Numerous news reports and blog postings have been aghast at the fact that some execs were setting the price of their option grants at the lowest price in the period. They are simply stunned that these execs would take advantage of the system. “How could they?”
Oh, grow up. As the guy responsible for this system at one of the leaders of the whole “options as pay” phenomenon, let me tell you that nothing, literally nothing, could surprise me in the realm of pay. I’ve seen senior executives complain about pay that would be the GNP for a small country. I’ve seen people who normally show incredible judgement and morals become slimey at the drop of a paycheck. And I’ve seen amazingly smart people put sincere time and effort into figuring out ways to game any system that involves their pay. I’ll tell some of these stories over time here, but, nothing in this realm surprises me any more.
Let’s be clear, you’re giving people options [money] and you need to decide when to give it to them [cost], and the choice is up to them. Hmmm, let me see… I’ve got it, how about when they cost me the least? Why does this shock anyone? Why does this even make news? How else would it be done?
At Microsoft, and other companies, the kind of backdating described in these reports was systemized in their ESOP (Employee Stock Ownership Plans). The plan defined as a rule the price to be paid for the shares as the lower of the stock price at the beginning or the end of the purchase period. Yes this is outright stock purchase, not options. Yes, this was defined as part of the ESOP plans, not some hidden understanding between the purchaser and the issuer. And Yes, it is legal under the ESOP rules. But it should not surprise anyone that a similar rule/system would be put in place for exec option grants.
The thing that seems to shock people is that this behavior resulted in people making obscene amounts of money. This is where they begin to get to the point. Executive pay is absurd these days. All you have to do is look at mediocre performers getting 9-digit pay packages and you see that it’s not how they get the money, but why they get it that is the problem. I have lots more to say on that [ed: stay tuned]. But come on, you give children the keys to the candy store, you have to expect them to binge on a sugar high.