Executive stock options are usually presented as motherhood and apple pie baked with the fruit that fell on Newton’s head. Like gravity, it’s the law – essential to the functioning of the business universe as we know it. Up to a point.
Can you believe managers who maintain that somehow they develop state-of-the-art efficiency and productivity when given huge piles of stock options in addition to ample salaries? Does a hefty swag bag of stock suddenly inject a dose of protestant work ethic and a virtual MBA from Wharton into a flaccid, failing executive?
Is moolah the only motivation for maudlin management?
Coincidentally, more and more emphasis is being put on rising share prices as the way of returning shareholder value. Over the last decade a whole industry has grown up around the idea of shareholder value. Used in lots of jargonish contexts, the main connotation implies giving returns to shareholders. Actually paying dividends is considered old-fashioned, a risible gift to the IRS, and if you look at the joke rates of most dividends, you can see why there are only a few of the traditional coupon clippers living it up nowadays. It would pay better to buy CDs and sell them to second-hand shops when you’re done listening. Indeed, with some companies, it would be better to put your money into Florida real estate sold by the Marx Brothers.
Is it just a coincidence that senior executives in US, UK and, increasingly, European companies are taking larger and larger stock options packages? The usual excuse is that by making executives significant stockholders, they will be motivated to deliver the goods for the other shareholders. Perhaps.
How much of an incentive are they? As soon as the market began to tank, executives rushed to reprice their options. The excuse was that the overall market going down was no reflection on their performance. On the other hand, I have yet to hear of an executive who turned down performance-linked options just because he couldn’t honestly claim credit for the markets going up.
The dangers of putting stock options in the hands of those who are in a position to manipulate stock prices should be apparent. For example, one well-known software company developed quite a habit of whispering discreet earnings warnings to analysts – driving down the stock just before their executive stock options were priced.
Others in the heyday of tooth-and-claw capitalism discovered that by announcing payroll slashings, they could get the bloodthirsty Street to applaud the stock prices upwards, regardless of what effect such announcements had on staff morale and efficiency. In other words, they were managing the stock prices, not the company.
In the long run, the stock price would drop to reflect the battered value of the mismanaged enterprise, but by then the perpetrators would have cashed out. Indeed, the bursting of the dot-com bubble strongly suggests that stock options promoting shareholder return were an elaborate Ponzi scheme to transfer wealth from ordinary investors to the officers, directors and their accomplices on the Street.
It may well be that stock options have helped drive the constant juggling with figures to try to rig the quarterly lottery of earnings results. What rational purpose is served by analysts and corporate officers trying to second-guess each other every three months? At best, it puts a premium on short-termism. At worst, it puts a premium on management’s dishonesty, which bathes their results in only the most Panglossian light.
In an age of alleged transparency, the murky side of options should raise a warning flag for investors. If executives depend too much on options, it may well be an indicator that the stock price is pumped up to a level that will deflate rapidly in adversity or under close examination. In short, they provide the conditions for an executive conspiracy to siphon off wealth from outside shareholders and ordinary employees in the company.
Most of Europe and Japan managed quite well without stock options for a long time and even now they are less than common. The Europeans are still not convinced, as the shareholders of ABB demonstrated by asking for the return of $90 mn in emoluments from former CEO Percy Barnevik this year. In the wake of Enron maybe American shareholders will take a similar retributive stand. Since managers see their prosperity tied to stock options – measured by extraordinary short-term performance and quick profits – instead of their prosperity tied to the long-term legacy they leave for their companies, maybe it’s time to start paying the managers a mere salary. In current market conditions, I can’t really see them fulfilling the oft-implied threat and jumping ship for better options packages. And as a shareholder,
I’d rather pay a large salary to someone with loyalty and job satisfaction than pay a ransom for a fickle money-grubber.
