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Expose on Insider Loans
Ctimes2 writes "Everyone's been grousing a lot lately about high priced CEO's and compensation packages, in no small part due to the 'Enron incident'. Business2.0 has a lengthy but enjoyable feature about how corporate loans became 'compensation packages', forgivable, sometimes tax free the and norm for corporations. And Slashdot's favorite whipping boy Microsoft, while not leading the pack, certainly isn't the poster child for trustworthy finance. More importantly (or rather, to our eternal annoyance), the article provides some much needed information trolls can add to their 'CEO's are bad!' rants: "Insider lending added thrust to the long surge in executive pay that has pushed the average major-company CEO's compensation from 45 times that of the average worker in the early 1970s to about 500 times worker pay today.""
... here's the full (very full) text.
Insider Loans: Everyone Was Doing It
By: Ralph King
Issue: November 2002
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It isn't just the Enrons and the Tycos of the world that will eat huge losses on insider loans. It turns out that the practice -- now banned -- was common at 75 percent of the country's biggest corporations.
Early in September, Microsoft (MSFT) had a small confession to make. Back in December 2000, the company had lent its president, Rick Belluzzo, $15 million, taking some of his stock options as collateral. Though the options were underwater and had no value at the time, Microsoft figured its stock would eventually go up. But by last August, when Belluzzo resigned, the options were even further submerged. So the software giant forgave the loan -- it had no choice under the deal Belluzzo had struck -- charged off the $15 million, and said its belated disclosure was "appropriate" because the loan was really just an "advance."
Corporate scandals are so big and bountiful these days -- Tyco (TYC) and WorldCom (WCOM) were getting the headlines the week Microsoft made its disclosure -- that the significance of the little item was easy to miss. Next to alleged accounting fraud and corporate looting, the practice of making and pardoning insider loans, even multimillion-dollar ones, seems like small beer. And why single out Belluzzo? He hadn't left his company in tatters like Lucent's (LU) Richard McGinn, Mattel's (MAT) Jill Barad, Webvan's George Shaheen, and the few other executives who made news by having their multimillion-dollar company debts erased as they headed out the door. Compared with WorldCom's (WCOM) Bernie Ebbers, whose officially disclosed unpaid loans stand at $160.8 million, Belluzzo hardly seems to rate.
Yet Belluzzo symbolizes an aspect of the ongoing revelations about boom-time corporate excess that, until now, has escaped notice: Insider lending and the subsequent forgiving of those loans didn't just benefit a few alleged corporate rogues and failed executives. It was astoundingly common. Read the full story >>
SOURCE: The Corporate Library
Roughly three-quarters of the nation's top 1,500 companies -- 1,133, to be precise -- have disclosed loans to insiders in recent regulatory filings, according to a study due to be published in November by the Corporate Library, a firm based in Portland, Maine, that analyzes corporate data and advocates greater accountability to shareholders. Of the companies that disclosed loans, 510 made them for the purchase of stock, for a handful of other uses such as housing and tax payments, or for purposes that weren't specified at all. The average loan was about $5.5 million. Most of the remaining loans were interest-free advances made to fund life insurance policies, which can often produce investment windfalls for executives.
Insider loans have been around for decades and aren't inherently bad. Their proliferation during the boom years was driven to a large degree by sound business purposes and market forces. Companies used insider loans to lure executive stars during the frenzied bidding wars for talent that broke out as the economy and the stock market roared. As compensation tools, insider loans have certain advantages over other forms of pay, like bonuses or big salaries; they're not immediately taxable, for instance. Corporations also cited insider loans made for the purchase of company stock as a way to meet the years-long clamor from shareholder activists to better align managers' and shareholders' interests.
The problem, critics of the practice say, is that when stocks crashed, companies in scores of cases quietly let executives off the hook by forgiving the loans, even as other shareholders were battered. Ann Yerger, research director at the Council of Institutional Investors, a shareholder advocacy group, calls it "stealth pay." In some instances, executives may have surrendered some other valuable perk in return for wiping out the debt. But in many cases, the terms of the loans themselves made them forgivable at little penalty. Often, as with Belluzzo, the only thing executives gave up in exchange were worthless stock options. Moreover, the loans sometimes weren't reported at the time they were made; when they were disclosed, in proxy statements, the details were frequently sketchy.
"This was an addiction that corporations for years felt they had to supply in order to keep executives," says Judith Fischer, managing director of Executive Compensation Advisory Services, a firm based in Alexandria, Va., that designs corporate compensation strategies. "And they got into even more trouble by not disclosing fully to shareholders how much the addiction was costing them. This became corporate America's secret vice."
