<<Hmm. First of all, I do not think you are tying up this thread. Although once vibrant and busy it has fallen somewhat in favor of other threads. >>
Ahh, OK. I had searched all the SI options threads by using the "Search This Thread" function at the bottom of the page, but none of them had what I was looking for. Thus, since none of the threads was exactly appropriate, I chose to ask my question here simply because it had the greatest number of posts for an options thread.
I should clarify a few things about the Crystal Report. The author of the service is perhaps the highest profile executive compensation consultant- he's the one the press go to when they need a good quote. Second, the author, I believe, would agree with most of the points you raised. He favors giving options as part of a pay package; in fact this is usually better than, say, giving restricted stock, because if the price falls the options will be worthless (simplifying here), but the restricted shares will still have half their value; there's thus a lot more incentive to keep the price up with options than with restricted stock.
The author's gripes with respect to options primarily have to do with how they are granted. In other words, good options packages are "gutsy", not "wimpy". Gutsy options packages tend to be granted OTM (out-of-the-money), not ATM (at-the-money). Gutsy packages tend to have staggered strikes (say 25% ATM, 25% OTM by 25%, another 25% OTM by 50%, etc). Gutsy packages have shorter life spans than the standard ten years. Gutsy packages don't involve repricings when things go against the company, they aren't swapped for options with with lower strikes.
The author would agree that generous pay packages are OK provided that the company's performance is excellent. But, of the several criteria for deciding what a "bad" pay package is, "over compensation" is one feature, and options packages that are too large are mainly responsible for the problem. What's too large? Well, in deciding this you have to look at several things, primarily (1) the performance of the company (as defined by shareholder return and/or various financial ratios), (2) size of company (defined by market cap, annual revenues, the sum of shareholder equity and debt, whatever), and (3) the industry. In another one of the author's article he breaks out the numbers for how different execs in different industries are compensated- public utilities, not surprisingly, fall in a low tier although this will presumably start to change with deregulation. In fact, the author has yet another study showing that this is precisely what happened with the telephone industry- RBOC CEO's and AT&T started going up, up, up!!!
Unfortunately the author's methodology isn't revealed, presumably because its proprietary, so you're right to be cautious.
Anyway, thanks again for your comments.
Now rest your eyes!
:-)
Anaxagoras |
