Thursday, May 3, 2012

Stock Options Equal Pay?

It was reported that a local CEO's compensation went down 24% because the return to shareholders decreased by 5.3%. Okay, that seems fair until you learn that the reason his pay was down was because he chose not to exercise some options. Obviously, the options weren't worth as much and therefore not worth exercising. Also, he's already taking home mega-millions so what's a few more. He didn't need to exercise them to pay for groceries.

It's not like the board took any action to reduce the CEO's pay, nor did he decrease any payroll expense for the company in direct, immediate pay or bonuses.

I realize that many companies use options, phantom stock, stock appreciation rights (SARs) and other equity vehicles to promote retention and long-term strategies. However, if the executives aren't creating value and that's what they're hired to do, shouldn't they be penalized with the non-deferred, short-term compensation? If the share price goes down, the options, etc. will take care of themselves. Likewise, when the share price goes up. The executive compensation in that form is automatic. But if they're not performing satisfactorily then there should be some other form of accountability.

There also needs to be some accountability with regard to SARs and other compensation forms. The board can artificially inflate the price for the future by purchasing company stock. Fewer shares outstanding, and the price goes up given similar operating profits, cash flow, etc. Earnings per share looks really good, and the stocks look like a bargain. The public flocks to it and the CEO looks like a hero, even though nothing substantially has changed to make the company more valuable. The market value (business value, enterprise value) is still the same; it's just that each share owns a slightly bigger slice of the pie and is therefore more pricey on the market.

If boards want to issue equity compensation, great. But don't think that because that portion of the compensation takes a hit in an off-year, that the board has done its job of watching executive pay and paying for performance. C'mon, guys and gals, ask the tough questions. Are they really adding value and worth the pay your giving them?

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