ECONOMY

Executives’ stock options are not a very good idea

More than six months after the issue of stock options for top US company executives became headline news, more and more Greek companies appear ready to set up such plans, while others have already done so. Although the extremely generous terms of most Greek stock option plans should have attracted the attention of all interested parties, including the tax authorities, few seem to have bothered. This, however, will undoubtedly help to furhter undermine the confidence of local retail investors on the Athens Stock Exchange and may even prolong its long-sought recovery. In theory, stock option plans are supposed to be enacted to align the interests of employees with the interests of shareholders, making the employees feel they are part of the company and providing them with more incentives to increase their productivity and help boost company profits. A study by Douglas Kruse and Joseph Blasi at Rutgers University in the USA showed last year that over a three-year post-plan period, companies which granted stock options to most or all employees experienced a 17 percent increase in productivity over what would have been expected had there been no plan. According to the same study, their stocks did better or the same as comparable companies during the same period. On the other hand, companies that granted options to just a few high-level employees did not do as well. Even so, it should be noted that an average of 65 to 70 percent of the total options granted in the USA goes to top management. Moreover, recent history shows that many stock option plans had little to do with the well-being of the company and its employees. Indeed, many stock option plans were set up to provide top executives with extra benefits, giving them in turn reason to «cook» the financial results so as to drive their company’s share price higher and, therefore, make the exercise of their stock option profitable. Exercising the option In Greece, they do not have to do that. They simply set the exercise price of the stock option so that those who are entitled can buy the shares at low prices and ensure that the options will be exercised when the time comes. In many cases, all employees have the right to participate in the stock option plans but still the lion’s share is reserved for the few at the company’s apex. It is reasonable for somebody to ask why such stock plans are approved in the first place by the general shareholders assembly. Still, the answer is simple. In many cases, the top executives happen to be the company’s major shareholders, so it is no surprise that they would vote in favor of granting options to themselves and setting the exercise prices at extraordinarily low levels, sometimes 50 percent or more below the share price at the time, so that they can reap the benefits quickly. The fact that Greece does not tax the capital gains on stock transactions makes the appeal of stock option plans even greater as they can churn out a good deal of tax-free money. The holder of the option gains the difference between the current stock price and the exercise price. It is also no surprise that some top executives, who happen also to be major shareholders, have been liquidating some of their shares at higher prices with the obvious intention of buying them at a much lower price via the stock option plan. Although some listed local companies used to provide equity compensation to their top executives, the number has grown immensely in the last couple of years. So much so that even executives working for listed companies whose stocks have suffered steep losses on the back of declining corporate profits have been able to exercise their options and earn huge amounts of money. Last Thursday alone, the Athens Stock Exchange authorities authorized the floating of millions of new shares related to the stock option plans of 13 companies. In one case, Intracom, the company was given the green light to issue more than 4 million new shares or 3.23 percent of its outstanding shares within the context of its stock option plan to employees. The exercise price had been set at 2.63 euros some time ago when the stock was trading at much higher levels than Friday’s close of 4.26 euros. There is no question that the current structure of Greek stock option plans does little to restore investor confidence in the local stock market. It may well be argued that it adds insult to injury since these stock option plans are not tied to above-average corporate performance and simply provide mega-grants to top executives at the expense of existing minority shareholders. To that extent, the current system of stock option plans should change to avert a confidence crisis which will simply prolong the market’s downturn, deprive public finances of much needed revenues and hurt the real economy. Measures such as prohibiting executives from exercising their options before they leave the company and taxing capital gains as personal income in case the exercise price is set below market prices should be high on the agenda of any reform