Volume 18, No. 11

S&P 500 Stock Compensation: Running Out Of Options:  Executive compensation is a perennial sore spot for investors. Compensation packages designed to knit together shareholder interests and those of the managers working for them were subverted over the years by substandard accounting standards that let compensation tied to option rewards go unreported.  By the time the faulty accounting was repaired in the mid-2000’s, the damage was probably irreparable: super-size compensation packages continued to be the norm in American companies. Even though there’s complete expense recognition given to pay denominated in options, and even though there’s now a compensation effect on earnings - equity instruments for pay continue to be dispensed like water from a fire hose.

Instead of focusing simply on the compensation of a handful of executives, investors should focus on the relationship between “incentive” compensation and other forms of deferred compensation - like pensions. Investors worry about being on the hook for contributions to sinking pension funds - but fail to consider how management stock comp largesse compares to pension funding. Investors also fail to compare firm-wide stock comp largesse to factors affecting corporate returns - factors like research and development or capital expenditures. Finally, investors fail to look at how their ownership interests are crowded out by stock comp plans. These overlooked relationships are examined for the S&P 500 in this report.

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