Stock options are promoted by their supporters as the most effective way to align executive and employee interests with those of shareholders.
They are supposed to transform executives from fly-by-night plunderers in the mold of former Tyco or World Com executives into rational leaders who make prudent, long-term-oriented decisions with shareholder capital.
These companies met their demands, and were allowed to do so by shareholders who were far too distracted in their quest to find tech companies with the best growth prospects.By the market bottom in 2002-2003, scores of tech companies were left with unhappy employees holding worthless options with triple-digit exercise prices.Afterward, the number of suspicious grants dropped in half. (BRCM), a communications chip company, stands out as one of the best examples of how an excessive option plan can dilute shareholder interests.The tech bubble of the late 1990s was a time when top-notch engineers and programmers routinely demanded generous stock option packages as inducement to sign on with public companies.This fact is often used as a reason to downplay the seriousness of the issue.
You’d think that shareholders wouldn’t tolerate the use of accounting sleight of hand to compensate executives while bypassing the traditional “selling, general, and administrative” line in the income statement.But first, on the same page of the July 15 Wall Street Journal is another article quoting an early whistle-blower in the backdating scandal.He suspects that it will turn out much worse than what has been exposed in the media thus far (emphasis added): “Erik Lie, a University of Iowa business professor whose work helped fuel regulatory inquiries into backdating, is expected to release fresh research this weekend showing anomalies that suggest a huge cohort of companies may have played games with their options grants.This practice requires at least a nominal investment on the part of the option holder if he or she wishes to exercise.The CEO’s conflict of interest between short-term personal wealth maximization and long-term shareholder interests tends to tilt in the shareholders’ favor.Lillard, the former member of Stryker’s stock option committee. 11 and say, ‘Gee, how can we take advantage of this? Brown said that for the past 10-12 years, the company, to compensate for a relatively small number of options given to executives, has tried to ‘pick what we think would be the low point of the year.