Stock Market Gains and Stock Options granted to Executives 03 21 2013

Stock Options for Management

It takes the focus off of long term gains and stability and that could lead to economic failure.  Or is it more empirical evidence that American management does not have the capability to make profitable long term investments in their business; the logic being if you can no longer reward yourself by creating long term success you create a system that rewards you for short term stock price volatility.  That takes the focus of your personal success as a manager away from the actual business.  So in effect there is a disjoint between personal success as a manager and long term success of a business.  ~A de-emphasis of long term planning as a managerial skill or again an adaptation in business for manager's that are incapable of if?

I have always believed that stock options granted to employees deplete the corporate equity and are really; both a substitute for pay and a form of granting in-equal pay.  And when un-equal pay is granted that is also the recipe for economic failure.  You pay someone what they deserve or you don’t.  The company either does better and then you are able to pay employees more at that time or you don’t.  And, An employee either buy’s stock or options themselves based on their personal beliefs in the success of the companies they work for or they don’t.  And that last sentence is the key.  No employee would ever count on the success of their efforts being reflected in the changing stock price to the point that they would purchase open market options themselves!  That is the way it should be and it would show a lot of confidence in them if it were that way and they did then purchase. 

The bottom line is that stock options weaken corporate management.  Why?  Because managements’ personal success in business should not be tied to a leveraged short term gain related to stock market volatility.   Bankers earn bonuses in the form of options while at the same time banks pay fines in the sum of $60 billion dollars related to fraud.  That creates a lot of systematic risk!!!!

PS.  Continuously issued stock options to executives are not a motive for performance they are instead a bonus tied to stock market volatility.  If you are always being granted stock options then your reward is not tied to performance.  Why not?  Because you cannot attribute stock market  gains based on stock market volatility to long term performance. Also empirical evidence tells us that our largest corporations, that indeed issued stock options, failed and went bankrupt.  So in effect none of those auto sector or financial sector employees deserved to be granted any of those stock options.  It is a recipe for disaster because at the same time the options are utilized the share count of the company goes up, this creates share count dilution~ and the dilution makes long term success even harder to reach! This creates the motivation for creative accounting to boost short term numbers and that is another source of bankruptcy.  Can we blame the undeserved granting of stock options to executives for the bankruptcies in the auto and financial sector?  You won't, but I will!  And that my friend is Voodoo Economics!

Copyright 2013 Thomas Paul Murphy

Originally published on 03 21 2013 at: www.themilwaukeeandwisconsinnews.blogspot.com