The primary mission of executives in U.S. corporations is to deliver value to shareholders. However, we constantly see extremely unethical behavior among these executives. Compensation packages are supposed to motivate executives by rewarding outstanding performance. This performance is easily measurable by looking at the corporate financial statements. The idea is that large increases in sales and earnings result in large compensation packages for executives. Now, we may debate the vulgar amounts of compensation that many corporations dole on their executives. But, what happens when corporate performance is declining? Executives don't get the huge bonuses, right?! WRONG! The following are examples of the raping of shareholders and are occurring on a regular basis. The examples show that, regardless of performance, the primary mission of many executives is NOT to deliver value to shareholders... It is to deliver riches to their own pockets AT THE EXPENSE of shareholders.
COMMON EXECUTIVE PRACTICES
- Continue Bonuses: receiving HUGE bonuses even when corporate performance is DECLINING. And, even INCREASE bonuses during times of horrible performance. This is simply a way to increase the riches of executives at the expense of shareholders.
- Reprice Stock Options: Options are typically given to executives as a motivation tool. These options are generally valued at or near the stocks current price. If performance is superb and the stock price goes up, the value of these options go up significantly. If performance is bad and the stock price drops, the options are nearly worthless. Good motivation tool right? However, in many corporations, if the stock price drops significantly, the company simply REPRICES THE OPTIONS so they have value again. This rewards executives regardless of corporate performance - so these are no longer "performance based compensation" tools. They are simply tools to line the pockets of executives at the expense of shareholders.
EXAMPLES OF SOME 'OFFENDERS' (AOL, ORACLE, TELLABS):Below, you will find examples of some of this corporate theft of shareholder's money. These may not be the MOST abusive cases, but they will give you a clear picture of what is happening to investor's money. We have singled out AOL Time Warner because their raping of shareholders is the most blatant we could find.
AOL Time WarnerThis company was hemorrhaging with massive losses of $4,921,000,000 in 2001, but still rewarded executives and employees with $1,431,000,000 of investor's money! This resulted in a pro forma loss (after accounting for stock options) of $6,352,000,000! Investors give their money to corporations to make money, right? Well, lately, investments in this company have been going right to the executives, resulting in a large drop in shareholder's equity. However, their own Executive Compensation Philosophy (as stated in their Proxy statement dated 3/26/2002 - [6]) says they will not be rewarded unless stock holders are also rewarded. They are not following their own statements to shareholders. Why aren't these false corporate statements and raping of shareholders punishable by imprisonment?
"Each of these programs included as key elements stock options, to provide substantial long-term financial reward to an executive only if the stockholders also realize long-term stock price appreciation..."
The following is a fictional letter to AOL Time Warner shareholders. Of course this is not what they really told shareholders, but maybe they should. (This letter could easily come from any of a number of companies if only the numbers were changed.)
We had a HORRIBLE year. Or, at least you did. In 2000, we merged AOL (which had $1,152,000,000 in earnings) with Time Warner (which had huge losses). The combined company had a net loss of $4,384,000,000 (yes... that's over $4 billion in losses). While we hoped to report better news this year, things only got worse. In 2001, losses ballooned to a whopping $4,921,000,000 (yes... billions).
But, we are trying to look on the bright side. While you suffered miserably, we made out like bandits! We had a great year! We gave ourselves $1,431,000,000 of your money with stock options. So, the corporation's net loss for 2001 of $4,921,000,000 that we reported is actually $6,352,000,000! Yes, we gave ourselves $1,4 billion of your money! (Sweet deal for us, bad for you...) Why did we do this? Well, we like money... your money. You may point out that our primary responsibility as corporate executives is to increase your shareholder value. Hell, we even state this ourselves in our Compensation Plan. But... we're always looking for creative ways to reward ourselves and relieve you of your retirements savings. And, for this, we THANK YOU!
We're looking forward to another great year in 2002! (Maybe, you'll do better too?)
