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Don’t take my word for it – today’s USA Today says so (yeah, I bought it – Derek Jeter’s pic is on the front page). The full title of the article is “Stock options help CEOs cash in,” and is on page 1.
The article says that CEO pay was up 18% in 2010 from 2009, compared with the average worker’s 2.6% gain in the same period. Nothing new here – it would be news if that weren’t the case.
But the main point of the article is how some CEOs got a majority or a substantial portion of their pay from exercising stock options. The foremost example (according to the article) is John Hammergren, CEO of McKesson, who earned $150.7 million in 2010, $112.1 million of which came from exercising options.
I don’t begrudge the CEOs their option pay, mostly. If the CEO (or others) make huge gains from options, that probably means the stock is doing well and all shareholders share the wealth.
But stock options are dilutive. I did a study of Microsoft a few years back and found that in some years the dilutive effect of the exercised options, i.e., the difference between the striking price and the value of the stock at the time of exercise, nearly equaled the company’s net income. Which was substantial. And people wonder why the stock doesn’t move.
Also, doesn’t it seem that options are issued at times when the stock is low? I haven’t looked at this empirically, but I wonder if most stock options are issued when the stock is trading below its 50-, 60-, 100- day moving averages. This is significant because most options are granted such that the exercise price is equal to the stock close on the day of grant (to receive favorable tax treatment). The lower the price on the day of grant, the lower the exercise price, the higher the profits for the holder when the options are exercised.
If anyone knows about such a study, or wants to comment on what I said here, or on Derek Jeter, please do so.
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