Speculation on doing away with stock options
There's no such thing as a free lunch. But until this year most of corporate America's leaders put their hands on their hearts and swore that their rapidly engorging emoluments were at no cost to their company, shareholders or employees.
It is remarkable how easy it is to build consensus in the financial world. The community that once talked about fundamentals, profit and loss and earnings and revenues bought wholesale into the hero worship of allegedly irreplaceable executives who, amazingly enough, managed to increase shareholder value during a bubble market.
But there's the rub: value for which shareholders? If Karl Marx were writing a column for the Financial Times now, he'd write, 'Workers and stockholders of the world unite! You have nothing to lose but your pension plans - if they haven't already been stolen!'
The instrument that unites these groups is the one that has been used to purloin their property. Almost any shady practice, be it accountancy or financial engineering, has the executive stock option lurking in the subsoil at its root.
As always, the road into the swamp is signposted with good excuses, maybe even intentions: options allegedly allied the interests of managers and stockholders. Of course, we were told, options were needed to motivate executives. No mention of loyalty or job satisfaction. No-one had studied the dubious history of mercenaries and their tendency to cut a deal with the enemy to their mutual advantage.
Interestingly, many managers felt that while they themselves were best incentivized with a juicy, ever-growing carrot, lesser employees were better enthused with thin gruel and fierce threats: dismissal, lower wages, remodeling their pension plans away from defined benefits to bask in the shark-invested waters of independent investing.
And of course, announcing these deeds got what the executive optioneers wanted - a temporary blip in the stock price while they unloaded their options. Each quarterly blip up or down was scanned anxiously, not because it seriously indicated anything about the fundamental health of the company, but because it caused the variations in stock prices that option holders could benefit from.
Investors were told tales of growth so that they would accept great expectations instead of dividends. Boards eschewed dividends, because giving money to shareholders took money out of the company instead of boosting share prices. They borrowed cash to buy back shares and boost the stock price.
The usual excuse for all this was that investors would pay less tax on capital gains than on income from dividends. And indeed this was true. Many stockowners have been able to claim large tax losses since the bubble burst.
Similarly, the rush of IPOs and launch of tracking stocks have not been about raising capital for investment in expanding business but about making money for investment bankers and executives. The poor suckers who rushed to put their IRAs and 401Ks into them did not make the 'killings' in IPOs; it was the executives and the investment bankers - whose analysts banished the word 'sell' from their retail lexicon.
Even those hypnotized by the bubble market should have taken fair warning when the market first blipped two years ago. The mad rush to reprice options gave the lie to options being performance incentives; now we saw they were bonuses for executives cashing in on a rising market that owed little or nothing to their managerial talent.
A further reality check was when the |airlines went for a government bailout while calling for cuts in staff and employee salaries - even as their lobbyists worked to remove a clause that would forbid executives rewarding themselves with options and bonuses while dipping into the taxpayers' pocket.
In the good old days, the families of people tortured and burnt by the Inquisition or the Witchfinder General would get a bill for the torturers' time and for the firewood. It is in that context that we should consider the successful use of shareholders' money to lobby Congress to keep options off the books for accountancy and for taxation purposes.
In some way, we can only hope the bad times last long enough to incentivize stockholders to make changes. There are clear models. In its wisdom the SEC says if mutual fund managers claim incentives on the way up, there has to be a penalty on the way down. This seems a good idea for corporate executives, too, but we have to make sure their rewards and punishments are open and transparent for stockholders and employees.
If we could get rid of options, we could have enterprises selling commodities, paying dividends to their owners and rewarding those who run them. That way leads to a business boom, not a stock market bubble, but you can't have everything.
The Speculator