Sincerely,
Stephen M. Case
Chairman & Chief Barbarian at the Gate
AOLTime Warner, Inc.P.S. We did do you a favor by hiding the stock option rewards and adjusted net income way in the back of the Annual Report in a note on page 73. So, hopefully others won't see it!
The following table presents AOL Time Warner's corporate performance vs. rewards under the Stock Option Plans.
AOL TIME WARNER
(Ticker Symbol: AOL)YEAR % CHANGE
IN EARNINGSSTOCK BASED
COMPENSATION
(SFAS No. 123 rule)% OF ENTIRE
CORPORATE
INCOME1999 $474,000,000 46% 2000 -1182.62% $653,000,000 57% 2001 -19.96% $1,431,000,000 139% ** Source: AOL 10K Annual Report, year end 12/31/2001 - [5]
MOST GUILTY: Stephen Case (Chairman): Received $1,000,000 salary and $127,000,000 from exercising stock options in 2001.
RUNNER UP: Kenneth Novak (Vice Chairman): Received $1,2000,000 salary and $32,000,000 from exercising stock options in 2001.** - 2001 compensation as % of net income is not measurable since the company had losses. We divided the compensation by the last profitable year's earnings, 1999, to arrive at this percentage.Source: AOL DEF14A Definitive Proxy Statement, year end 12/31/2001 - [6]
ORACLE
(Ticker Symbol: ORCL)YEAR % CHANGE
IN EARNINGSSTOCK BASED
COMPENSATION
(SFAS No. 123 rule)% OF ENTIRE
CORPORATE
INCOME1999 $126,157,000 9.78% 2000 388.22% $360,969,000 5.73% 2001 -59.33% $453,285,000 17.70% Source: 10K Annual Report, year end 5/31/2001 - [1]
MOST GUILTY: Larry Ellison (CEO):Received $706,076,907 from exercising stock options in 2001.
RUNNER UP: Jeffrey O. Henley (CFO): Received $85,604,278 from exercising stock options in 2001.Source: Oracle DEF14A Definitive Proxy Statement, year end 5/31/2001 - [2]
TELLABS
(Ticker Symbol: TLAB)YEAR % CHANGE
IN EARNINGSSTOCK BASED
COMPENSATION
(SFAS No. 123 rule)% OF ENTIRE
CORPORATE
INCOME1999 $36,610,000 6.66% 2000 32.95% $63,773,000 8.73% 2001 -124.90% $121,445,000 Not meaningful.
Increased
losses by
66.74%Source: 10K Annual Report, year end 12/31/2001 - [3]
Source: DEF14A Definitive Proxy Statement, year end 12/31/2001 - [4]
Why did the Ethical Atheist write an article on abusive executive compensation?
Just consider it a service to readers...
References:
1 Oracle Corporation, 10K Annual Report, Fiscal year ended May 31, 2001, Available at Edgar Online: http://www.edgar-online.com/brand/yahoo/search/?sym=ORCL
2 Oracle Corporation, DEF14A - Definitive Proxy Statement, Fiscal year ended May 31, 2001, Available at Edgar Online: http://www.edgar-online.com/brand/yahoo/search/?sym=ORCL
3 Tellabs, Inc., 10K Annual Report, Fiscal year ended December 28, 2001, Available at Edgar Online: http://www.edgar-online.com/brand/yahoo/search/?sym=TLAB
4 Tellabs, Inc., DEF14A - Definitive Proxy Statement, Fiscal year ended December 28, 2001, Available at Edgar Online: http://www.edgar-online.com/brand/yahoo/search/?sym=TLAB
5 AOL Time Warner, Inc., 10K Annual Report, Fiscal year ended December 31, 2001, Available at Edgar Online: http://www.edgar-online.com/brand/yahoo/search/?sym=AOL
6 AOL Time Warner, Inc., DEF14A - Definitive Proxy Statement, Fiscal year ended December 31, 2001, Available at Edgar Online: http://www.edgar-online.com/brand/yahoo/search/?sym=AOL
- Ethical Atheist
[Created: 05/06/2002]
[Last Update: n/a]