Al's Emporium: CEOs Paid To Crash
djones
As the portfolios of ordinary shareholders imploded in the second stock-market
crash of the 21st century, CEOs looked up from the smoke and ashes and breathed
a collective sigh of, "Hey, you know what? It's a buying opportunity."
Only CEOs don't have to buy. They get their crony boards to award them stock
options.
More than 90% of the CEOs of companies in the Standard & Poor's 500-stock
index loaded up with stocks or options in the grim, uncertain months between
October 2008 and September 2009. And the value of this largely free equity has
since grown by more than $3 billion, according to an analysis of S&P data
published by The Wall Street Journal last week.
The crash allowed our fearless corporate leaders to bet on a scary market at
an extremely low price with no risk to themselves. And since the market had
crashed so hard, and stock was so cheap, they were able to bag larger numbers of
options and shares as well.
Spin the wheel and wherever it lands, the boss is a winner again.
That's because when stocks crash, CEOs get new stocks.
This time, Washington put up taxpayer stimulus money. The Federal Reserve
flooded the banking system with trillions of dollars. And interest rates went to
zero. Bailing out the economy killed returns on savings accounts, but it pushed
the Dow Jones Industrial Average from the 6500s to the 12500s. And the rising
tide sure floated CEOs' boats.
How is it that the cost of everything in a corporation has to be constantly
justified, except for the cost of the CEO? The market was in the tank. Millions
of jobs would be annihilated. Why did CEOs deserve more equity? Retention pay?
As if the crash had proved that they were worth retaining?
Stock options are supposed to align CEO pay with shareholder value. But here,
CEOs essentially got paid for a market crash and a government-led recovery.
Many S&P 500 CEOs were handsomely rewarded simply because their share prices
recovered to 2006 levels. Or not. Take Capital One Financial. Its stock traded
in the $80s in 2006, fell to the $8s in 2009, and now trades in the $50s.
CEO Richard D. Fairbank's gain for this performance was $34.5 million. Next
time a Capital One commercial asks, "What's in your wallet?" say, "Not that
much."
While none of this smacks of illegal activity, it's reminiscent of the stock-
option backdating scandal that followed the Internet bust. There's nothing CEOs
hate more than underwater stock options. They want no risk (unless it's with
other people's money) and extravagant rewards.
To be fair, several executives did more than just ride on the economic bailout
wagon. Ford Motor CEO Alan Mulally, for example, has been credited with an
impressive turnaround that did not require a federal bailout. His equity gain: $
186.8 million. Not bad for a couple years of work, but no doubt supercharged by
the crash.
The lesson here is that CEOs get paid for stocks to go up, but often, for
stocks to go up, they have to go down. And this perverse economic incentive for
a crash only ensures more crashes.
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Al Lewis is a columnist for Dow Jones Newswires in Denver. Her blogs at
telltoal.com; his email address is al.lewis@dowjones.com
(END) Dow Jones Newswires
05-02-11 0749ET
Copyright (c) 2011 Dow Jones & Company, Inc.
