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Study links CEO pay and unsafe products

The effects of the latest automotive product scandal are only just beginning to unfold. How things will eventually play out in connection with the revelation that Volkswagen software engineers pulled off a hack of sorts is still unclear, but as we recently posted, the fallout is going to be felt quite broadly here in Texas and around the world and affected consumers have a right to seek justice for losses they suffer.

A number of reasons are being floated by analysts as to why VW engineers installed code that would detect emissions tests and make diesel-fueled vehicles run clean and let them run dirty the rest of the time. The one that seems to make the most sense is that emission-controlled engines lose a touch of performance and fuel economy.

The suggestion then is that the engineers, unable to meet the demands from higher up to deliver clean diesel performance, opted for another route. But that begs the question, what generated those demands from those higher up the ladder? A recent study by business researchers at the University of Notre Dame seems to suggest that executive compensation may have an influence. Specifically, the study looked at the role stock options in pay arrangements.

Stock options grant executives the right to buy company shares at a set price during a specific period of time. This allows such buyers to benefit when stock prices are up and minimize risk if they fall. But the researchers say there are also indications that stock options may also encourage reckless business decision making.

That was the conclusion they came to after reviewing data from 286 companies regulated by the Food and Drug Administration. They compared the scale of stock options offered to executives with the rate of product recalls and found that the higher the options, the greater the instances of recalls later.

The authors acknowledge there are holes in the research, but they surmise that the stock option model may encourage decisions that drive up stocks at the expense of product due diligence. That's a recipe that could have dire consumer consequences.

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