Good Morning All!!!!!! Here is something Chuz has touched on before. Sorry if it has been posted before.
Return to Company Headlines
<Picture>Heard On The Street: Stock Options At Firms Irk Some Investors
Dow Jones Online News, Tuesday, January 12, 1999 at 01:21
(Published on Monday, January 11, 1999 at 22:14)
By Joann S. Lublin And Leslie Scism, Staff Reporters of The Wall Street
Journal
Looking at corporate America's evermore-generous stock-option
packages, some institutional investors want to know: When is enough,
enough?
Many of these investors are the same ones who pushed companies to
adopt stockbased compensation programs. They believed the programs would
better align managers' interests with theirs, albeit at a price. The
exercise of stock options at below-market prices generally results in
earnings-per-share dilution, and this dilution can be severe.
But now some institutional shareholders are wondering about the
drawbacks of the system they promoted.
Jack Ciesielski, Baltimore-based publisher of the Analyst's
Accounting Observer newsletter, found that total returns to shareholders
of companies with lush options programs aren't necessarily above
average. Stocks of seven of 10 companies with the greatest percentages
of options outstanding, relative to basic shares outstanding, lagged
behind the Standard & Poor's 500-stock index between the end of 1995 and
the end of 1998.
Of 10 companies with some of the highest levels of unexercised
options relative to basic shares between 1995 and 1997, only Dell
Computer, Microsoft and Merrill Lynch surpassed the S&P 500's total
return of 110.9% in the three years through 1998.
NoAt Dell, where options outstanding ranged from 13% to 17% of basic
shares between 1995 and 1997, shareholders enjoyed a total return of
3,282%. Microsoft, whose options represent nearly 20% of outstanding
shares, delivered 532%, while Merrill Lynch, with options ranging from
17% to 21% of shares outstanding, served up a 173% return.
On the other hand, despite options packages representing 15% to 30%
of shares outstanding, results were less than stellar for Transamerica,
General Mills, Mirage Resorts, Ascend Communications, Autodesk, Cendant,
and Silicon Graphics. At the low end, Silicon Graphics delivered a
negative return of 53%, Cendant minus 15% and Mirage Resorts negative
13%.
To be sure, Dell by itself would have enabled an investor who owned
all 10 of those stocks to top the S&P 500. Still, Mr. Ciesielski asks,
if management believes that aligning its interests with shareholders is
so important, "why don't more of them do better than the market?"
Good question, says Christopher Davis, portfolio manager with Shelby
Cullom Davis & Co., who has concluded that alignment is "an absurd
myth." In reality, he says, options-laden managements "cannot lose
money, they can only make money" - even if their stock underperforms the
market or competitors' shares.
In the face of criticism, companies insist there are legitimate
reasons for issuing so many options. For high-tech companies, a popular
refrain -- and one investors agree has some merit -- is that talented
employees have come to expect such options as part of their pay
packages, and they'll work only for those companies with generous payoff
possibilities.
"We use stock options as an employee-compensation vehicle to attract
and retain quality talent," says Eric Warren, a spokesman for
computer-network company Ascend Communications. Adds a spokesman for
top-performer Dell: "These programs are necessary in a pretty
competitive hiring environment."
Of those trailing behind the S&P 500 index, Bill Kelly, a senior vice
president with computer maker Silicon Graphics, acknowledges that
criticism of the company's stock-options program in light of its subpar
returns is "not the most unfair shot that's been taken at us over the
last couple of years."
He blames "difficult, shrinking markets" for part of Silicon
Graphics' three-year stock showing, and notes the company hired a new
chief executive last January. Other companies on the list also cited
industry-specific issues that hurt performance.
Investors' stirrings against stock options have a lot to do with
their proliferation. They now represent more than 13% of shares
outstanding for large U.S. companies, up from 5% in 1990, experts say.
One measure of investors' growing misgivings: They defeated 15 of
more than 2,000 option programs put up for votes between July 1997 and
June 1998, while only six plans failed the year before, according to New
York consultants Strategic Compensation Research Associates. Even when
plans are approved, high votes against them are "increasing at a
dramatic proportion," says Richard Wagner, the firm's president.
Where do investors draw the line? The defeated plans would have
raised potential dilution to between 8% and nearly 33%, according to a
separate analysis by Strategic Compensation Research Associates. At
Phycor Inc., a Nashville, Tenn., physician practice-management company,
shareholders rejected a plan that would have increased potential
dilution to 26.1% of shares outstanding.
Jim Reda, a compensation expert with Hewitt Associates, expects
opposition to grow, especially if the S&P 500's torrid stock-market
performance cools. Says William Patterson, director of the AFL-CIO's
office of investments: "You get as much performance oomph out of a
medium-sized option grant as a heavy one."
Good luck!!
D.
|
