simply called non voting stocks. While this type of stocks is often seen alongside traditional voting stocks, this is not a requirement. Rather than direct ownership of the company, these shares represent an entitlement to parts of the company's profits through dividends. Shareholders are mostly kept out of the business side of the company, as they do not get to take direct part in the company decisions.¹⁵ This represents an opportunity for funding the company that provides a high ceiling for return on investment to investors without direct decision power from the investors into the company.

But without this decision power, do these non voting stocks really represent a valuable asset for investors? Well, in companies that propose both types of stocks, non voting stocks are always valued less than voting ones, but only by a couple of percent.¹⁶ This small difference clearly shows that investors value this access to a company's dividends very much, even without the control over the company that comes with voting stocks. This also confirms non voting stocks to be a valid alternative to the intrusiveness of standard voting stocks, and provides confidence that they would still be highly valued even if they're the only type of stocks offered by a company.

Changing the incentives

My point here is not necessarily that we need to choose one or the other out of these two solutions to make the problem go away, but they can act as a starting point. What we really need to do is to reevaluate the current structure and privileges granted by stocks. They have become extremely powerful in the globalized oligopolies most modern markets have devolved into recently. At minimum, we need to revisit the tight coupling between decision power and company funding, which is currently all bundled up into highly volatile assets. The consequence is that large investors are taking virtually all the decisions in a large part of the consumer markets today, without much care for the business, the product or the services. And we all pay this price in the end, as the workers and consumers of this world. It's high time that we treat ourselves to better products, services and working conditions by changing the business and decision incentives that stocks provide.