Investors Should Take Close Look at Executive Compensation

Article excerpt

Anyone who owns stock in a major U.S. company should look closely at what's going on in corporate compensation circles.

We're not talking about the multimillion-dollar salaries, the hefty severance deals, the company cars and planes and country-club memberships.

We're talking about stock options.

These options, which are rights to buy common shares at a set price in the future, were designed to make company officers feel like owners rather than hired hands. And that was supposed to result in better management, thus higher share prices _ a benefit to both the managers and outside stockholders.

Instead, many of these plans give managers the riches and outside shareholders the shaft.

The latest news on this subject was a proposal by Time-Warner Inc. to sell more than $3 billion in new securities. The proceeds would have been used to pay down the company's staggering $11.3 billion debt.

According to the plan filed with the Securities and Exchange Commission, the company's current stockholders would have been forced to kick in at least $63 for each of their shares if they want to own the same percentage of the company. Shareholders were so unimpressed with the deal that the company's stock price fell 20 percent immediately after the terms of the transaction were made public.

The company dropped the plan Thursday.

Time-Warner had argued that paying off debt would benefit shareholders _ the company would be healthier and shareholders will be better off. And that may be true. But what's troubling is that stock options held by managers will be "adjusted" so that executives do not have to pay for the deal like other shareholders.

Unfortunately, this isn't unusual. Stock deals that benefit managers _ often at the expense of other shareholders _ are becoming the rule rather than the exception, said Graef Crystal, a compensation expert and professor at University of California Berkeley.

"Executives are only in the same boat as shareholders when the stock price rises," Crystal said. "When the stock price tanks, shareholders are in a tiny, little rowboat going down the drain, while the executives are sitting on the deck of the QE2 waving goodby."

Shareholders have been virtually powerless to do anything about this problem because of SEC rules that essentially said they can't have a say in a company's day-to-day operations. …