I’m less of a fan of issuing the executives stock options instead of stock, there’s far more manipulation embedded in that approach. Nearly 30 years ago i wrote to the WSJ (it was Taranto’s Management weekly column back then) about giving the rank and file cash bonuses based on a targeted ROE (return on equity) instead of stock grants as a fair way to incentivize them.
The actual long-term impetus for top executives to get so much stock-based compensation came out of the 1970’s bear market, when CALPERS (the true 400-lb. gorilla of institutional investing back then) insisted on taking away the perks like country club memberships and access to private planes and replacing them with stock-based grants.
This didn’t work too well for the income equality types because the Dow was under 1,000 then and when the next bull market hit those options were worth a lot more than anyone predicted. Large corporations then reacted in the 80’s by eliminating bonuses and substituting stock grants, which saved them cash in the short term but when the job layoffs ensued many lost those grants because they hadn’t vested yet.
If you want to really blame anyone for wealth inequality you can look at this approach and this time frame for screwing the worker in many large corporations.
To specifically address your question, it’s not so much the granting of stock that is the problem, it is the RETROACTIVE reduction of the ‘strike price’ that drives me crazy when Boards of Directors do it. That rewards either a) failure of the execs to reward shareholders or b) faulty design of the award at the start.
Top executive talent is pretty scarce, which is why some CEO’s really make out. There’s a lot of mediocrity out there too . . . Rometty, Chenault, etc., who have been off strategically (if a CEO can’t get it’s core strategic approach right nothing else they do should be rewarded).
Issuing corporate debt to retire stock should be based on the combination of free cash flow, an undervalued stock price and future confidence in that cash flow. EPS bonuses are the price you pay today to hire the right CEO. A great example of it working well was DirecTV, where value was truly unlocked. A bad version was IBM, which has retired over 50% of it’s float over the past 12 years or so but would have been better off utilizing free cash to buy into some more exploratory technologies.
Thanks for your reply.