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Wrong options

The stock options backdating scandal swirling through US boardrooms could damage more than the reputation of a few chief executives. Regulators and press attention to the practice is threatening to attach an indelible stigma to options as a whole. With several US companies already moving away from options because new accounting rules consider them as an expense, the mechanics of employee compensation could be in for a major disruption. It is easy to sneer at options as a get-rich-quick scheme for Silicon Valley whizz-kids. And it is right to attack abuses such as backdating - the corporate equivalent of having your cake and eating it. But it is worth remembering that options have enabled vast tracts of the US economy, not just the high-technology sectors, to lure and motivate top talent.

By promising workers a stake in the future of the company, they have also fostered a sense of ownership that has helped drive corporate America's recent productivity increases. But in the past three years, the number of companies giving options to employees has fallen 40 per cent, according to PwC. The trend is all the more worrying because the alternatives being offered are unsatisfactory. The current favourite, restricted stock - shares that cannot be sold until a certain date - is just as imperfect as options at rewarding performance. And it has the side-effect of giving holders the right to vote and receive dividends even though they do not actually "own" the shares - a feature that, incidentally, gives undue power to executives with millions-worth of restricted stock. Companies should really spend more time and money devising more sophisticated pay schemes. But until they do, it is unfair to penalise employees for executives' sins and accounting changes.

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This Forum program is open, free of charge, to all shareholders of the invited corporate participants, and to any fiduciaries or professionals concerned with the investment decisions of those shareholders, according to the posted Conditions of Participation.  The Forum's purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their investment interests described in the Forum Summary.  As stated in the Conditions, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program has been organized with the support of Hermes Equity Ownership Services, Ltd.  It is the first in an expected series that will be managed by a not-for-profit “Institute” to be established for the purpose of continuing the Forum programs conducted by Gary Lutin.