OT: My letter to Senate Banking Committee Subcommittee on Finance and Investment
August 31, 2002
Senator Paul S. Sarbanes
Senator Phil Gramm
Senator Christopher J. Dodd
Senator Michael B. Enzie
Senate Committee on Banking: Subcommittee on Securities & Investment
RE: Remarks on the subject of executive incentive compensation
Dear Senators:
I am a retired private citizen-investor who is, like all of you, very interested in resolving abuses in the financial markets and restoring trust. Of particular interest to me is executive incentive compensation that gives options for large numbers of shares to management, setting them up for windfall profits, whether the firm does well or not.
Also, as you know, many companies with such plans do not account for them except in financial statement footnotes, annually only. Many companies have recently begun to change this, and plan in future statements to expense these options, but still annually only. While this is better than nothing, I believe it’s an attempt to solve the wrong problem.
The problem lies not with how options are revealed or expensed. The real problem is that the interests of shareholders and managers are misaligned because of the options. Greed is inbred in these plans. It cannot be avoided. Common shareholders cannot learn of it until much too late to protect themselves. Trust becomes a further casualty.
Senators, there is a way to fix this. Simply ban option plans for all employees and replace them with outright stock grants. Impose a 2 to 3-year vesting period, defer taxes on the grants until sale occurs. Require quarterly reporting of grant amounts. Require 72-hour advance notice of sale of granted stock (by management, not lower level employees). Stock grants are already expensed immediately, so that whole matter just goes away. With this plan, the interests of shareholders and management are perfectly aligned, as least as far as stock price is concerned. Every share goes up (or down) the same amount based on how the company does. Not true if I have shares and management has options. They can gain while I lose. If we both have shares, we gain or lose together.
Thank you for reading this. I hope you’ll find merit in these ideas. I am also sending them to the House Banking Committee, and to the SEC.
Charles E. Durham, |
