Volume 11, Nos. 9 & 10


2001 Stock Compensation:  500 The Hard Way:  Kozlowski. Rigas. Ebbers. What do the names have in common? They belong to three men who've been ousted from their positions of power. They've all been laid low by the self-dealing transactions they engineered with the firms they were supposed to be running for shareholders. All of those deals involved remuneration of some sort and were not clearly visible in their firms' financial statements. Had such dealings been more visible from the start, no fall from grace might have been necessary; full financial clarity might have made such transactions unthinkable. In the end, free markets and slow-moving corporate governance removed these men from power inefficiently and messily. Maybe the right things got done - but they were done the hard way. Managements have a penchant for doing things the hard way when it comes to transactions they don't want shareholders to see. They'll lobby Congress to help them keep stock compensation expense from being shown in plain sight. They'll spend large sums of shareholder cash on share buybacks just to keep options from nicking earnings per share. They'll scare the living daylights out of unthinking investors with apocalyptic stories of how good accounting for stock compensation makes for bad stock returns. In short, to keep markets from effectively monitoring their actions, they'll do things the hard way - no matter the cost. Fortunately for investors, there are clues in the annual report footnotes about the earnings effects of stock compensation plans. It's tremendously inefficient to take information from the footnotes and insert it into the income statement where it belonged in the first place - it's the hard way to do things, just like managements would like it to be. Nevertheless, the end result shows why they want this kind of information to be hidden - out of sight, stock compensation in the S&P 500 continues to grow at outrageous rates.

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