DirectorsatWork 209mendous, a bit like the apocryphal story of Lady Astor’s famous quip
on the Titanic: “I asked for ice, but this is ridiculous.”
What the governance gurus got was a proliferation of payment
not in stoc kthat was the functional equivalent of the forgone cash
but instead stoc koptions with a value vastly exceeding what the cash
payment could reasonably have been. The explosion of option-based
compensation remains one of the most controversial subjects in cor-
porate governance history.
Some say that the widespread use of stoc koptions in the United
States simply reflects the priority given to this alignment goal in the
United States and that its relative infrequency in Europe and else-
where reflects the absence or irrelevance of this goal. However, the
tal kof alignment is more myth than truth and too often represents
an attempt to sanitize management compensation packages that con-
flict with shareholder interests (not to mention labor interests).
Stock Option Myths
No evidence indicates that the prevailing structure of executive com-
pensation in the United States comes anywhere close to aligning
manager and shareholder interests. On the contrary, a great deal of
evidence demonstrates that the compensation structure is random.
Many corporations give their managers stoc koptions which in-
crease in value simply through earnings retention, rather than be-
cause of improved performance resulting from superior deployment
of capital. By retaining and reinvesting net income, managers can
report annual earnings increases without doing anything to improve
real returns on capital.
Buffett makes the point: “You can get the same result personally
while operating from your rocking chair. Just quadruple the capital
you commit to a savings account and you will quadruple your earn-
ings. You would hardly expect hosannas for that particular accom-
plishment.”^7
When that happens, stoc koptions rob the corporation and its
shareholders of wealth and allocate the booty to the optionees. In-
deed, once granted, stoc koptions are often irrevocable and uncon-
ditional and benefit the grantees without regard to individual per-
formance—a form of instant robbery.
Even if stoc koptions encourage optionees to thin kas share-
holders would, optionees are not exposed to the same downside risks
as shareholders are. If economic performance improves and the