When bad ideas go bad: the stock options scandal

By Lee Russ

Wednesday, January 10, 2007 at 05:09 PM

You've undoubtedly heard about the ongoing scandal of allowing corporate executives to make millions off their stock options by the simple device of back-dating the grant of the option to guaranty huge profits. But did you know that the current popularity of the stock option as a means of compensating the expensive but empty suits was part of a "reform" effort that tried to tie executive compensation to executive "performance?

This is the way it works for you and me: You buy a stock and hope it goes up. If not, you might cuss a bit, but ultimately you take the loss. Such is life.

But this is the way it has worked for some company chief executives: They bought a stock, it went down, so they went back and found a better date. If you think about it, any stock (or more accurately, an option to buy a stock) can be profitable if you manipulate the date of purchase. Such a deal.

What's troubling about this year's option scandal is that it began as a "reform" measure; the idea was to tie executive performance to the price of the stock. That way the interests of shareholders and managers would be aligned.

"At many companies, options morphed into the biggest executive bonanza yet, pouring out cash like a stuck ATM, sorely disappointing those who thought options would moderate executive pay," The Wall Street Journal said last week.

And just who is surprised that it turned out this way?  You create a device which is designed to compensate a specific group--corporate executive.  You put all the aspects of the device that will determine how profitable it is to that group in the hands of that very group.  You go to sleep, smug and satisfied that you have really put it to the members of that group, and that they had better shape up or go uncompensated.

Yeeesh!