Drowning In Underwater Stock Options

The market's downward slide is forcing employers to rethink their next moves on stock options.

Employers, it seems to me, have mounted a good case against shareholder attacks on the use of stock options based on the contention that they dilute shareholder value. Offering greater amounts of stock options to key executives ties the executives’ fate ever closer to the fortunes of the company, the argument goes. If it does well and the executives do well, the stock price goes up. That can only benefit shareholders.

One can dispute the use of stock options as a tool to motivate chief executive officers to increase the value of their shares. Executives with big holdings in options may have the incentive to make inordinately risky moves, confident that they can only gain on the upside without experiencing actual losses on the downside.

That issue of personal enrichment does give shareholders a legitimate claim on gaining the right of approval of all stock-option plans that include directors and officers, a matter now under debate at Nasdaq and the New York Stock Exchange.

Shareholders have the high ground in the debate when they declare that stock option grants may be excessive because of the presence of the risks of self-dealing. As outgoing SEC Chairman Arthur Levitt said, concerning executive compensation packages, “things get a little complicated when [shareholder dollars are] spent by officers and directors for officers and directors….”

In other words, there must be some independent check on the motivation of personal enrichment at the expense of the company. Certainly, stock option grants should be disclosed.

The SEC, in fact, is moving swiftly to get companies to disclose facts about all stock options. Mark A. Borges, counsel for SEC Commissioner Laura S. Unger, is working on a proposed disclosure rule that is “still being considered internally” but could be published soon, he told me recently.

See the story on disclosing stock-option plans. But shareholder arguments sound weak when it comes to the use of stock options purely as a tool to attract and retain employees. That use, in the current labor market, goes to the heart of a company’s ability to compete and its very survival.

In that sense, the interests of an institutional shareholder, which holds stock in a multitude of companies and is interested in maintaining only its own value, are less crucial than that of the employer, whose very existence is on the line.

So, when an employer considering whether to boost or diminish stock options as an employee benefit is being pulled by shareholders on the one hand and employees and potential employees on the other, the employer must tilt to the latter.

Shareholders should indeed take a close look at the quality and integrity of management in the companies they invest in. But, if management passes muster, then shareholders should let executives employ stock options in the way they judge to be in the best interests of the company.


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