In a recent speech to corporate directors in Chicago, former Federal Reserve Chairman Paul Volcker asked: "How did we get compensation to the truly grotesque levels to which I think it has risen?"
He answered: "What was going on was our good friend, stock options."
Despite the backlash in recent years against outsized executive compensation--much of it focused on windfall profits from options--some firms concentrate their options awards on a handful of executives. The companies argue that these executives have the most influence over corporate performance and need to have their interests and shareholders' interests closely linked.
Several studies have found that companies with broad-based options programs outperform the market over the long term. But a Tribune study of the 50 largest companies in Illinois and northwest Indiana during the past five years showed companies that gave the most options to senior executives outperformed those that gave the least, in part because of dismal results posted by some tech firms that widely distributed options.
But the results are mixed: Three of the 10 best stock performers gave options to more than half their employees at least once during that span, compared with only one of the bottom 10.
That one is Naperville-based Tellabs Inc., which, like many tech firms, consistently grants options to all employees. Over several years, it was the best-performing major Chicago-area stock. But the telecommunications bust sent Tellabs shares to the biggest loss among the 50 biggest local companies over the past five years.
"I think it makes good sense to have everybody in the company feel like they own the place," said company co-founder and Chief Executive Michael Birck. "I just always thought that equity ownership was a good thing--not only a potentially attractive thing for the individual, but also a great motivator."
Birck noted that many of the options that Tellabs awarded while shares were skyrocketing are now underwater, trading for less than it costs to exercise the options. That makes them worthless--at least for now.
Nonetheless, he said, the program continues to instill a sense of ownership.
"I don't really think it has reduced its attractiveness in the eyes of our people," he said. "I think they recognize there is a value, and it's something that makes their relationship tangible with the company, rather than just a place to work and go pick up a paycheck."
Although Birck, who still owns a large stake in the firm, was not CEO the entire five years, Tellabs still gave one of the lowest percentages of options to its chief executives--just over 2 percent.
The Tribune study found the typical firm gives about 7 percent of options awarded annually to the chief executive, and nearly 17 percent to the highest-paid executives whose compensation must be disclosed each year.
Masked by those median figures, however, is an extraordinary range: Some gave no options to the CEOs during the five years, and fewer than 1 in 20 gave them to all executives listed on proxy statements. Others bestowed nearly a quarter on the CEO and over a third to top executives.
In their recent book, "In the Company of Owners," Joseph Blasi, Douglas Kruse and Aaron Bernstein argue strongly in favor of "partnership capitalism," in which companies provide options and other ownership incentives throughout the workforce to improve performance.
Their research found companies with broad-based options plans and those that gave more options to employees outperformed firms that concentrated options in top executives. Those firms also outperformed the market as a whole.
"The companies that concentrated the options more heavily did seem to have lower shareholder return over the '90s," Kruse, an economist at Rutgers University's School of Management and Labor Relations, said in an interview.
"It shouldn't be limited to CEOs," he added. "The studies sure don't point to any link between [concentrated] stock options and performance."
Among the eight area firms that gave less than 3 percent of all options to CEOs, five had either a founder or relative of the founder among them. The others--Chicago-based Boeing Co., Oak Brook-based McDonald's Corp. and Peoria-based Caterpillar Inc.--are, coincidentally, the members of the blue-chip Dow Jones industrial average that area based in Illinois.
Another company that routinely grants options to all employees, Vernon Hills-based computer equipment seller CDW Computer Centers Inc., was among the best stock performers over the last five years.
Chief Financial Officer Barbara Klein, who has worked at other companies with less broadly based options programs, says the CDW model shows up in the "dynamic" nature of the firm and the spirit of the workers, who are "always looking for ways to improve the way we do business every day."
Nonetheless, CDW also was among those that gave the highest percentage of options to its CEOs and top executives--due largely to a 1.6 million-share grant to John Edwardson when he was named CEO in 2001.
Edwardson received nearly 86 percent of options that CDW granted that year. And he and other top CDW executives got 90 percent--the highest one-year concentration in the Tribune study. Overall, companies gave more than half of their options to proxy-level executives nine times over the five years, with four of them consisting of grants of more than 75 percent.
Some, like CDW, used large grants to help lure a new CEO.
But those figures don't include six other grants of 50 percent or more from two companies that did not qualify for the Tribune analysis--Prospect Heights-based lender Household International Inc., which in late March was taken over by HSBC Holdings PLC, and Hoffman Estates-based higher education provider Career Education Corp., which went public in 1998.
In the five years, Household gave just over half its options to top executives, while Career Education was just under 44 percent. Both gave nearly a quarter of options to the CEO.
Overall, Chicago-based real estate investment trust General Growth Properties reported the highest five-year percentage to top executives, nearly 45 percent, on its proxy.
CEO John Bucksbaum, however, noted that the proxy figures the company reports do not reflect options granted to roughly 600 employees under a separate plan. Including those options gives it a much lower five-year percentage.
Even without including that separate option plan, however, less than 3 percent of the options reported in the proxy went to Bucksbaum and his father, Matthew, the two CEOs during the past five years.
Chicago-based insurer Unitrin Inc. gave the highest percentage--just under a quarter of all options granted--to CEO Richard Vie.
Unitrin Vice President Edward Konar said Vie's total is skewed by option reloads, grants made when he sold stock to exercise options, designed to maintain higher levels of executive stock holdings. But, Konar said, it also reflects the company's philosophy.
"We've always been fairly targeted on who gets stock options," focusing on those with biggest potential effect on results, Konar said. "Therefore, the higher-ups--particularly the CEO--tend to get the bulk of the stock options."
Another company granting a higher proportion to its CEO and top executives, Warrenville-based truck giant Navistar International Corp., echoes that viewpoint. "Some people can have a much greater impact on how the stock price moves based on the decisions he or she makes," said Senior Vice President Pamela Turbeville.
She also said Navistar believes that, as an executive moves up in the ranks, his or her compensation should increasingly depend on the company's results.
Consequently, a CEO will receive more options, and have "more at risk," Turbeville said. "He's going to have a smaller proportional base salary, a little higher proportional bonus and more from options."
Although they clearly see them as a motivational tool, many companies said it's difficult to quantify the effect that options--either heavy grants to executives or spreading them throughout the workforce--have on results.
But CFO Klein of CDW looks to the bottom line. Her company's stock is up more than 236 percent from 1998 to 2002.
"I think the best measure you can look at is the total return to shareholders," she said.Copyright © 2015, Los Angeles Times