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The problem with options
Filed in archive executive pay by leon on November 25, 2006
The problem with options
Good help is hard to find these days, particularly at the sharp edge of the business world where Zegna suits, seven figure base salaries and jammy incentives are all the go.

Which makes the fuss around one of those incentives - the little perk that allows executives and directors to buy bulk shares at potential discounts to market prices - so interesting.

Up until the recent rule changes, options were not expensed which made them subject to all sorts of abuse that would inflate earnings. "Options are a huge cost for many corporations and a huge benefit to executives. No wonder, then, that they have fought ferociously to avoid making a charge against their earnings. Without blushing, almost all C.E.O.'s have told their shareholders that options are cost-free,'' Warren Buffett wrote four years ago.

But now that options are being expensed, companies are abandoning them and using full-value shares instead, according to a new study.

CEOs fighting stock option expensing are doing it for one simple reason, says accounting professor J Edward Ketz, and it's got nothing to do with the health of the company.

In his piece, Ketz says it's all about keeping the public and shareholders ignorant.

"I posit it is because, first, they do not want the general public to understand the ever increasing gap between the wages of the average American worker and the average corporate CEO and, second, they do not want investors and creditors to realize the nexus between treasury stock repurchases and their personal bank accounts.

"The second point is that we need to understand better the nexus between stock repurchases and CEO's personal bank accounts. Stock options line their bank accounts of managers with tons of money, but needing some emphasis is the fact that stock options are quite similar to the government's printing more money. When the government prints more money, the effect is inflation; for instance, it takes more money to buy the same goods. In like manner, when corporations print more stock certificates, the effect is also dilutive; for instance, an investor's shares in the company provides over time a claim to fewer and fewer of the net assets of the entity."

The argument about options is it supposedly rewards talent and aligns the interests of the executives with that of the companies. But in many cases, it's an excuse for greed that, if badly handled, can damage the business and hurt shareholders.



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Tags: options  Warren  Buffett  J  Edward  Ketz 
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