Executive Stock Options: What's Appropriate?

As a long-term holder of Disney stock, I find your report on Chief Executive Michael D. Eisner misleading (''Is greed good?'' Cover Story, Apr. 19). The fact is that when Eisner came on board, Disney bought him cheap. His position was that he would accept really big money only if he led the company into huge increases for stockholders. He has done that and more, but now whenever he exercises options, there is an outpouring of resentment and jealousy from those with short memories.

Eisner was willing to gamble based on results. He and the shareholders led by Roy Disney have happily prospered.

Robert A. London
Scottsdale, Ariz.


You made reference to Cendant Corp. Chairman, President, and CEO Henry R. Silverman's exercise of stock options, stating that ''a spokesman says [Silverman] exercised most of the [options] before the troubles surfaced.'' It's important to note that when exercising options, one can exercise and sell or exercise and hold. On Feb. 5 and 6, 1998, Mr. Silverman exercised and sold 1.7 million founder's options granted him in 1992. The accounting irregularities at the former CUC International were discovered and disclosed in April, 1998. In October, 1998, Mr. Silverman also exercised and held 200,000 shares.

Your reference to Mr. Silverman's exercise of options implied that he exercised and sold some options after the announcement concerning accounting fraud on Apr. 15, 1998. He did not. Furthermore, your description of the repricing of stock options paints an incomplete picture. First, 33% of Mr. Silverman's stock options were revoked, 33% were reset to an exercise price of more than twice the fair market value ($20 per share), and 33% were reset to fair market value ($9.81). The 25.8 million options affected by the repricing action were fully vested. The approximately 17.2 million restructured options are unvested and will vest at 25% per year through 2002. They are worth zero unless and until vested.

Elliot Bloom
Vice-President
Corporate Communications
Cendant Corp.
New York


Eye-popping CEO pay reflects not greed but the shortsighted apathy of shareholders. Managers might run a company, but they don't own it--shareholders do. What has been lost in the 1990s is the responsibility that goes along with owning equities. Today's stock ''investor'' is more concerned with making a fast-buck trade than voting proxy statements, reading annual reports, or going to shareholder meetings. Only after the market takes a hit will younger investors think about anything other than their own returns.

Jonathan Hoenig
Evanston, Ill.


Large awards of stock options for executive compensation are usually justified in the proxy with a statement that the purpose of the stock options is to ''align the interests of the executives with those of the stockholders.'' Unlike the stockholder, the executive with stock options has no money at risk. The award of a stock option is in effect an interest-free, non-recourse loan that enables the executive to obtain the potential gains from an increase in share value with no downside risk and no tax liability until the option is exercised.

This is in addition to a substantial salary and bonus. Often when the stock tanks and the stockholders suffer losses, the board of directors rewrite the executive options at a lower price.

The interests of executives would be more closely aligned with stockholders if they purchased shares and had their money at risk. A stock-option program that requires the purchase of one share for each two shares received under an option would curb the excessive compensation and make the executive feel the pain of poor performance.

Edward H. Sonn
Carlisle, Mass.


There are two primary reasons for the lofty valuation of the stock market and, thus, of CEO compensation. In the late 1980s, the baby boomers finally realized they had to retire someday. The stock market is the only game in town for accumulating sufficient wealth for a reasonable retirement, especially since defined-benefit plans went the way of indemnity health insurance. Thus, it is boomers' retirement accumulation that has driven the market for the past decade. It would have happened whether or not boardroom rocket scientists had done anything.

The second reason for the stock-market behavior over the past decade has been the robber-baron mentality of CEOs. Most weren't as open about it as Chainsaw Al [Dunlap]. Instead, citing foreign competition, they began firing legions of employees, thereby reducing their biggest cost. They then coerced the remaining workers into accepting the idea of doing ''more with less'' by implied and real threats of further downsizing if cash flow and profitability didn't improve, i.e., if they did not pick up the work of their former colleagues.

While it is true that technology has enhanced productivity, the implementation of that technology wasn't due to any great leadership or brilliant insight by CEOs. They just bought what was already in the pipeline. There are predictions that the stock market will stagnate and decline as the boomers head into retirement en masse. And there's eventually a limit to what workers will accept. It will be interesting to see then what happens to CEO compensation.

Rick Cunnington
Chandler, Ariz.


You proclaimed that ''BUSINESS WEEK has long argued that CEO pay is excessive.'' Your numerical evidence was quite striking. Your argument, in a simple form, is that CEOs are overcompensated, which could lead to the conclusion that they are overrated. If CEOs are overrated, why are they so frequently popularized by your magazine?

James R. Schembs
Swarthmore, Pa.

