Wednesday, January 31, 2007

Note to Bush: P4P Produced Widespread Corporate Stock Option Cheating

As the President wanders in search of an audience that can still stomach his musings, does he ever re-examine his positions? While on Wall Street, the President once again touted “pay for performance”. Corporate stock options, one of the simplest and most impartial pay for performance schemes has a twelve year track record in the U.S. What does it show? A study indicated some 2,000 out of 6,000 publicly traded companies backdated their stock option grants.

Most grant programs did not allow the CEO and his staff to pick the best date of the quarter, the one with the lowest stock price to date their options. Yet, thousands did so in violation of their own rules which makes it a violation of SEC regulations. Company after company is restating earnings over an 8-10 year period, often at a cost of millions in profits to shareholders.

What President Bush claims to be the solution actually created the problem. With no incentive plans, the motivation to cheat to optimize one’s executive pay at the expense of the company goes away. It disappears. While it won’t remove all senior leader pathology, the corporate carrot dangled in front of the money obsessed vanishes immediately (like much of the country envisions the Bush Presidency). Poof!

No comments: