The passion for reforming corporate America seems to have had both the fervor and the brevity of a high school crush.Congress busily went about passing notes -- or, if you prefer, legislation -- rife with banalities intended to improve executive behavior. But little has been done to punish the bullies themselves and fix the issue that forms the root of the problem: the abuses in so many executive stock option plans. Now, the problems with executive compensation aren't limited to abuse of stock option grants. But that's a fine place to start in terms of reform, according to compensation expert Graef Crystal. Crystal developed an idealized plan for option pay at the behest of the California State Teachers' Retirement System, or Calsters, the nation's third-largest pension fund. Crystal's findings and proposal drive home how excessive options packages have become. Companies are aware that there's little action small investors can take -- even if they're able to acquire and understand the executive compensation plan. But many "socially responsible" fund companies, such as Domini Investments and Calvert Group, consider compensation plans when investing. And managers of large pension funds such as Calsters, Calpers and the AFL-CIO serve as the best watchdogs on this issue. Below are a sampling of some of the thorniest issues in executive stock option plans today. The bigger the better. The actual size of option grants has exploded in recent years. Crystal looked at 180 companies with 2001 revenue of $8 billion or more. In the three-year period from 1999 through 2001, the average CEO received an average option grant of $9 million a year (present value as of February 2003). That's 562 times the present value of the typical options grant in the mid-1960s.
In addition, option "mega grants" -- millions of shares granted in one fell swoop -- have begun to crop up at unlikely intervals, as opposed to annually, as is historically the case. The mega grants coupled with erratic timing seriously reduce the compensation amount that gets reported during pay surveys -- and that means investors aren't as able to judge what its executives are making.Timing is everything. If option grants are not restricted to, say, distribution at the January board meeting, Crystal says, that allows companies to time the option grant in order to maximize the future gains of the chief executive. That means, Crystal says, a mega-grant could be made just a few days before the company announces positive quarterly earnings, or a few days after it announces earnings won't meet Wall Street expectations. Either way, the CEO receives options with a low, advantageous strike price (the price the executive must pay to exercise the option).