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Stock Options: The Gravy Train Could Derail


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STOCK OPTIONS: THE GRAVY TRAIN COULD DERAIL

The highest-paid chieftains in America are getting ready to do the compensation-reform zealots a big favor: They're about to report some of the most mind-boggling gains in executive pay in business history.

Just how gargantuan? Are you sitting down? The stock-option and warrant gains of just 10 selected chief executives totaled more than $500 million last year--an amount that exceeds the sum of all long-term pay for the 363 CEOs in BUSINESS WEEK's executive-pay scoreboard for 1991.

Look at just a few of the earliest returns. In 1992, Sanford I. Weill of Primerica Corp. pulled in more than $60 million from stock options. Anthony J.F. O'Reilly of H.J. Heinz Co., who set a pay record in 1991 by earning $75.1 million, took home $33.5 million more, before salary and bonus. Walt Disney Co.'s Michael D. Eisner, like some others acting expressly to avoid higher taxes, got $193 million. H. Wayne Huizenga of Blockbuster Entertainment Corp. pocketed more than $65 million by exercising warrants--a windfall that won't be recorded in a proxy, because it falls outside the government's definition of compensation.

FRIENDS OF BILL? The numbers look phenomenal, and they are. But for corporate executives cashing in that most golden of perks--the stock option--this round of outsize rewards couldn't come at a worse time. By focusing attention once again on corner-office extravagance, the fat paychecks will turn up the heat under the Financial Accounting Standards Board (FASB). Compensation critics--and there are many--want the industry group to push through an esoteric rule that promises to be one of the most hotly debated issues in business this year. If enacted, it would force companies to deduct from their earnings the value of stock options granted to executives.

What's more, this year's pay bonanza--and the outcry it will spark--could actually win Clinton support for hefty tax increases on high-income individuals and for his plan to prevent companies from taking a deduction on annual pay in excess of $1 million.

Granted, most attempts to legislate caps on compensation are shortsighted at best. Clinton's plan for limiting pay deductibility would be simple to circumvent--and it likely would raise little new revenue. Even if it did, the higher costs would quickly be passed to shareholders. "No matter how outraged the public gets, cooler heads will realize you can't set a legal limit on compensation," says Derek Bok, former president of Harvard University. Still, the vox populi counts for a lot, and executive pay is, if anything, a more emotional issue than ever before. "What it will do," Bok says, "is strengthen the popular feeling for all the current remedies being discussed."

Among those remedies is the complex but critical issue of charging options to earnings. For years, economists have argued that a stock option has significant value. It certainly does, as the numbers reported by Eisner et al. clearly attest. Yet companies are not required to charge them against earnings--partly because of heavy business lobbying and partly because of disagreement over how to do it.

Treating options as an expense would have an immediate impact on corporate earnings--a result largely of directors' profligate use of such megagrants in the past few years. That's why FASB, the rule-making body for accountants, has been swamped with 400 comments--uniformly negative--even before it issues any proposal to change the rules. The board expects to issue an "exposure draft" in the spring. That's an important step to allow for an open, if belated, debate.

TOO GOOD. If the board bows to business pressure and fails to grapple with this issue, the Clinton Administration, promoting "shared sacrifice," should turn up the heat. Of all the perks and goodies lavished upon occupants of the corner office, overly large stock-option grants are certainly the most excessive.

Whatever the source, whatever the specifics, pay-cutting action is out there, and it's headed for the executive suite. All the lobbying in the world isn't going to offset the public furor likely to erupt when CEOs again collect record paychecks--especially as rank-and-file workers see more of their cohorts out of work. Within months, Corporate America's highly paid bosses may get the credit for the demise of their goose and its very golden eggs.John A. Byrne


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