New Mexico Is Holding Its Schools Hostage

Education reform does not necessarily require additional funding, but it does require rethinking a system whose rewards are based on not changing (''States go to the head of the class,'' News: Analysis & Commentary, Apr. 19). And vouchers, the elixir lauded by so many, are no fix at all without the means and support to fix the schools that will be abandoned and put in the throes of competition. This is no free-market experiment.

Between the governor and the Democratic leaders in the House and Senate, education is being held hostage in New Mexico. Yes, our governor vetoed the budget--along with the funding required for additional classrooms, a new science curriculum to be used in the 1999-2000 school year, and all education technology funding. In its wake, he killed proposed legislation to reinstate art and music at the elementary school level and physical education and intramural sports in middle school. True reform means delegating control to the neighborhoods. Until districts, state governments, and federal agencies allow that to happen, no change will occur.

Carole R. Hedden
Sandia Park, N.M.

Nordstrom Has a Promise to Make Good On

The biggest problem facing Nordstrom is not its lagging technology or overabundance of buyers (''Great service wasn't enough,'' Marketing, Apr. 19). It's simply people. This is a company that entered the East Coast and raised the bar of consumers' expectations for quality of service. Their reputation was well known for months prior to the first store being built.

What they failed to anticipate was the problem facing all retailers today: how to staff a store with the best-quality people. Moreover, similar retailers, such as Saks Fifth Avenue and Bloomingdale's, took measures to improve their own customer-service practices in advance of the Nordstrom entry. And as Nordstrom expanded, it became obvious that its growth rate was outpacing its ability to deliver on the Nordstrom promise. Hopefully, Nordstrom has developed strategies to address this. But whatever it does, please do not mess with the shoes. That's still working!

Karen McAuvic
Scotch Plains, N.J.

Alberto's New Leader Learned from the Master

''Daughter knows best'' (People, Apr. 19) makes great reading--a palace revolution! But it was Len Lavin who coached daughter Carol, and later Howard Bernick, in the skills you praised. And the management transition at Alberto-Culver had been planned and carefully nurtured over a period of 20 years.

The unique business started in 1955 in a competitive forest that included Procter & Gamble, Unilever, and other deep-pocketed marketers, and it grew to more than $1 billion in annual sales. One of Alberto-Culver's strengths was the ability to develop remarkably long-term consumer loyalty for most of its brands. As its founder, Len Lavin contributed two uncommon abilities: recognizing unmet consumer needs within the clutter of the market and directing the creative talent to develop short, attention-capturing TV commercials that addressed those needs.

Daughter Carol Bernick, vice-chairman and president of North American operations, proved to be a chip off the old block. Early on, she spotted gaps and introduced new products. She and her husband, Howard, should make a very successful management team. But that does not mean the past should be ignored. It would be an example of Shakespeare's line about a thankless child and a serpent's tooth if she were not the first to recognize that truth, as I am sure she does.

Horace Schwerin
Moorestown, N.J.

Don't Wedge the Pentagon Between Today and Tomorrow

''The Pentagon: High-tech dreams, low-tech wars'' (News: Analysis & Commentary, Apr. 19) reported that the U.S. military is caught between buying new high-tech gear for tomorrow's wars and not having enough munitions and spare parts to handle today's Kosovos and Iraqs. But the prescription--sacrifice readiness tomorrow for readiness today--is off-target.

The Pentagon should not have to choose. Sometime since the cold war ended, Washington sold America on this flawed idea, the ill-effects of which we read about: overworked troops and equipment. The fact is, the U.S. military straddles two jobs. First, be ready to win today's wars. Second, always enlist, train, and equip troops properly so they can win unexpected wars in the future.

The gear U.S. servicemen and women use today was built 10 to 25 years ago. Likewise, the new aircraft carriers, fighters, and submarines we are buying will be defending this country long past the retirement of today's troops. Military superiority is not something that once gained can never be lost. History is littered with once-powerful nations that forgot that. Let's not join them.

Ernest Blazar
Senior Fellow
Lexington Institute
Arlington, Va.

Let's Throw Out the Computer Snoops

''Privacy'' (Special Report, Apr. 5) did a great service to those of us who are neophytes in computers. It is outrageous that a computer would have anything in it by which our movements on the Internet could be tracked, followed, spied on, or learned of.

What right do these people have to invade our lawfully purchased equipment for any reason whatsoever, including selling to us? They have no right to do so, as far as I am concerned, and I hope that gets established in law soon.

George C. Williston
Wooster, Ohio

''A wiser bull?'' (Cover Story, May 3)

An error in ''A wiser bull?'' (Cover Story, May 3) misstated the stock price of Pfizer Inc. on Apr. 21 in a table. Pfizer closed that day at 123 3/8.

''e.spire: A direct link to the Net'' (Inside Wall Street, Apr. 19)

In ''e.Spire: A direct link to the Net,'' (Inside Wall Street, Apr. 19), the acquired company, CyberGate, was misidentified.