Hi GV, RE: "When management has a large option based incentive, that gives them a large potential reward for getting the stock price high."
This is called motivation. Motivation is a good thing.
Don't kill an execs or employee's motivation - that would be a bad thing. Motivation is a key ingredient to the GDP.
RE: "stock (shares) does not leverage returns like options."
There's a difference between shares and options. When determining the kind to give, one asks the goal:
- create motivation?
- short-term or long-term commitment?
- deliver X vs. deliver value?
A consultant delivers X for you today, then leaves. They're more appropriate for shares. Granting shares is used for the pay-as-you-go model, say for a consultant or an advisor. A one-time situation. Not exactly a strong need to create an incentive of long-term motivation.
Meanwhile, an employee delivers repeatedly for you today and tomorrow, builds value for you over time. You give them options, because they earn the value over time. Options match the philosophy of building value over time. If they build value over time, they win and so do investors.
RE: "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"
In your scenario, not common to the rank-and-file, which just to remind you plays a huge role in the more empowered industry of high-tech. If the law changes to expensing & taxing, then one of two things happen to keep expenses fixed: a) lay offs for employees or b) all employees get less options. Neither of these two things will help investors or the GDP grow.
RE: "options became the preferred vehicle of motivation compensation"
Because of a) motivation, b) increasing duration of commitment, c) fostering innovation and growth, d) not penalizing employees but rather motivating them.
RE: "By leveraging management's compensation via options, this gives management an incentive to take riskier returns."
I hope you're not invested in MSFT, because every step of the way it's, "bet the company." e.g. DOS->WIN, NT/WIN--> WIN2k, NET, etc. You wouldn't have had a 10 year return at 50%/year without huge risks.
RE: "If they were compensated by straight stock rather than options, management would lose money by the stock price declining."
If an employee doesn't build value over time, their options don't have value, they lose.
RE: "With options, management doesn't lose with a declining stock"
Incorrect. A share has value all the way down to Epsilon, while an option has value down to the grant price.
As an investor, I'm not going to give someone shares, so they can just cut and run with value after tanking the company. A fly-by CEO that brings market cap from $2B downto $200M gets $10M for tanking the company -- I doubt investors would like that. I want to grant options, so they are obligated to build value over time, so everyone is motivated to win. On another note, from the perspective of the employee, you can't penalize employees with income taxation (which is what granting shares would do) on what is risk - risk should be a capital gains tax not an income tax. Also, employees should get a leveraged potential for wins/gains (which is what options are), due to the risk they are personally willing to take on. Risk-taking is necessary for businesses to grow. The riskiest thing any company could ever do is not take risk. The riskiest thing this country could ever do for its GDP is impact employee motivation (by expensing/taxing options) in addition to risk-taking.
RE: "With the greater emphasis on options, this gives management incentive to take on extra risky projects"
And thank goodness executives have guts.
Otherwise, we would all sit around wondering why some company blew right by us. The auto industry never took risk in the 70's and early 80's. They had to go bankrupt before they were motivated to take risk, and then they didn't have any funds left. A stock option motivated company, will take risks when it is best and affordable, not wait until they're a gasping-breath before bankruptcy.
Options are truly for innovative companies that take risk, and for investors who are interested in growth stocks.
Don't kill an execs or employee's motivation - that would be a bad thing. Motivation is a key ingredient to the GDP.
The true answer is to beef up reporting for off-the-book debt that Enron did, rather than penalize employees and investors. Hey, here's a better idea: why not make the execs responsible go to jail for their apparent crime, rather than letting them go free? Nah, just penalize the innocent employees, and negatively impact the GDP.
Regards,
Amy J
PS Here's a thought: no one in the US should get paid at all, because there is a risk that their motivation to earn money for a living could result in something bad, like a crook holding up a bank. Rather than prosecuting a criminal, let's create laws that hurt those who work at an honest living. |
