http://www.scrippsnews.com/node/11552
Executive bacchanalia
Business & Economy | Business & Technology
By LEE DRUTMAN
Recently, the Securities and Exchange Commission finally got around to approving new executive-pay rules. The new rules (the first in 15 years) come as concern about the latest flabbergasting fiasco of executive chutzpah _ the backdating of stock-option grants _ continues to metastasize.
Under the new pay rules, corporate proxy statements will come with a "Compensation Discussion and Analysis" section, which will explain and justify executive-compensation levels to investors _ unless, of course, the company begs out of this requirement by proving that such disclosure would reveal competitive information (a potentially gaping loophole).
The disclosure is meant to prevent companies from burying descriptions of unrestrained executive perks in abstruse legalese in the far corners of financial reports. Investors complained that this practice was confusing and misleading; now, if all goes according to plan, the investors will be able to see not only that executives are earning "a lot," but also that they are earning "even more."
The rules will probably spur innovation. Companies will doubtless discover creative ways to justify giving executives annual compensation of the kind that it would take an average worker several lifetimes to earn. (Big-public-company CEO compensation now stands at about 400 times average-worker pay.)
As for stock-options backdating (the executive pay scandal du jour), companies will now have to document and justify all options grants. Nothing, however, says that justifications have to be convincing. For example, when The Wall Street Journal recently reported that almost 200 companies had taken advantage of post-9/11 stock-market lows to grant top executives millions of stock options, a Black & Decker's spokesman responded: "It did not bother the board that it was at an advantageous strike price, because that helped the retention aspect." Take that, shareholders!
At last count, at least 80 companies were under investigation for backdating: changing the grant date to a time when the company's stock price was lower than the original grant date. (Options sellers get the difference between the stock price on the day of the sale and the stock price on the day of the grant _ so changing the grant date to a lower-stock-price day is an easy way to make more money on option sales.)
As usual, the winners in this scandal are mostly top executives, and the losers are ordinary shareholders. The irony, of course, is that stock options were designed to align the incentives of executives and shareholders, by giving executives a stake in the company's share price. Instead, in an astonishing demonstration of the law of unintended consequences, stock options display the irrepressible ingenuity of avaricious executives and their friendly boards. (Options also played a pre-eminent role in the recent cascade of accounting scandals, giving executives a powerful incentive to artificially inflate earnings and cash out at a stock-market high.)
Indeed, despite all efforts to the contrary, American corporate executives keep coming up with ways to get even richer _ far outdoing their corporate compatriots throughout the developed world. (The United States is an outlier in executive- to worker-compensation ratios, by a factor of 10.)
This month, it's backdating of stock options. Next month: Who knows what fiscal bacchanalia will undermine any sense of fairness and shared enterprise in the corporate economy _ what daring act of clever cupidity will provoke further resentment from the ever-more-beleaguered ranks of working America? But hey, at least with this new requirement for disclosure of executive compensation, we'll know a little more about it.
(Lee Drutman, a California-based writer, is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy," Berrett-Koehler Publishers. E-mail ldrutman(at)gmail.com.
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