During the boom years of the late 1990s, many of the nation’s biggest companies justified lavish option grants to chief executives as a reward for delivering equally out-sized earnings. Not so, say the authors of a new book, who scrutinised almost a decade of regulatory filings by bricks-and-mortar corporations and came to the conclusion that the bottom line has failed to keep pace with executive pay.“There’s no question that there isn’t any scientific evidence that the level of executive compensation we’ve reached promotes positive shareholder returns,” said Joseph Blasi, co-author of In the Company of Owners: The Truth about Stock Options and Why Every Employee Should Have Them.Blasi—who wrote the book with Douglas Kruse, a fellow Rutgers University School of Management and Labor Relations professor, and Aaron Bernstein, a senior writer at Business Week magazine—said top executives at 1,700 ‘traditional’ US companies saw their stock option profits leap nearly 640 per cent between 1992 and the end of 2000, when they hit $17.7 billion.During that same time period, when those executives also saw their paper wealth from unexercised options rocket, the total market value of the companies they captained climbed only 350 per cent, they said.The authors, who combed through reams of Securities and Exchange Commission filings and reviewed years of research on compensation-related issues, also said they found that the firms whose corporate chieftains were most likely to take a bigger share of options had sub-par performance to begin with.“We do think it’s important to align executives with shareholders through employee ownership—but not at these astronomical levels,” said Blasi, who added that companies would do better to give lower-level managers and employees options as an incentive. As the title suggests, the authors come out on the side of broad-based employee stock option plans. The use of employee stock options has come under fire lately due to recession and a string of high-profile accounting scandals and bankruptcies. Proponents say employee options plans enhance shareholder value, while opponents say they enrich company insiders at stockholders’ expense. This book—written during the recent stock market decline that wiped out trillions of dollars of investor wealth—is a follow-up to The New Owners, Blasi and Kruse’s book from a decade ago about growing employee ownership within US companies. Admitting that it does not give a strict ‘apples-to-apples’ comparison between old and new economy companies, Blasi said the research does show that high-tech shops shared more wealth with workers than ‘traditional’ firms.To that end, he said, rank-and-file employees at 100 high tech companies selected by the authors held 19 per cent of options, while only 2 per cent of options went to such workers at old-school companies. Finally, the authors said, a review of 25 years of research on broad-based employee stock options plans suggested three key things.• First, that employee ownership improves a company’s productivity level by about 4 percentage points, compared with firms that don’t adopt such practices.• Second, that total shareholder returns are about 2 percentage points better, relative to other firms.• And finally, that profit levels—as measured by return on assets, return on equity, and profit margins—jump by around 14 per cent. (Reuters)