It was an expensive habit. Companies of all stripes made and forgave insider loans during the boom years, from highflying Internet wonders like Priceline.com to staid blue chips like Home Depot. Some executives, including Belluzzo, got insider loans from more than one company. Others used them not to buy stock in their own companies but for more adventurous efforts at wealth creation: At high-tech contract manufacturer Flextronics, for instance, a group of executives used insider loans to speculate on technology startups.
All told, loans to insiders in recent years may have reached more than $5 billion. Hundreds of millions of dollars in loans, perhaps as much as $1 billion, have been or will be forgiven, based on Securities and Exchange Commission records and estimates by corporate compensation experts. This suggests that companies will be eating losses from insider loans for years to come. But the more damaging legacy may be that the practice -- by helping fuel the explosion in CEO pay that is at the heart of much of today's outcry over corporate behavior -- will contribute to the perception that management has all too often lined its pockets at investors' expense, and to the public's distrust of how American companies are run.
Congress has already reacted. The Sarbanes-Oxley Act, which was signed into law in July, bans insider loans for stock, insurance, or anything else. But corporate lobbyists are even now pressing lawmakers to water down the law, and many corporate compensation experts are hard at work dreaming up new executive pay schemes to replace insider loans.
How did the system get so out of whack? Insider lending added thrust to the long surge in executive pay that has pushed the average major-company CEO's compensation from 45 times that of the average worker in the early 1970s to about 500 times worker pay today. Insider loans started cropping up several decades ago, with a clear but limited business purpose: Companies in high-cost housing areas wanted to help newly hired executives relocate. Forgiving such loans was rare. Stock-purchase loan programs came into use during the late 1980s bull market, although disclosure was spotty. American Express is one company that made these programs widely available to managers when it spun off Shearson Lehman Bros. in 1987, just before that year's epic crash. Borrowers watched in horror as their Shearson shares dropped by two-thirds, leaving the managers with huge liabilities. "It backfired terribly," says attorney Michael Sirkin, a veteran compensation attorney based in New York.
Meanwhile, the colossal fortunes amassed by the likes of junk bond king Michael Milken -- he was paid a reported $550 million in 1987 alone -- and corporate raiders like Carl Icahn and Ronald Perelman during the 1980s had an intriguing effect on many chief executives: They felt underpaid. The solution was jumbo-size grants of stock or options. For instance, Coca-Cola (KO) CEO Roberto Goizueta, in packages backed and partly designed by the great shareholder champion Warren Buffett, received stock grants in the early 1990s that were worth more than $1 billion. Since Coke's market capitalization increased nearly fourfold to $93 billion in roughly the same period, Buffett and most other Coke shareholders had no problem with Goizueta's eye-popping pay.
The Internet boom changed the scale of CEO pay again, and insider loans became a key facet. Two big pluses were that executives didn't have to pay tax on them and companies could sidestep the $1 million limit on salary deductions. (Forgiven loans were taxable, but companies often picked up executives' tax bills on those too.) For some companies, loan-related payouts dwarfed other forms of annual executive compensation -- salary, bonus, pension, perks. Fischer recalls questioning the insider-lending spree at a January 2001 compensation conference: "I said, 'This is all crazy,' and everyone asked, 'Who invited her?' The party was still going on, and nobody wanted to think about the consequences." Indeed, during the long run-up in executive pay, the Dow Jones industrial average climbed from 760 in 1980 to more than 11,700 in early 2000. As long as stocks kept rising, it was easy to argue that insider loans, options, and other means of boosting executive compensation were justified.
For rising stars like Belluzzo, the climate of the late 1990s presented marvelous opportunities. Belluzzo, who became one of Silicon Valley's hot properties by guiding Hewlett-Packard's (HPQ) flagship printer division to some of its most profitable years during the mid-1990s, became CEO of Silicon Graphics Inc. (SGI) in early 1998. As an incentive for taking the job, SGI loaned Belluzzo $3.4 million, enabling him to exercise options he had at HP and to reap a $600,000 gain. Belluzzo repaid that loan. In August 1999, with SGI's stock price virtually unchanged, Belluzzo quit to run Microsoft's consumer operations. In its eagerness to land him, Microsoft awarded him a $4.2 million signing bonus. A year later, shortly before Belluzzo was promoted to president and chief operating officer, the company extended the $15 million loan, which it finally disclosed in September. The loan was collateralized by his Microsoft options.
Belluzzo, now 48, resigned from Microsoft in August after losing a power struggle. He didn't leave empty-handed. In addition to the pardon of his $15 million loan, granted in exchange for most of his worthless options, Belluzzo retained hundreds of thousands of other options. They too are worthless now, since Microsoft stock, recently at $44, trades below their strike price. Whatever happens with those options, Microsoft paid Belluzzo more than $21 million in cash, the bulk of it from the forgiven loan. He was at the company for 35 months. In that time, Microsoft's market cap fell by more than $200 billion.
