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
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.
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.
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
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.
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.Return to top