You Got Screwed! by James J. Cramer

Author:James J. Cramer
Language: eng
Format: epub
Publisher: Simon & Schuster

Six

Executive Options

If you can come up with a surer plan for ripping out the lungs of the investor class than the current executive option compensation, my hat’s off to you. The idea behind executive option compensation was to allow executives to become owners of their companies. Call it a reaction to the eighties, when the executives running the companies didn’t own enough of the companies to matter. Their lack of ownership led to such abuses as large salaries and perks that made you feel these people were country club wards, not execs.

People forget that Gordon Gecko wasn’t railing against managements that owned stock through options and sold it; he was railing against management that was paid extravagant cash salaries and owned no stock. Today, Gecko would be castigating the executives who granted themselves stock options, hyped their stocks, and then bailed. That’s how far we went from an era when the execs had nothing at stake to one during which they lied to make their personal fortunes.

It would have been fine had we set up a system in which executives could buy stock slightly cheaper and then have to hold on to it. It is quite different to set up a scheme to reward executives with millions upon millions of options—not stock—that won’t let them make money until they sell. We incentivized them to make short-term results by getting out quickly. It would be bad enough if that were all that was at stake, but we also allowed executives to write their own compensation packages. And because options didn’t count against earnings—another accounting fiction—the more options the merrier. In other words, we created a compensation package wherein execs could make five, ten, fifteen, twenty, one hundred times more than the workers, and then we insisted that they sell the stock to realize those gains.

The result? The bizarre spectacle of executives who spend all of their time managing their stocks, not their companies. They got paid hundreds of millions of dollars to manage the Street’s expectations so they could be beaten. Once the stock went higher, they could exercise calls and skedaddle. And, if the companies couldn’t make the numbers that they set themselves, then the executives were allowed to reprice the options downward. Even if the companies didn’t do well, the executives could still make a bundle.

Did the rank and file get to reprice? Are you kidding me? Of course not. Did you, the shareholder, get to reprice? Dream on.

So, a situation meant to put the executives on the same page as the suffering shareholders ends up giving them a much better position regardless of whether the business does well. It also rewards short-term stock performance over long-term corporate results; better to build a stock than to build a company.

This created the upside-down situation in which executives called analysts and told them to low-ball their earnings estimate. The compliant analysts did so, and the execs beat the “numbers.” The dumbfounded media reported the “better than expected” numbers. Then when the

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