Category: Money Tips Date: 2007-05-15
Recently, the domestic equity incentive plan executives of listed companies have emerged. In fact, if equity incentive plan unreasonable, then, will result in executive pay levels with the level of operating performance seriously do not match, unable to meet its due role in this scheme.
In the 2005 Berkshire annual report, the famous investment guru Warren Buffett on the U.S. equity incentive plans of listed companies are always stuffing the pockets of executives rather than to truly improve company performance levels were severely criticized, which could be my just emerging equity incentive plan upon the formulation and implementation of some inspiration.
Buffett said that in many cases, the U.S. executive pay levels and operating performance does not match the level of serious, and this situation will certainly not improve. Because the CEO remuneration arrangements, as do a license by fraudulent means out of the old 1000, as already pre-arranged, it is entirely not conducive to investors. The result is a mediocre or even poor performance of CEO, in his head carefully to identify relationships and very helpful consulting firm consultant's help, will eventually allow the company to develop a maliciously-designed executive compensation plan, from engaging in to a large sum of money.
Buffett to ten fixed-price stock options as an example. Suppose stagnation Inc. (Stagnant) granted to Mr. CEO useless (FredFutile) a certain number of stock options, such as the equivalent of 1% of the company's total share capital, then his personal interests will determine his behavior is very clear: he will definitely not be allocated to shareholders any dividends, but with the company all the profits to buy back stock, thus pushing up stock prices, so that his own stock options to maximize returns.
In its annual report, the shares of God to make the following assumptions: the useless, under the leadership of Mr., stagnation company worthy of the name, did not achieve significant growth. Options the decade after the release, the company's annual 100 billion in net asset value basis, profit of 10 billion U.S. dollars, assuming all of the outstanding shares of the company for 100 million shares, which means that per-share profit of 10 U.S. dollars. Useless's refusal to distribution of dividends to shareholders, buy back shares but with all the profits. If the stock price has maintained the level of 10 times earnings, then the options expiration date, propelling the stock repurchase will be 158%. This is because the continued buy-back will enable the company to reduce its 3870 million shares outstanding, earnings per share would thus increase to 25.80 U.S. dollars per share. Is just simply the proceeds retained by shareholders, not do the distribution, by pushing up stock prices continued to repurchase shares, CEO useless and will be able to receive 158 million U.S. dollars, Mr huge wealth, even though his leadership, the company's business do not have any growth . More surprising is that even if the company's stagnant earnings in the past decade declined by 20% through stock options, Mr. useless can still earn more than 100 million U.S. dollars.
In another case, non-distribution of dividends, retained earnings would be disappointing to invest in a variety of projects and random junk on mergers and acquisitions, stock options, Mr. useless still be able to let him make a killing. Even if these investments can only get a mere 5% rate of return, Mr. useless stock options will still be able to earn his bulging wallet. The calculation shows that in the decade stagnant stock price-earnings ratio remains unchanged circumstances, the options would make him useless, Mr. 6.3 million U.S. dollars earned. In the meantime, all shareholders will begin to suspect that, when the company's implementation of the equity incentive plan Mr. Xiang Wuyong grant options, it claimed that equity-based incentives will enable executives and shareholders to form "the interests of alliance", but the result is that no matter how how the performance of the company, CEO it can make a killing? This is how what is going on?
Of course, a "normal" dividend policy, such as one-third of the profits for distribution of dividends, the implementation of the stock incentive plan will make the proceeds with the company after the CEO does not match the level of performance decreased, and will not like is nothing distribution of dividends that do not match so extreme, but still allow those who do not have any success managers receive generous rewards.
Buffett said that, CEO were well aware that the allocation of dividends less he earns from the stock options on the more they know the distribution of dividends to shareholders every penny is a corresponding reduction in the value of the issued options. However, never seen any company to consider approval of the shareholders equity incentive plan materials mentioned before, the implementation of a fixed-price stock option plan in fact exist between management and shareholders, conflicts of interest. Although the CEO is always invariably within the company to promote, there is no free lunch, access to capital is always to pay the cost, but they do not know why they always forget to tell the shareholders, fixed-price stock options granted to the CEO to bring in capital but is completely free of charge.
For this phenomenon, Buffett sees the company's board of directors in fact a completely avoid this from happening, a simple preventive measures could not have been simple: It is the development of a change in the level of retained earnings as the automatic adjustment of stock options, exercisable at a price of incentive plan. But let Buffett surprise, he had never seen the development of such a listed company's equity incentive plans. In fact, specializes in designing executive incentive plan for the "experts", the option's strike price adjusted retained earnings as incentive programs seem like a strange fairy tale, however, these same experts, for all other companies have developed been in favor of the management incentive plan are well known, familiar with no less than a living encyclopedia.
Domestic capital markets in the individual listed companies on executive equity incentive plan, does not withstand scrutiny. Listen to Buffett's proposal might be a bit helpful. (In investment securities)
