Don't Eliminate Options

Jason Pront
September 18, 2002

Enron. WorldCom. Global Crossing. Angry yet? The recent spate of corporate implosions due to massive accounting fraud has been successful at, if nothing else, provoking the American public?fs collective ire. And, certainly, this anger is well deserved. Corporate greed and deception have not run so totally amok since the Harding administration, and the executives responsible seem to be just as brazen as those from the days of Teapot Dome.

Fortunately for the average citizen, the enormity of this recently exposed fraud is causing significant changes in the way that publicly listed companies in this country conduct business. Yet, while these changes slowly begin to take effect, the public demands more action. And this is where the danger sets in. While we need to do much, much more, (Harvey Pitt, this means you,) we should not go overboard. Some of the demands of the public, in particular the elimination of stock options as compensation, go too far.

Before I go any further, a note of disclosure. I work for a company that trades options on approximately 150 listed companies. However, and I stress this, the options I work with are not the same as the options that employees of major corporations receive. They are similar, but definitely not the same. The options I deal with are purely speculative in nature, and are not issued by the corporation, but are rather created by one of the five major exchanges in this country, which deal in speculative stock options.

There appears to be a growing popular sentiment that stock options for executives should be eliminated. The reasoning behind this argument is that such methods of compensation encourage executives to do anything possible, including fraudulent and illegal actions, in order to inflate the price of their company?fs stock, so as to make their options more valuable and line their own pockets. Thus, by eliminating stock options, the motivation for executives to commit these crimes is eliminated.

This may seem like a logical argument except for one thing. We are forgetting that executives are going to be compensated for positive performance, stock options or no stock options. And, as long as there is a reward for running a company successfully, executives will still have just as much as a motive as before for cheating, lying, and defrauding.

Let?fs look at WorldCom as an example. Various top officials at this former communications giant have been accused of cooking the books in order to hide losses, making the firm appear to be profitable when it was in fact losing money. Proponents of the argument above would have you believe that if the executives at WorldCom never received options, they would never have had the incentive to hide such losses. Well, what about keeping their jobs? That seems like a good incentive for starters. And how about a raise? Or a big cash bonus for a job well done? All of these things are ways a company can reward its executives for strong performance without the use of stock options. The motive for fraud still exists; the only thing that has changed is the method with which the executives in question can reap the benefits of this fraud.

Eliminating options for employees is not a solution to our current problem. Clearer financial reporting, the elimination of ?gpro forma?h earnings, a federal accounting oversight board, and a reform of this country?fs corporate tax code all are. By eliminating loopholes, simplifying reporting standards, and proper government oversight, investor confidence will be restored and illegal activities will be curtailed. What this economy needs is a reform of the system itself, not an elimination of one of its components.