Wednesday, April 19, 2006

Creative Compensation

As I discussed in my Compensation Integrity blog on April 19, the latest compensation scandal over the timing of stock option grants has created shock and awe. Would corporate executives and members of boards of directors really time the granting of options to catch stock price lows and ensure additional gain from those options? Or worse, would a company backdate an option grant? Would a company then try to make amends when record-setting option gains are suspected of being a result of such practices? Or would that just be too darn obvious?

Yesterday's news included the story that UnitedHealth Group is suspected of this behavior and the CEO has called for a halt to all equity grants to executives plus capping some other noncash perks and supplemental executive retirement benefits. I would just love to be the person who gets to do the calculation to see if these "givebacks" are comparable in value to the alleged ill-gotten gains from the purported option granting practices.

Other companies have recently been caught doing something similar, including Vitesse Semiconductor, and I can tell you there are many, many more. What is most surprising to me is that so many companies have been doing this for so many years, and so many company employees were aware of the practice, yet it took investigative journalism years later to uncover it.

My clients often ask about "creative" compensation plans or how to do something "innovative" with their compensation programs. I tell them my view is that "creativity" is applying an existing solution to a new problem (like using a paperweight for a doorstop), while innovation is developing a new solution to an old problem (inventing a device that holds paper to your desk and keeps your door open at the same time). If the accusations are true, I think these companies were not creative but were quite innovative in finding a way to prevent underwater stock options and ensure the maximum "bang for the buck" for each option granted. But like developing an innovative way to rob money from a bank, or even creatively robbing a bank, it's illegal and it's wrong.

So please, let's not again conclude as many did after the Enron debacle that stock options are the source of the problem. That would be like closing all banks to prevent bank robberies. Let's instead make sure that the penalty for bank robbers is not just that they have to promise not to rob any more banks and offer give back some of the money they stole from robbing amored cars. Our jails might be overcrowded but there's always room for one more billionaire.

The solution to these recurring instances of abuse of otherwise sound compensation practices is well-documented and accepted by many organizations: an active, informed Compensation Committee of the Board of Directors that resists "one-off" deals and "exceptions" and has a formal calendar of meetings and actions prepared in advance of the year. With those things in place, the alleged UnitedHealth situation could never happen and if it looked like it did there would be ample documentation to the contrary. Absent such practices and policies, however, it might look like someone got a little too creative, or innovative, or maybe just greedy.


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