Corporate theft?

The theory of stock options is one proof that the science of economics has fallen prey to  the very social mechanism it attempts to describe....

Stock options - the right to buy company shares (stock) at below market prices - came into vogue when economists at the University of Chicago constructed a theory that directors and senior managers should act as the "agents" of the owners and be given a direct personal interest in the company. Options, it was argued, made the interests of directors and interests of shareholders the same.

Before the "shareholder movement" of the 1980s the interests of corporate managers were held, in theory at least, to be very different from those of shareholders. Since managers back then were a professional group in their own right, there were concerns that, "out of professional pride", they might pay workers too much or produce goods of too high a quality. As such they had little incentive to perform the sort of stunts that would bring about the short term appreciations in share prices. The answer devised in the 80s was to compensate directors in shares as well as salaries. By making directors owners of the company it was believed that they would become particularly motivated to help the company achieve good long-terms results. It was, as Joseph Stiglitz wrote in The Roaring Nineties, a seductive argument but as events have since proved, ill-founded.

Granting options to top executives dramatically changed the class dynamics of the corporation. During the 90s, compensation of American executives was completely out of line relative to the salaries of both middle management and of workers. Stiglitz noted that while senior executive compensation rose 36% in 1998 over 1997, the wages of the average blue-collar, in the same period, rose just 2.7%.

All the talk about "incentive pay" was in practice simply a euphemism for "big pay". For instance, in 2001 fiscal year, Cisco's John Chambers, is said to have cut his annual pay to $1 and yet received 6 million stock options as his company lost $1 billion and its stock price fell 70%.

Stock options essentially encourage executives to be preoccupied with stock prices in the short run and in the short run it is easier to use "creative" accounting to give the appearance of profits than to increase true profits. The objective being to create the appearance of alluring success and/or promise and cash out before the world discovers the truth. Enron, anybody?

Small wonder, some people refer to stock options as corporate theft.