Normally, the people who get the most attention during proxy season are chief executives of companies whose stocks have been so doggy you can almost hear them barking. But instead of picking on losers–a popular journalistic sport–let’s look at megagreedy winners. To wit, the folks who are already loaded to the eyeballs with stock in their own companies but take stock options as part of their pay package. Is any useful corporate purpose served by heaping options on top of already massive stockholdings–what Wall Street calls piling pig on pork? To find these people, Institutional Shareholder Services did an analysis for NEWSWEEK matching the ISS compensation database against the 40 richest people in the Forbes 400. The Top 40, as it were. ISS isn’t a bleeding-heart outfit. It advises big investors on how to vote their shares, and it has nothing against stock options and big pay packages per se. Its only concern is whether these deals are good for shareholders. Giving options to billionaires “is like piling whipped cream and cherries on top of a gallon of ice cream,” says Patrick McGurn, an ISS vice president who performed the study. “Options are supposed to be incentive pay. How much more incentive do you need when you already own billions of dollars’ worth of stock?”
ISS turned up seven grandees in fields from computers to cosmetics to cruise ships. All these people run companies with publicly traded stock whose most recent proxy statement showed them getting stock options. None of the seven would talk to us, which didn’t exactly come as a shock. That’s why their views aren’t reflected in this article. The ISS study also turned up an interesting list of Top 40 types who could have taken options, but chose not to.
At the head of the options-taking list is the fourth richest person in the United States: Michael Dell of Dell Computer. (Yes, I know this is the second time in three weeks I’m writing about Dell. That’s by accident, not design.) Dell’s stock performance has been a capitalist’s dream. Its shares are up more than 100-fold in the past five years, creating scads of “Dellionaires.” Many people–including, as you would expect, Dell Computer spokesmen–think it’s absurd for me to question anything about Michael Dell’s pay package. “You’d be hard pressed to find any Dell shareholders who would object to his package,” says company spokesman T. R. Reid. “He’s performing a job, and he does it extraordinarily well.” Granting that, what purpose other than enriching Michael Dell was served by giving him 6.4 million options (adjusted for stock splits) in fiscal 1998? He already owns 190 million shares, his name is on the building and his $16 billion stake offers him ample incentive to get the stock price up. Will he defect to Gateway or Compaq if he doesn’t get options? Was he a slacker before fiscal 1996, when he first got options? I doubt it.
And there’s another problem. At the same time the company is giving him stock options as reward and incentive, Dell, 34, is selling stock by the boatload. He unloaded more than $725 million of stock in the past 15 months, according to CDA/Investnet data. Diversifying his holdings makes sense. But why take options at the same time that he’s selling stock? It looks to me like he’s using options to play my-fortune-is-bigger-than-yours, a familiar techie sport. The company says I’m being unfair.
Now, to a crucial point. Even though granting options doesn’t hurt a company’s reported profit, it does convey substantial wealth from the company–and, by extension, from its shareholders–to the option recipient. Dell’s 10-year options gave him the right (but not the obligation) to buy stock then worth $75 million, now worth about $550 million. Having options on $75 million of stock is better than owning it, because you make money if the stock rises but don’t lose if it falls. And, of course, you don’t have to shell out $75 million. Using an options pricing model, the company valued these options at $33.5 mil-lion when it gave them to Dell. And consider this. If Dell Computer wants to make good on those options with-out diluting existing holders’ stakes in the company, it will have to shell out $550 million for stock it will sell to Michael Dell for $75 million. If instead it sells Dell new stock, it will reduce everyone else’s proportionate stake.
Then there’s Ted Turner, vice chairman of Time Warner. When Turner ran Turner Broadcasting and was its major stockholder, he never took options. But when Turner merged with Time Warner in 1996, he began scarfing them down, despite owning Time Warner stock currently worth $7.6 billion. Turner, whose company owns Time, my employer NEWSWEEK’s archcompetitor, has been talking for years about Forbes 400 types needing to dial back greed. Apparently that doesn’t apply to him. The company says he gets options because he’s running Time Warner’s fastest-growing businesses. My bet is it’s because his nominal superior, chairman Gerald Levin, gets options.
Sumner Redstone of Viacom, who owns $8.7 billion of stock, is an unusual case. He took no salary or options from Viacom from the day he took over in 1987 until 1996, when he became chief executive. He’s still not taking any salary or bonus (don’t worry, he has plenty of non-Viacom wealth) but is now taking options. “The board decided it wanted him to take compensation,” a Viacom spokeswoman says. “He’s never sold a share, and he says he never will.” Fair enough. But how does this help non-Redstone shareholders?
To options aficionados, Larry Ellison of Oracle would be a likely candidate for our list. He took hefty options grants for years–but for some reason, we don’t know why, didn’t take any in the most recent proxy filing. He may be the exception that proves the rule. As Pat McGurn of ISS says, “Do you think Ellison worked any less hard last year, when he had no options, than he did in the years he got them?”
There are other Top 40 members who could have taken options but didn’t. Among them: Bill Gates and Steve Ballmer of Microsoft, Warren Buffett of Berkshire Hathaway (a board member of NEWSWEEK’s owner, The Washington Post Company), Ross Perot of Perot Systems, Phil Knight of Nike and Phil Anschutz of Qwest. These aren’t necessarily selfless people, but they do have common sense. “It’s a matter of conscience,” says Graef Crystal, an executive pay consultant. “Some people have a well-developed conscience, and some don’t.” That’s a line I won’t even try to top.
Michael Dell CEO, Dell Computer $33.5 million in options $16.4 billion in holdings
Sumner Redstone CEO, Viacom $10.2 million in options $8.7 billion in holdings
Ted Turner Vice chmn, Time Warner $4.6 million in options $7.6 billion in holdings
Micky Arison CEO, Carnival Corp. $841,680 in options $5.3 billion in holdings
Ted Waitt CEO, Gateway Computer $4.9 million in options $4.4 billion in holdings
Leonard Lauder CEO, Estee Lauder $8.8 million in options $4.2 billion in holdings
Alfred Lerner CEO, MBNA $5.3 million in options $2.4 billion in holdings
