Re-Christening stock options

As the earnings season advances in Wall Street, there is something that is being overlooked. Stock options are disappearing. Instead, executives are being compensated by performance-based restricted stock.

The financial crisis has not killed, but at least severely curbed, the use of stock options in the United States. According to a study by the consultant firm Hay Group, options went from accounting for 26.3 percent of the CEO compensation in the US in 2008, to 16.4 percent in 2012. The stock market meltdown of 2008 and 2009, the rise of shareholder activism and the change in account rules to make options less attractive after the public outcry over them are the causes of the fall.

Then, companies discovered performance-based restricted stock, and executives fell for it. Hay Group has found that the share of these products in CEO’s compensation has moved from 18.8 percent in 2008 to 27.4 percent in 2012. That matches almost exactly the stock options’ decline.

What is the difference between bot systems of compensation? Virtually nothing but the name.

What is performance-based restricted stock? Basically, stock that cannot be sold until a specific date. How is that time established, and how are the requisites to have those products established? Using a number of metrics–the most important of which is the shareholders returns. So, basically, the whole compensation system has moved from buying (i.e., exercising the options) to selling (the performance-based restricted stock).  That’s all.

Outside of the executive boards, regulators and shareholders have made things worse. Regulators give restricted stock better tax treatment, and activist investors tend to consider it more performance based than the traditional stock options. However, the actual difference between the two is indistinguishable.

If stock options were supposed to give wrong incentives to executives, by making them focus on the stock price and their options’ execution dates, there is no reason to believe that the performance-based restricted stock is making things anything better. The problem has not been fixed–it has just been re-christened.