how to create barcode in vb.net 2010 THE PROBLEM WITH OPTIONS in Software

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THE PROBLEM WITH OPTIONS
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Executive stock options are a problem for two reasons. First companies have granted too many of them. Second they are ineffective incentives and rewards at most companies. This has been exacerbated by accounting rules that contributed directly to the untenable mess that all of us involved in executive compensation, including executives, board members, and compensation consultants, must address. Let s look at the facts. Under current accounting a very narrow definition of a derivative security specifically an at-the-money call option granted to an executive or other employee receives a very special accounting treatment. These options have no expense whatsoever associated with them, no matter how many are exercised and no matter how much money executives make from them. Through this strange but very tempting little loophole, truckloads of options grants have been delivered to executives with no expense to the companies granting them. Because of this same loophole, hundreds of billions of dollars of shareholder value have been transferred to executives with virtually no controls or limitations. But this is only part of the story. More importantly because of this loophole, approximately 95 percent of public companies pay their executives in exactly the same way, using exactly the same specific derivative security. And they have blindly granted them in substantial and ever-increasing num-
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CHAPTER ONE Dimensions of the Problem
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bers. I refuse to believe that large quantities of at-the-money call options are the best incentive for virtually every public company. There is no way that if every company in America started with a blank sheet of paper, virtually all of them would simultaneously conclude that this particular form of incentive is precisely the best one for them. That is absurd. This might not be a problem if we knew that options were (A) an effective incentive and (B) a cost-effective way to deliver that incentive, but we do not. Because there is no expense, companies have never been forced to make this determination. They just keep granting these narrowly defined derivative securities in increasingly larger quantities, as illustrated in Figure 1-2. All the while 10 to 15 percent or more of the increase in value of the entire stock market is being transferred from the pockets of shareholders into the pockets of employees and mostly into the pockets of executives. As I will discuss in the latter chapters, options are not effective as incentives for a variety of reasons (see s 6 and 7). The point is that increasingly larger option grants by virtually all companies are likely a misuse of corporate resources. In a few companies options have contributed to some highly dysfunctional and overly risky behavior. In the majority of companies, they have been
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Executive Compensation Growth
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Dollars in Millions of Total Compensation
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Options 27% of Total Compensation 40% of Total Compensation Options 60% of Total Compensation
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In 1992 the median compensation paid to CEOs was $1.8 million. Of this median compensation 27% was paid in the form of stock options. By 2000 the median compensation increased to $6.1 million with stock options contributing 60% of the total compensation.
Source: The Conference Board on Public Trust and Private Enterprise
PART ONE The Stock Option Problem
ineffective incentives to encourage and reward meaningful and sustainable corporate performance. Clearly many steps must be taken by companies and their boards, including examining the expensing issue, weighing the pros and cons of stock options, exploring alternative forms of incentives, and improving board governance over executive compensation. Before considering these issues in later chapters of the book, it is important to discuss the dimensions of the problem a bit further.
THE CURRENT SITUATION
Despite the decline in corporate performance since 2000, total executive compensation packages have remained very generous, particularly when it comes to stock options, according to an April 2002 Wall Street Journal special report. Total direct compensation for CEOs fell 0.9 percent; the first downturn since the newspaper began tracking this data in 1989.2 Total direct compensation includes salary, bonus, restricted stock value at the time of the grant, gains from exercising options, and other long-term incentive payouts. While this reported compensation has declined slightly, many executives have more than made up for any drop in cash compensation with substantial additional stock option grants. According to the Journal article, top executives of 111 of the 350 firms surveyed received mega option grants in 2001, up from 85 in 2000. A mega grant has a face value of at least eight times an individual s salary and bonus. (The face value is the number of options granted times the exercise price per option.) As long as options grants were free with no required expense, executive compensation never really declined. Even in a bad year, when CEO salary and bonuses decreased due to poor corporate performance, companies made up the difference with even larger option grants. For example, a CEO who received a $900,000 base salary and a $500,000 bonus also received a mega grant of options on $11.2 million in stock. This means the CEO has been given the right to the increase in value on $11.2 million in stock for the next 10 years. If the company s shares go up only 10 percent in value, when he exercises his options from the mega grant, he will make $1.12 million. This profit would be in addition to the options he normally receives annually on $2 million to $3 million in stock.
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