<An option is a tool with asymmetrical risk - it can't go below zero.>
Well said Robert. But hey let's all stop pussy footing around. While any competent lawyer will tell you there will never be a successful fraud case against Intel as option packages are described in filings, the reality is quite simple. This applies to many public firms, esp. tech, but not just INTC.
Follow me here:
1) Management tells investors they want to 'align' their interests with shareholders via the use of outright stock grants and options (collectively "equity comp"). Also, it is better to use equity than simply trying to increase cash bonuses.
2) Management does indeed have an incentive to increase shareholder value.
3) Management will not 'lose' anything should options become valueless though they have foregone add'l comp.
4) Mgmnt. has a built in incentive to swing for the fences' as home-run projects result in gigantic windfall and only the three strikes out results in no more chances (i.e., BK). All other failures assigned to 'bad market timing' and (where have we heard this before) 'paying too much in hindsight, but that's hindsight.' Mgmnt. not that worried about being fired as their base salary makes them rich on its own and they are usually in another job pretty fast unless it was criminal. So the objection that being fired is a disincentive for risk taking is weak as it is an extreme act and even then not all that fraught with peril.
5) Shareholders as a group, even now, are always the weakest most scattered voice. Most don't understand the complexity of options or dilutive effects or the fact that dollars spent to buy back shares in open market came out of cash. Consequently it is easy to steamroll them. Advocacy groups are finally getting louder way too little too late.
6) There is a huge incentive to use equity comp, as many common shareholders have no clue what is being offered at the time or how to properly value it, only later on news releases does it hit them (carl here admits this has come as a surprise in INTC's case). GAAP rules made it (and make it) far easier to keep under rock where Mgmnt likes it.
7) The larger the company the easier to 'hide' the true value being distributed. With 100s of billions in market cap, say, and billions in earning per qtr. would anyone really stir to the latest exercised options (in this hypothetical company)? Why would the industry as a whole (pronounced: run by the execs profiting most) want to blow the collective whistle on this sweetheart deal?
8) it isn’t like Mgmnt doesn't get a monster salary to boot!
There's more but this makes the initial point.
Summary: some proper level of equity kickers are appropriate and incentivize fairly well. The numbers though have gotten far out of control. Reality is no doubt many of these execs would have stuck around for far less, but hey who’s going to bark down the gravy train. Hellova thing.
Qualifier: these are all IMO and *general* observations and not meant as a specific comment on any particular company etc. etc.
RO
P.s. Funny part is some shareholders may *want* a company to swing for fences hoping for a 10 bagger, willing to lose it all in that hope, so equity comp might help their cause. Problem one is other shareholders had no idea what these incentives would result in and 2) shareholders win on home run, but lose all on ejection from the game for wild behavior...whilst the coach gets giant bonus for home run and winning series, but if bust keeps monster salary and goes on to coach another team next year: same strategy applied. Now who wants to own a pro rata piece of the Reds, they look like a lock for the Pennant with all these new, high priced players ;-) |
