Will the traditional MBA continue to have market value in a world that is constantly moving toward more specialization? How do you see business school programs changing over the next ten years? (Cathy Dowdell, SC Johnson, Racine, WI, USA)

I think the MBA will likely become more and more valuable as the economy continues to globalize. The returns to technical specialization have increased over time and, by all accounts, are likely to increase even further in the future. But, by the same token, as individuals specialize more and more, the gains from trade will increase. So managers that can figure out how to combine the skills of specialists and how to allocate assets efficiently to those specialists will become more valuable. As long as business schools are successful at teaching these managerial skills (which include managing people, but also understanding the financial tools to make decisions), MBAs will continue to be highly valued in the labor market.

While general management skills will continue to be valuable, not everyone learns those skills in exactly the same way and people’s pre-MBA backgrounds differ. So specialization of the way the MBA curriculum is delivered has the potential to make MBAs even more valuable. Schools have recognized this in recent years and are trying to make adjustments to deliver programs that are more tailored to individuals’ needs. We have been working very hard on this issue at Stanford and will be introducing major changes to our curriculum soon.

If stock options are such a good reward policy, why are they used so little below the top-management level?

Stock options are not a good reward policy below the top-management level, but they may be a good pay policy. The reason I say they are not good for rewards is that, except at very small companies, rank-and-file workers simply cannot own a significant enough portion of the firm for stock options to have meaningful incentive effects. At a typical medium-to-large firm that has a broad-based stock option program, a middle manager owns 0.01% of the firm. So suppose you have a great engineer who does a bang up job and creates $1million of market value for the company. She gets $100 from her stock options (at the most). While that engineer would prefer $100 to nothing, she is unlikely to work late and come in weekends for that. A good subjective bonus plan that gave her a few thousand dollars if she did a very good job (and at much lower risk than stock options) will have a better incentive effect than stock options.

However, stock options can be thought of as a pay instrument rather than an incentive device. Different pay instruments are attractive to different people. The people who are attracted to stock options include those who are relatively willing to take risk (at least with money) and those who are optimistic about a company’s prospects. A firm that wants to attract these types of workers may find stock options to be a good pay instrument. Options can also be useful for retention purposes because their value tends to fluctuate in a manner that is correlated (at least somewhat) with employees’ outside options. A firm that finds its employees getting outside offers when things are going well, and that wants to save on compensation when things are not going well, may want to use stock options as a pay instrument.

Stock options are not the right pay instrument for all firms. But they can be good for firms that want to attract and retain certain types of workers.

Consider a person with a ten-year work experience who just reached the level of Director: how much would it help to get an MBA at this stage? (Maria Portillo, Barcelona, Spain)

All else equal, the value of an MBA will decrease with the amount of experience a person has already had because the person will have fewer years to exploit MBA skills. Also, if you’ve already made it to the level of Director, it’s unlikely that your firm has an explicit or implicit policy that top managers need an MBA. So an MBA is only likely to be worthwhile if you want to gain new skills in order to make some sort of radical career change (or if you would really enjoy spending two years as a full-time student). However, there are ways to get MBA skills without paying all the costs of getting an MBA, including executive education and other programs.

Assess hiring an MBA graduate for a career in Finance or Management with no previous experience in either area vs. an individual who has no MBA who has 5 plus years of experience in the field? (Brian Jacobs, Chicago, IL, USA)

I think it is very hard to make a blanket recommendation here - you really have to do it on a case-by-case basis. But I think it is safe to say that, if you are looking for someone with broader skills who you can give flexible assignments and let the person grow in the firm, the MBA may be the way to go. If you are sure you only need someone to work in a specialized field, a proven track record in that field may make sense. Of course, you don’t always have to choose between these two types. In many situations, you may want someone with certain skills and the ability to grow into a broader manager. Then why not hire a new MBA with a pre-MBA background in the specialty you need?

Will the recent SEC proposal on new compensation disclosure rules affect the way executive pay is structured? (Bob Garrelli, New York, NY, USA)

I hope so. When more has to be disclosed, I hope firms will make pay plans simpler rather than adding complexities that can keep some pay hidden. In general, more disclosure is good as it allows markets to discipline firms and boards that do not act in the shareholders’ best interests. I do not think, however, that the disclosure regulation alone will lead to a radical change in the form or level of executive compensation. Most pay is already disclosed and easily available to investors or researchers.

Small, dynamic startups use stock options to motivate their employees, while large companies provide non-monetary benefits such as kindergarten, health plans, etc. What is the best option from the employee’s point of view?

The thing to keep in mind here is that employees are different. So there is no best option from “the” employee’s point of view - there is a best option for “each” employee’s point of view. Large companies do tend to offer more lifestyle benefits than small firms. This is because they have a comparative advantage in providing these benefits (due to economies of scale) and because these benefits can increase job tenures (which are more valuable at large firms because people can be moved around as their careers develop.) Small firms have a comparative advantage in offering incentives because their stock is not as diluted. So firms offer things that they can offer cost effectively and that fit with their strategy. Workers that want stable jobs with certain benefits will sort to large firms while those who are more willing to take risk will sort to small firms. The key is that firms offer what they can offer most efficiently and employees pick the firm that best fits their tastes.

The economy is finally thriving: how will companies’ incentive schemes evolve? (Las Vegas, NV, USA)

For the most part, the state of the economy should not really affect the ways firms provide incentives. The key economic idea here is that incentives are an attempt to affect the marginal actions of individuals while a thriving economy affects employees’ alternatives and, therefore, the level of pay. Though there are some exceptions to this, for the most part the incentives that drive the right actions for employees during good economic times are the same ones that drive them during down periods. It’s just that the firm will have to make sure the total compensation is higher when times are good. This may be done through profit sharing, stock options, or some other pay mechanism that looks like incentive pay, but is really just a way to index employees’ compensation to their alternatives.

I run a venture-backed biotech company and I’ve recently been sued by another startup firm. As a result I’m losing some of my key employees, who fear the effects of litigation. Is there anything I could do to reassure them and avoid their departure?

Great managers turn a crisis such as this to their advantage. Reputations are very important in the business world and it is difficult for small organizations to establish their reputations with current and potential employees. This lawsuit gives you an opportunity to establish yours. I don’t know the specifics of this case, of course, but honesty is generally the best policy. Share as much detail as you possibly can with your employees about the facts of the case, its likely effects, and the opinions of your venture capital investors. This will hopefully have two effects. Those who believe in the company will stick it out while those who are not as committed may leave. Also, when your firm next faces a challenge, people will remember your honesty and respond again. That may sound naïve and idealistic, but it will help you build the kind of organization you probably want to have.

Would a corporate world without expensive, inequitable and volatile stock options be a better one? (Yuichi Tanaka, Osaka, Japan)

I don’t think so. Stock options give corporations another choice for paying their employees. For most firms, they are not that useful. This is because, as your question suggests, they can be quite volatile. Given that most workers exhibit substantial risk aversion, firms have to compensate workers for the risk they impose on them when they pay with stock options. However, in some cases, they can be very useful (as I discussed above.) So, as long as boards of directors and managers use common sense and don’t abuse stock options, firms that can benefit from issuing them should do so. Others should not. Overall, choice is good and sometimes stock options are the right choice.