The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISFigure 2.9Grant-Date Number of Employee Stock Options (measured by % of company shares) in theUSA S&P 500, 1992-2005Note: Figure shows the grant-date value of options (in millions of 2006-constant dollars) granted to all employees in anaverage S&P 500 firm, based on data from S&P’s ExecuComp data. Grants below the Top 5 are estimated based on“Percent of Total Grant” disclosures; companies not granting options to any of their top five executives are excluded.Grant-values are based on company fair-market valuations, when available, and otherwise use ExecuComp’smodified Black-Scholes approach. The number in parentheses indicates the value of the grant, on average, that isawarded to the indicated employee (or employee group).employees on 2.6% of its shares. By 2005, annual grants as a fraction of outstanding sharesfell below 1995 levels to 1.3%.Over the 14-year 1992-2005 time period, the average USA S&P 500 company awardedover €1 billion worth of options to its executives and employees (or €500 billion across all500 companies). Moreover, the average S&P 500 company transferred through optionsapproximately 25.6% of its total outstanding equity to its executives and employees. 522.4.4. Options Replaced By Restricted Stock (2002-2010)As shown in Figure 2.2, the compensation of the median S&P 500 CEO peaked in 2001after increasing monotonically for over a decade; average compensation peaked a year earlieralong with the Internet “bubble.” Since that time, both median and average compensationhave fluctuated, but have not displayed a discernable trend. But, as shown in Figure 2.3, the52 The 25.6% calculation simply sums the annual percentages in Figure 2.9. This calculation overstates thetransfer of equity to the extent that some options are forfeited or expire worthless, and understates the transferof equity to the extent that the overall base of shares expands as options are exercised or as the company offersadditional shares.-37-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISFigure 2.10 CEOs in USA S&P 500 Firms receiving equity-based compensation, 1992-2008Note:Sample is based on all CEOs included in the S&P 500, based on Standard and Poors’ ExecuComp database.apparent “leveling” of CEO pay in the USA masks a more dramatic change: the decline instock options and the emergence of restricted stock as the largest single component ofcompensation. Figure 2.10 shows the percentage of S&P 500 companies that made stockoption or restricted stock grants to their CEOs between 1992 and 2008. The percentage ofcompanies granting options in each year increased from about 63% in 1992 to 88% by 2000,falling to 68 percent in 2008. Over the same time period, the percentage of companiesmaking restricted stock grants more than tripled from 24 percent to 74 percent. We believethat a large part of these trends reflects the changes in the accounting treatment of stockoptions.Accounting scandals erupted across corporate America during the early 2000s,destroying the reputations of once-proud firms such as Enron, WorldCom, Qwest, GlobalCrossing, HealthSouth, Cendant, Rite-Aid, Lucent, Xerox, Fannie Mae, Freddie Mac andArthur Anderson. The scandals focused attention on the quality of accounting disclosures,which in turn renewed pressures for companies to report the expense associated with stockoptions on their accounting statements. Before 2002, only a handful of companies hadelected to “expense options” under FAS123; the remainder elected to account for optionsunder the old rules (where there was typically no expense). In the summer of 2002, several-38-
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