Limits on Executive Pay.

[Ludovic]

@Algher

Now, it is 5 years later and all of Cecil’s options can now be exercised. Under his stewardship, the SDMB has increased in market value by 10% per year. Shares are now trading at $1.61 per share. His 1,000 options can be exercised for a net gain before taxes of $610.51 (he has to pay the $1.00 remember).

Now, that $610.51 represents a payment from 5 years ago. It represents value accrued over 5 years. However, when the Chicago Reader prints an article on this, everyone just looks at the total gain in the year of exercise against his current salary. They IGNORE when the grant was made.

But that’s not the whole story of how it works out. I’d be fine even with the incestuous board of directors creating circle jerk compensation packages such as these if it were actually based on medium term stock performance like you outline.

But what really happens is if the stock doesn’t perform, CxOs realize they won’t get their millions and have to try to survive on just their salary, so get their options repriced so they can rake in the millions anyway, so there’s no risk of failure.

[Isamu]

@Magiver

What would inspire you to think fraud is a function of capitalism or that anyone would think this person was a hero?

(a) Because I’ve been a lawyer for 12 years. Fraud is part and parcel of the way American ‘capitalism’ (as losely defined) works. In this case he got away with it. So the system protected his actions. What would inspire you to believe fraud is not a part of US style capitalism?

(b) I bet his wife thinks he’s a hero. I could name a few more people too. What makes you think no-one thinks he’s a hero?

[Voyager]

@Algher

Cecil Adams is the CEO of SDMB. The BOD, in hopes of getting him to increase the value, grants him 1,000 stock options. The current price is $1.00, as is the exercise price of Cecil’s shares. The vesting will be over the next 5 years, at 20% per year on each anniversary.

Right now, Cecil does not have a damned thing. His options have no value, and he does not even have the right to exercise his shares. However, FASB has decided that there must be SOME sort of an expense taken. We run a Black-Scholes analysis on SDMB and determine that the “cost” to SDMB for those shares is 40% of the exercise price, or $400.

So, do we look at Cecil’s pay rate in comparison to the FASB valuation of the shares at the time of grant? That will certainly give us AN answer.

Now, it is 5 years later and all of Cecil’s options can now be exercised. Under his stewardship, the SDMB has increased in market value by 10% per year. Shares are now trading at $1.61 per share. His 1,000 options can be exercised for a net gain before taxes of $610.51 (he has to pay the $1.00 remember).

Now, that $610.51 represents a payment from 5 years ago. It represents value accrued over 5 years. However, when the Chicago Reader prints an article on this, everyone just looks at the total gain in the year of exercise against his current salary. They IGNORE when the grant was made.

The one thing not considered in this analysis is the gain from a general market gain and a gain from Cecil’s stewardship. If S&P (or some analogous companies to Cecil’s) went up 15% a year during this period, Cecil is a chump and deserves nothing. If they went up 5% a year (or went down) Cecil has likely added value to his company, and does deserve his reward.

BTW, Dan Ariely notes that CEO salaries were somewhat more rational before they got published. Though the purpose was to shame boards into limiting executive pay, what actually happened is execs told compensation committees that they deserved more than that guy over there.

[Algher]

@Voyager

The one thing not considered in this analysis is the gain from a general market gain and a gain from Cecil’s stewardship. If S&P (or some analogous companies to Cecil’s) went up 15% a year during this period, Cecil is a chump and deserves nothing. If they went up 5% a year (or went down) Cecil has likely added value to his company, and does deserve his reward.

BTW, Dan Ariely notes that CEO salaries were somewhat more rational before they got published. Though the purpose was to shame boards into limiting executive pay, what actually happened is execs told compensation committees that they deserved more than that guy over there.

I commented on that earlier - that the problem with typical options is that the reward keeping up with the market (or less). Premium priced options are a better choice for many firms, or performance share plans with payouts in restricted shares.

I agree that the public information created an arms race (and a lot of billable hours for me back in the 90s). However, the alternative was not knowing what peer firm CEOs were making. I will take more knowledge over less.