Lots of Zeroes

It’s shareholder meeting season, and hundreds of companies released their information in proxy statements on executive pay. Many executives made tens, even hundreds, of millions of dollars last year, as the media like to count it, leading to continued concerns about excessive executive pay.

Remember the caveat in my recent blog about how the media counts these numbers. A lot of the pay attributed to last year is the result of executives exercising options that are up to 10 years old and in many cases had to be exercised last year before they expired. These gains represent years of hard work, managing through the bubble and the bust, and are often reflective of significant long-term shareholder value creation. Case in point is the article in which I was quoted (misquoted actually, but that frequently happens) regarding Boeing. Even where that was not a factor, the continued adding of apples, oranges, and bananas gives us mixed fruit, not an accurate apple count. Many of the media stories that compare these pay numbers to last year’s share price performance are not only absurd but intentionally misleading because the writers and their consultants know better. Admittedly, there are overpaid executives in some companies, especially when company performance is considered (which requires matching the time period of pay with the time period of performance, not a simple calculation). In the past week, however, I have encountered some pay and performance issues myself, such as the cook at the restaurant that burned my little boy’s grilled cheese sandwich not once but twice (how hard can that be?). I’m a big fan of pay for performance and conclude that overpaid and underperforming employees are distributed throughout our economy, at all levels of companies, and often seem to be clustered in the businesses I deal with. They don’t have their pay and performance published in the paper but I’m happy to help spread the word.

These executives made a whole lot more than just about anyone reading (and certainly anyone writing) this blog. Some organizations are obsessed with calculating exactly how much more these executives earn than the so-called “average worker”. I am encouraged if some of those executives are reading my blog because I think they could learn a lot about some of the fascinating technical aspects of compensation, not to mention the added bonus of hearing my opinion, which is that comparing executive pay to that of the average worker is meaningless, distorted, and incites unwarranted anger.

Many executives are good negotiators, some have professional negotiators working for them, and others might be good buddies with those on their Board of Directors who have a voice in determining their pay. (We can gripe about that last point all day and won’t change the fact that business is often done among friends and always will be.) Many others were in the right place at the right time. But others are brilliant strategists and managers who have managed a complex multi-billion dollar multinational corporation in a manner that has created enormous value for shareholders, employees, customers, and our economy. Yes, CEOs make hundreds of times more than we average folks do. There’s a complex set of reasons for that and continually complaining about it will not get anyone a 20,000% pay increase – they could, however, start a company that ends up being worth $10 billion and then they might earn $10 million a year, too. That would require enormous effort which is what many of these executives have expended and they’re being paid for the results.

These stories dominate the business section this time of year which limits the number of interesting topics to write about, but this next item is keeping things interesting. At least a few of the individuals mentioned in the news items above may have received additional compensation, beyond what was intended by the formal compensation program, due to a questionable practice in how their options were granted. It appears some companies may have granted options on days when the share price hit a low, ensuring the options produced gains much higher than they might otherwise have. When they missed that opportunity, they may have simply backdated the options when they were granted later. The most recently accused include UnitedHealth Group (whose CEO has about $1.6 billion in option value – no I did not misspell “million”) and Vitesse Semiconductor. “Yeah, these options were really granted a few months ago before that big price run-up that I just made a lot of money on. Yeah, that’s right, that’s the ticket.” (If you weren’t watching SNL in 1985 you might not get the reference to the Pathological Liar character but it seems fitting.)

I blogged about this earlier this week. We thought that after Enron, Sarbanes-Oxley, and a number of CEO perp walks that these kinds of things wouldn’t happen any more. Oh well, let’s roll out some additional legislation shall we? No, let’s just jail the crooks, if in fact a crime was committed, and not blame the problem on stock options. It’s costing Americans too much money to continue having these scandals eroding the confidence of US companies in the world’s capital markets.

Some companies reacted to these disclosures by either putting the individuals suspected of the behavior on “administrative leave” or by promising not to do it any more. I’m not sure but I think that if I had done something similarly unethical and illegal my leave might be much more than merely “administrative” – probably more along the lines of “incarcerative” and “refund-ative” (c’mon, that’s no worse than calling it ‘option-gate’ which some journalist inevitably will do.)

Pardon my tongue-in-cheek tone today, but reading a week of these kinds of headlines, for one who is dedicated to the field of compensation – and dedicated to professional integrity – requires maintaining a sense of humor about it at times. Too much time is spent on superficial numbers and analyses and not enough time on the real issues. Sometime soon I’ll write about the various “golden parachute” and severance deals that have produced some very excessive compensation for some very inadequate performers so that we can understand the real problems that need solving. Here’s a previous blog describing one example.

I be posting next week from NYC at the Global Equity Organization (GEO) Annual Conference where I will have to be very brief because I must spend less time blogging and more time attending critical events like the evening receptions. As everyone knows, that is where the real work gets done and I have a job to do. Maybe I’ll add a gossip section to the blog - though I wonder how compelling gossip among global equity professionals could really be: “I can’t believe what they did with their option term! This won’t help them a bit with their FAS123R expense and there were better ways to deal with ISS’s concerns on their plan.” This might set me up to say something like “you had to be there.”