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To: GST who wrote (143176)	6/19/2002 8:48:35 PM
From: H James Morris	Respond to of 164684

>>4. Pay CEOs, Yeah--But Not So Much Before they stumbled, they cashed in. Enron's Jeff Skilling made $112 million off his stock options in the three years before his company collapsed. Tyco's Dennis Kozlowski cashed in $240 million over three years before he got the boot. Joe Nacchio, who's still in charge at Qwest but has left investors billions poorer, made $232 million off options in three years. If you're looking for reasons corporate America is in such ill repute, this kind of over-the-top CEO piggishness is a big one. Investors and in some cases employees lost everything, while the architects of their pain laughed all the way to the bank. The funny thing is, we asked for it. "Pay for performance" was what investors wanted--and to a significant extent, got: For the first time in memory, CEOs' cash compensation actually dropped in 2001, by 2.8%, according to Mercer Human Resource Consulting. The value of top executives' stock and options holdings in many cases dropped by a lot more than that. But while CEO pay has become more variable--and study after study has shown it to be more closely linked to company performance than it used to be--it has also grown unspeakably generous. Fifteen years ago the highest-paid CEO in the land was Chrysler's Lee Iacocca, who took home $20 million. Last year's No. 1, Larry Ellison of Oracle, made $706 million. There are a lot of complicated, difficult-to-change reasons for this. Some are addressed in the next item, on corporate governance (see also "The Great CEO Pay Heist" in fortune.com). Some may be insoluble. In any case, we're probably due an acrimonious national debate over just what a CEO is worth. But for now, here's a straightforward suggestion: Force companies to stop pretending that the stock options they give their executives are free. It's probably safe to say that Oracle's board would never have paid Larry Ellison $706 million in cash or any other form that would have to show up on the company's earnings statement. All that money (Ellison didn't get a salary last year) came from exercising stock options that the company had given him in earlier years. And because of the current screwed-up accounting for stock options, Oracle's earnings statement says that Ellison's bonanza didn't cost the company a cent. Options are by far the biggest component of CEO pay these days. Virtually all of the most eye-popping CEO bonanzas have come from options exercises. While it is sometimes argued that options are popular because they link the interests of executives with those of shareholders, there are other, possibly better ways to do that--outright grants of stock, for instance--that don't get used nearly as much as options because they have to be expensed. Do the markets really have trouble seeing through this kind of financial gimmickry? Are boards really so influenced by an accounting loophole? In a word, yes. "Anybody who fights the reported-earnings obsession does so at their own peril," says compensation guru Ira Kay of the consulting firm Watson Wyatt. So let's make companies charge the estimated value of the options they give out against their earnings, and see if the options hogs are up to the fight. Justin Fox Reporter Associates: Doris Burk and Noshua Watson