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Executive Compensation

Ever wonder why most companies pay executives (i.e. CEO, CFO, COO etc.) in stock options rather than cash?

The annual base salary of a CEO of a large U.S. company could be $800,000 "only", but he may end up receiving stock options worth $10,000,000! The companies normally state that the stock options are an incentive to the executives to work well (since the stock options are not exercisable until the share price hits a certain value).

However, the stock options usually become exercisable almost right away since the "exercise price" is set too close to the current share price for the options to qualify as long-term or even medium-term incentive.

Obviously, shareholders are being misled. The stock options given to an executive should, more appropriately, be considered as part of the annual salary - and not as incentives.

The company derives a huge advantage in the financial statements - namely the Income Statement - by paying executives in stock options. The advantage is that it does not have to deduct from its revenue the amount paid to executives in stock options. Salary paid in cash is deducted (among other expenses) from revenue to arrive at the net income figure.

The result is that revenue is overstated. The executives are filling their pockets with shareholders' money and shareholders are none the wiser.

In the interest of shareholders and investors - and fairness - the securities commission should make it mandatory for companies to deduct the value of stock options paid to executives from the Income Statement.

2 comments:

The Devil's Paradise....... said...

hey... nice thingu ahvestarted writing..... i guess i myslef wud want to become a ceo one day and start dealing in stock options......
i am vinay's frnd.... i ahve a blog of my own.. amateur u may say...i hope u wudn mind me commenting... please do visit mine....
http://intendedpun.blogspot.com/
and feel free to comment.....
- shreedhar

The Shrew said...

Quite Enlightening.
Thanks.
~The Shrew

 
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