Stock Options and the New Rules of Corporate Accountability

In Stock Options and the New Rules of Corporate Accountability, Don Delves has given us a clear, lively exposition of multiple issues and variables to be considered in formulating incentives to improve corporate and executive performance. Along with his unequivocal advocacy of expensing stock options, he calls for a more balanced approach to compensation, one that blends a variety of elements to engender more attention on the long-term health of the enterprise. His interviews with thought leaders such as Paul Volcker and Myron Scholes and the incisive questions he poses help frame a robust debate on the proper use of options.

Author’s Introduction:

Will stock options disappear? I hardly think so. Nor should they. There is nothing inherently wrong or bad with stock options. The damage is done, however, when huge amounts of stock options—which promise a share of future shareholder wealth—are granted indiscriminately. In the new world of executive compensation, stock options and all other forms of compensation will have to be earned through performance.

Given the decline in the stock market over the past three years, stock options may not be perceived as the bonanza that they once were. There are many companies who have granted stock options in the past, with exercise prices that are far above where the stock is currently traded. Paper fortunes have been amassed and lost. In this environment could the bloom be off the stock-option rose? Perhaps.

Companies must use lucrative rewards to attract and retain talent. Human capital, from the executive office to the sales department to the factory floor, has become increasingly important. But merely granting options “freely” is not going to be the one-size-fits-all solution. For one thing under the proposed (“new”) accounting rules, the options will not be free. More importantly companies will need to question if a stock option is the right kind of incentive—with the desired perceived value—to provide to executives and other employees.

Microsoft recently took a bold and revolutionary step in deciding to replace all of its stock options for virtually all of its employees with restricted stock. In so doing, this leader of the technology industry has acknowledged the limited perceived value of options relative to their likely expense and the need to replace them with more highly valued and effective incentives. While the new restricted shares for most employees will vest over five years based only on time with the company, shares granted to the top 600 executives will be based on achieving performance objectives. To truly improve executive compensation, it is critically important that companies do not just blindly replace executive options with time-vesting restricted stock. This will merely replace a gamble with a gift. Future long-term incentives must be based on achieving specific performance goals.

Many others in the broad world of compensation are seeking to do things differently. I have talked with people who have a variety of well-reasoned opinions and points of view. At the end of many chapters you will find questions to consider about stock options and executive compensation, as well as interviews with respected CEOs and other thought leaders. It is my hope through this book to foster a robust debate. The goal is to develop solutions that promote healthier companies and by extension a stronger economy.

Contents:

• Dimensions of the Problem
• The Sources of the Problem
• The Accounting Story
• An Accounting Solution Everyone Can Live With
• Valuing Options
• Providing the Right Questions—and the Right Tools—for Boards
• Making Options Performance Based
• Designing a Balanced Portfolio of Incentives
• Building Healthy Employee-Employer Contracts for Public and Private Companies
• Restoring Corporate Integrity
• Vision for the Future

Stock Options and the New Rules of Corporate Accountability: Measuring, Managing, and Rewarding Executive Performanc By Donald P. Delves pdf