More News On My Pet Peeve – Option Repricing - The GovernanceGadfly - 19 Aug 2009

More News On My Pet Peeve – Option Repricing

There were two news pieces today that involved option repricing that are worth mentioning.

The first was a piece about a study that tracked CEO pay in 2008. 
The article reported that CEO pay rose in 2008 despite the crumbling
economy.  Of the 10 most highly paid CEOs, only one is from a top 20
company – Larry Ellison of Oracle, who pocketed $557 million, coming in
at # 2.  I know you’re wondering: # 1 was the Blackstone
Group’s Stephen Schwarzman at $702.4MM.  See http://finance.yahoo.com/tech-ticker/article/306108/The-Rich-Get-Richer-Top-CEO-Pay-Up-While-Stocks-Tumble?tickers=aig,anf,dia,spy,bx,orcl&sec=topStories&pos=9&asset=&ccode=.

I know you’re saying to yourself, “Hey wait a minute, Dave – didn’t you say in the April 3 post on your old site, http://corporategovernancegovernance.blogspot.com, that CEO pay decreased in 2008, and that none of the 20 biggest companies had their CEO in the five most highly paid?”

Well, I’m going to answer that question, because I also asked it of
myself.  Yes, I did say that in my April 3 post.  Today’s article is
based on a study that tracked cash received, including cash reaped as a
result of exercising options, then selling shares (this is where my pet
peeve begins to come in – read on).  My April 3 post was based on a
Wall Street Journal article that tracked pay as disclosed in proxy
statements.  Those statements calculate pay based on a theoretical
current value of options that can only be exercised in the future, a
dubious proposition.  So I like the study in today’s Yahoo! article
better.

The study in today’s article is discussed in a video you can watch
that is embedded in the article.  In the video, Michelle Leder gives
more detail on the study and explains that in many cases, options get
repriced so that the execs can make more money.  Yes, that is my pet
peeve. 

Ms. Leder runs a nifty website, www.footnoted.org,
that publicizes SEC filings that otherwise might be buried and
overlooked.  If you’re interested in corporate governance, I highly
recommend it.  If you’re not interested in corporate governance, www.espn.com or www.oprah.com might do the trick.

Ok.  Today’s second piece on option repricing was a New York Times
article about an appeals court throwing out the conviction of Gregory
Reyes, former CEO of Brocade Communications Systems.  See http://www.nytimes.com/2009/08/19/technology/companies/

19options.html?th&emc=th.

The allegations were that Mr. Reyes re-priced options for his
benefit but did not disclose the resulting earnings hit.  Apparently
the prosecutors told the jury that Brocade’s finance people were
unaware of the re-pricing (how could they not be?), after the same
people told government investigators that they were aware of it.  That’s a no-no.  So the appeals court remanded the case back to the trial court for a new trial.

According to the article:

“Backdating in and of itself is not illegal. But accounting rules
require the company to record such grants as a noncash expense.
Otherwise, companies could greatly inflate their profit through
improper backdating.

“Studies have shown that backdating was not uncommon. At hundreds of
companies, options grants were listed at historical lows for their
stock prices — far too often to have been simple statistical anomalies.”

No duh.  If they prosecuted all the executives that have benefitted
from options backdating, there would be no one left to run the tech
industry.

http://thegovernancegadfly.wordpress.com/2009/08/19/more-news-on-my-pet-peeve-options-repricing/