Wednesday, December 20, 2006

IBM Ditches Lauded Stock Options

The widely practiced “impersonal rewarder” of executive performance, stock options are on their way out at IBM. The company chose to double pay for members of its governing board while dropping option grants altogether.

An article on executive pay states the logic behind stock options:

Industry's conventional wisdom is that options tie executive compensation directly to the long-term fortunes of the company: If the stock price goes up, executives and shareholders all benefit. If the stock price drops, executives get nothing.

So what happened during the dozen or so years that options comprised a significant chunk of executive and board compensation? Nearly 1/3 or 2,000 publicly traded companies manipulated their stock option grants by backdating them. Picking the stock’s lowest price of the quarter enabled execs to maximize their pay without doing much other than using hindsight.

Of course the consultants who design such pay for performance systems have advice to improve their implementation. These include restricted stock grants and more specific performance measures. However, if the people at the top cheated with the simpler program, why wouldn’t they cheat with their more complex successors?

Notice no one is talking about eliminating such performance plans altogether. Dr. Deming would if he were still with us. The man who rebuilt Japanese industry after World War II would be appalled by the goings on in corporate executive suites and board rooms. That our federal government picked up on pay for performance as way to solve America’s education problems must have Dr. Deming fuming in the afterlife. “When will they ever learn?!!”

With managerial reward systems that distort behavior, learning will become ever more difficult in our public schools. Will the students learn how to cheat from their teachers? Educators have to be near as smart as America's CEO's…

1 comment:

PEU Report/State of the Division said...

Do they give you stock options too? How long before they vest? When you flip them will you make over $1 million like Senator Bayh's wife?