The stock option swindle

When CEO John Roth of Nortel Networks retired in 2001, the company was collapsing around his ears. The stock, selling at $105 a share when he became CEO in 1997, now sold at $6 a share. Tens of thousands of workers were being laid off. The company had shrunk by over a quarter. But Mr. Roth, unlike his company, was in fine shape. Although his salary was a mere pittance at $1.5 million a year, before the sky fell he managed to cash in $135 million in stock options.

Stock options were meant to be a reward for creating company value. Cynics often suggest they are more a matter of creating value for CEOs. Now the cynics seem to have been proven right. Ontario Teachers Pension Plan recently conducted a study of the relationship between the compensation of top executives and their companies' performance and found no such relationship exists. CEO pay and shareholder return simply didn't correlate. Indeed, the most mediocre companies were generously providing the highest executive incomes. The study's authors were so surprised by the result they redid their work various ways but kept coming up with the same sad answer.

The Pension Plan people shouldn't have been surprised. The world of CEOs and boards of directors is one of financial incest, one of good old boys taking care of other good old boys. If shareholders want to pay their top people top dollar only when they've earned it, they are obviously going to have to be a lot less forgiving of their boards. In fact, considering we all pay for these golden handouts one way or another, perhaps we should all be a lot less forgiving.