Executive Compensation:
• "Stock option plans reward the executive for doing the wrong thing. Instead of asking, 'Are we making the right decision?' he asks, 'How did we close today?' It is encouragement to loot the corporation." - (Late) Peter F Drucker • Lee R Raymond, who retired in December 2005 as Chairman & CEO of Exxon-Mobil, was compensated more than $686 million from 1993 to 2005, which is $144,573 for each day. This includes 98.4 million dollars paid as pension in 2005 - The New York Times • Ray R. Irani, the chief executive of Occidental Petroleum, received about $63 million in total compensation last year, an increase of more than 50 percent over 2004. Over the last three years, Mr. Irani has reaped more than $135 million, mostly in options and restricted stock - The New York Times • David J. O'Reilly, the chief executive of Chevron, received nearly $37 million in salary, bonus, stock and stock options last year. The stock and options vest over multiple years. Mr. O'Reilly already owns stock options valued at $34 million - The New York Times • Steven P. Jobs, received $775 million, mostly from stock options, in 2000 from Apple Computer - The New York Times • Michael D. Eisner, the former head of the Walt Disney Company, took home $577 million in 1997, largely from stock option exercises - The New York Times • The CEO of Home Depot was paid USD 245 million in the last five years by the board while their shares were falling - The New York Times dispatch of May 24, 2006 Salaries & bonuses of top executives coined compensation by American academics and followed everywhere, have the built in stock options plan today in most American and other MNCs. The concept of stock options was popularized by the Harvard professor, Dr. Michael Jensen based on his study of performances of various companies. According to him the main responsibility of a CEO is to add shareholder value. He suggested that shareholders reward those executives who do just that. This was left in the hands of the board of directors who are supposed to take care of shareholders' interests. The idea was brilliant and the American stock market is well developed and SEC is a good regulator.
I am sorry, I beg to disagree with the view that the main responsibility of a CEO is to add shareholder value. The main responsibility of a CEO is to add value to all stakeholders. By stakeholders, I mean the customers, employees, suppliers, government and finally, shareholders. A CEO has to balance all the interests, sometimes of conflicting nature.
Unfortunately, what Professor Jensen did not take into account was the executive greed and avarice. He also forgot that board of directors in most companies is members of the old boys club. I have seen some of these guys literally sleeping in the board meetings. This has led to a dangerous nexus between corporate executives, investment analysts, stock brokers and investment banks. Most executives benefited in 100's of millions as majority of the results are cooked up. Others in the business play ball with them as all of them stand to gain. What started in a small way has become the biggest legal money making technique, as even freshers in dotcoms were offered stock options, when the going was good. Auditors also joined the bandwagon. This is the reason you will find companies which have never declared profits are quoted at fancy prices.
Once the stocks hit the lows, the analysts, who gave the buy signals earlier, are caught in their own trap. They cannot offload and have to keep the myth alive. The minute markets react to their rosy picture; they will quietly sell their own holdings and recover their money or make huge profits. Even today when the analysts talk of economic revival, it is only to protect their backsides. It is the small shareholders and pension funds that take the beating. To quote "It is the old lady in tennis shoes who gets ****** and loses everything". Insiders are always privy to information which outsiders can never access. Insider trading is illegal only on paper but it goes on in stock markets all the time and all over the world.
The first thing that should be removed once and for all is the stock option plan. The CEO should be paid bonuses only on what net profits he or she brings to the company. This can be in the form of percentage of net profits after auditing. SEC should appoint their own auditor who should certify the work of the company auditor. Another area SEC should closely look at is the policy of stock exchanges asking for quarterly results. The moment results are announced it sends the prices either skyrocketing or plummeting. It is practically impossible to audit giant companies in a short time.
The CEO is a paid professional and not an investor or a speculator. There should not be conflict of interests. If he or she wants to own company stock then they should buy at market prices like any other shareholder with their own money. SEC should look more closely into the stock options plans of companies and a veritable Pandora's Box will open. The late Dr. Peter Drucker, who died on November 12, 2005, was also against the stock options plan and his famous quote is given on top of the page. Now the question can be raised as to why the corporations still have the stock options plan. The reason is obvious. They can continue to loot the corporation, legally.
Note: The above article is an abridged and condensed version. It was first written on April 20, 2002 and has been revised and updated.
Copyright. September 2007. www.madgopes.com. All rights reserved.
To learn more about this author, visit Madhavan T Gopalachary's Website.
Like this article? Share it with your friends
|
|
Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name/
mtg.html
mmgconsu
lting.biz/
|
|
 |
|
Madhavan T Gopalachary's
Complete
List Of
Management
Articles
|
|
If you enjoyed this article, get Madhavan T Gopalachary's Complete List of Management Articles For FREE!
|
|
|
|
This is hard to believe, but according to a new study, most American executives say they believe they are overpaid.
