Tenchusatsu, RE: GV, would the public been any less outraged had the Enron execs received cash compensation in lieu of stock options?
Argue what you want regarding the expensing of stock options. Like campaign finance reform, it will do little to remove the corruption.
That misses the point.
When management has a large option based incentive, that gives them a large potential reward for getting the stock price high. Yes, the options are not part of the fraud, but they are the motive. If corporations were to have to expense options, then we might see a comeback of of plain vanilla stock incentives. Awarding management stock, instead of options, is different in two ways: first, stock does not leverage returns like options. Second, stock must be expensed by corporations on their books, while options are not expensed. Back before a lot of companies figured out that second loophole, stock grants were common everywhere, Silicon Valley included. Once people realized that if they granted options instead of stock, they could report higher profits, options became the preferred vehicle of motivation compensation.
By leveraging management's compensation via options, this gives management an incentive to take riskier returns. (If they were compensated by straight stock rather than options, management would lose money by the stock price declining. With options, management doesn't lose with a declining stock, they only win with a rising stock) With the greater emphasis on options, this gives management incentive to take on extra risky projects. If the project works out management gets their home run and shareholders are happy. If the projects fails, shareholders lose but management loses nothing. That is the main problem with incenting management with options vs granting them stock. |
