Hi Windsock and Thread,
This is a significant improvement over the previous article, but there are some key points clearly needing to be added . . .
RE: "Ms. Koors, the compensation consultant. "When you really get down to the number of people who have the ability to influence stock prices, it's not a big group.""
Ms. Koors' reply makes it seem as if she isn't familiar with the level of leadership, initiative one would expect in an option culture. A well-run company has the culture where people feel they do indeed have an influence on the stock - of a large company too. Peer culture for starters. A comp consultant should know how to create this culture in a large company.
Ms. Koors might be an East Coast comp consultant, where executives tend to have a higher portion of the stock themselves.
RE: "Many executives aggressively oppose a rule change and are threatening to stop giving options to rank-and-file workers if the grants would reduce reported earnings."
No, Board of Directors are threatening not to give out options. Execs don't hand out options, BODs do. Execs are painfully aware of the need to have motivated work forces.
Charging earnings by options that are already counted in the full dilution, makes it way more costly for small public companies to do business (options reduces the costs by way of reduced salary, delayed taxes for employees - very important for students, etc.) It increases costs for large companies that motivate with options on a large employee base.
RE: "But the actual distribution of options has received relatively little scrutiny."
Excellent place to stay focused !
==> Recommend distribution rules, instead of creating rules that hurt growth.
RE: "In reality, the use of options is far less democratic than many opponents of an earnings charge have claimed, and their concentration appears to be damaging many companies' performance"
Bingo. Now take this a step further and you get the absolutely obvious point:
Expensing options will actually increase the concentration to the top, which is exactly what everyone (at least in high-tech) is trying to avoid.
How ironic that an Enron stock-piling hoarding problem could create a rule that actually stimulates increased concentration at the top - this is exactly how the Enron guys would have loved it - they must be laughing at us from jail!
The New York Times should articulate this very key point - it's a core point.
RE: "the spreaders have outperformed the hoarders over the last decade, posting an annual return that is almost nine percentage points better. "
Why not recommend a rule that encourages spreading rather than hoarding. Why not create a distribution rule that actually fixes the problem? (Rather than charging earnings, that will ironically increase hoarding and have the opposite affect of what's desired.)
RE: "Options, which have become the dominant form of executive pay over the last decade largely because of the favorable accounting treatment"
No, largely because options keeps the employees' goals more consistent with the shareholders. And largely because Gen X workforce (and high-tech Baby Boomers) felt the planes, jets, limos were a disgusting way to motivate an "entire" workforce. Would you truly work for a company where the CEO was driving a limo to work?
In 1990 I interviewed with a "prestigous" (image-oriented) Wall Street firm that tried to entice me to join them by saying a "limo" would drive me to & from work. (Huh?) I asked, "is this for everyone at the firm?" Answer, "no, it's a special privilege you would have as well as some of your peers in the firm already have." I asked, "how do your employees that don't have this special privilege get to & from work?" Answer, "I don't know. I never thought of it." I decided then, I was not going to work for the firm. Wasteful with money and not in touch with a rather large portion of their workforce, which isn't a good way to get the most out of people. Microsoft has a democratic environment where everyone is in the thick of it and it fosters challenge and growth for all, to everyone's benefit. Clearly the better route. Microsoft's earlier CFO, who has long since passed away, would turn in his grave if he knew how his formula was being messed with. It's really too bad he isn't alive today.
Options clearly should be a preferred tool, because they are the only tool that solidly aligns employees with investors. While handing out shares doesn't incent for future growth, nor do dividends.
Regarding dividends, the guys in San Diego are probably just hopping up and down gleefully happy they got away with cutting huge dividend checks to themselves without having any goals tied to it. They are probably thinking what fools the mutual fund managers must be! Investing company cash into themselves rather than RND is absolutely obscene and bordering on the sinful for a small company that only has a few billion.
Any more of this kind of stuff, and we may see the Enron-kind of execs actual enter high-tech for some easy dividends to pick up for themselves - without any goals, without it being tied to stock performance. Doesn't anyone recall the companies in the late 80's (or early 90s?) that raided their cash by paying nice dividends to themselves, meanwhile their companies tanked, sending their stocks into a descent after they raided the cash?
This might hurt our industry - by attracting the Enron types. The way our industry has kept them out for the most part, is through the industry's overall nerdy & frugal culture that scares those types off.
High-tech stocks can do better in part because people are encouraged and motivated to be frugal, work hard, take initiative, and think creatively.
How concerning it is, the mutual fund investors are too focused on quarterly profits, that they are willing to play into the hands of those companies that pay large dividends to themselves (that really shouldn't). (And I'm not referring to those companies sitting on 47B in cash that need to pay out some dividend.) Large dividend payouts essentially to executives/founders rather than RND simply hurts this entire industry's way of doing business, image, and might start attracting the Enron-types.
And a charge to earnings for options, could create a set back to the industry in another hugely significant way:
No longer will BODs have the power to tell CEO's with certain fetishes for limos (or, goodness only knows what other bizarre things), that they can't have it because options are better for them.
That is, by equating the bad types of compensation with the good types of compensation, which is what charging options to earnings might do, this industry will have the potential to breed some bad companies and possibly attract the Enron-types (which we certainly don't want.)
RE: "Even a glance at the list of companies that have recently given more than 20 percent of their options to their top five executives in a single year makes the point."
Sounds like a law creating a distribution amount for the top that's no more than 20% would fix this. Contrary to this, charging earnings will negatively impact the distribution, and ironically make it more concentrated at the top, the problem everyone (at least in high-tech) is motivated to avoid.
The obvious answer is to recommend a certain distribution amount for the top. That could be the fix on how to avoid an Enron-like situation where the concentration is at the top.
Question: why hurt high-tech for Enron? Aren't the Wall Street firms at fault for their fancy offshore loans? Why is this problem going to be solved on the backs of high-tech? How could the WS firms not smell the weird stuff coming out of Enron in 2000 that even those of us in high-tech smelled?
The AMD thread says this is NYTimes first positive article on options, but out of how many biased negative ones?
It's a good "first start". But it's important to see some of the key points above mentioned - because they are more reflect Silicon Valley, high-tech, and options on the Nasdaq. So far the media has conveyed a strongly biased presentation of "options = Enron = bad", when in fact, the issue is "options = good", "distribution = bad" and "distribution can be fixed."
One other key point: high-tech companies (esp small public companies) use options extensively during downturns in order to reduce cash consumption - it's the best way to get the most out of investors' money and keep the most number of people employeed and productive. Why ruin that formula too?
It's ironic how Enron's top-heavy concentration could create a situation where people try to fix this through an earning charge rule that may only increase even more top-heavy concentration.
Ironically, the very thing people are trying to avoid.
Regards,
Amy J |