Belluzzo declined to comment. A Microsoft spokesperson says Belluzzo's deal was dictated by competitive forces, and adds, "We felt his compensation was appropriate for an executive of his caliber at the time." Today, Belluzzo is CEO of data-storage firm Quantum (DSS); in addition to a $600,000 salary, Quantum awarded him a $1 million relocation bonus and 2 million options (he received no insider loans; the practice had been banned by the time he was hired). A Quantum spokesperson declined further comment on Belluzzo's compensation package.
If the rationale for making insider loans was to lure hotshots, the stated reason for forgiving the loans was often to keep them onboard when the going got rough. In mid-1999, Daniel Schulman, then 41, was named Priceline.com's (PCLN) president. He came from AT&T, where he ran the consumer markets division. Priceline was on a meteoric rise at the time; its stock closed at $107.50 the day Schulman took over. Schulman eventually wound up with 7 million Priceline options and borrowed $9 million, promising to repay the loan from the profits on the options. It's unclear how Schulman used the money. In any case, there's no evidence that anyone at Priceline doubted that the options backing the loans would only grow in value. But by December 2000, Priceline was on the verge of collapse and its stock was in the single digits. The company's board forgave $4.5 million of Schulman's loan, plus $5 million lent to two other executives, "to maintain senior management continuity in order to facilitate the company's turnaround plan," according to Priceline's proxy.
Six months later, having failed to reverse Priceline's slide, Schulman was forced out. Terms of his agreement called for the company to absolve him of repaying the other half of his loan. Thus, after less than two years of running a company with dismal results, Schulman walked away with $9 million from the forgiven loan, plus salary and other payments worth $1.8 million. His loan terms required that he surrender only stock options that were then worthless in exchange for having his debt wiped out. Priceline declined to discuss forgiving the loan. Contacted at Virgin Mobile USA, a startup phone service where he is currently CEO, Schulman also declined to comment.
Even when loans did work to keep managers on the job, the results often don't appear to have justified the cost. In June, Maxtor (MXO), a troubled data-storage firm, forgave a $5 million loan to CEO Michael Cannon, plus a total of $4.3 million in loans to 10 of his managers. The loans had been handed out in 1999 in return for the managers' agreement to stay for at least three years. But during that period, the high-priced team at Maxtor didn't stem the company's bleeding -- its three-year net loss totaled $824 million. And its stock price slid from $5 per share to $2.40 today. Maxtor declined to comment.
As the stock market continued to boom, insider loans spread quickly beyond the Young Turks of high-tech. In December 2000, Home Depot (HD) named Robert Nardelli, then 52, president and CEO and gave him a $10 million loan as a "long-term employment incentive," the company's proxy says. The loan is automatically forgiven at the rate of 20 percent a year. Many analysts predicted that Nardelli, a General Electric (GE) veteran, would deliver GE-like growth, and Home Depot's stock price at first did go up, hitting $53 per share in May 2001. Today it's at about $24 per share, down from $40 when Nardelli arrived. Toymaker Mattel gave CEO Barad loans totaling $7.2 million, in part to keep her from selling off company shares as they vested. When she was forced out in 2000, Mattel forgave the loans. SEC records show that the company went on to award her successor, Robert Eckert, a $5.5 million loan that will be forgiven if he stays at Mattel until next May. Douglas Leatherdale, 65, who retired as chairman of the St. Paul Companies last year after 29 years of service, still owes the firm $3.8 million lent to him for stock purchases.
Not all insider loans went toward company stock -- or even, for that matter, to insiders (defined as executive officers). Hundreds of companies, from BellSouth (BLS) to Outback Steakhouse (OSI), made loans to pay premiums on multimillion-dollar life insurance packages known as split-dollar policies. (AOL Time Warner (AOL), Business 2.0's corporate parent, also made such loans.) These arrangements can be bonanzas: They can be cashed out during an executive's lifetime, and only the premiums have to be reimbursed to the company. Investment gains the policies generate over the years can and often do go to the executives, tax-free, after they leave the company. In mid-2000, Fred Langhammer, CEO of Estée Lauder (EL), got a $26.6 million policy that the company will fund over five years, SEC filings show (it isn't clear what the policy, including any gains, is worth today). In April, Qwest (Q) gave its president, Afshin Mohebbi, a $4 million insurance loan after forgiving an earlier $600,000 interest-free loan made for an unspecified purpose.
Planet Hollywood doled out options to celebrities like Bruce Willis and Sylvester Stallone, whose only corporate role was to frequent and promote the restaurants. The company initially did well, prompting some of the stars to want to cash their shares in. To head that off, the company lent its celebrity friends $5 million, thereby avoiding potentially negative press about its stars bailing out. In late 1999, after Planet Hollywood's business crashed, it filed for bankruptcy and apparently wrote off the loans, according to a recent bankruptcy court examiner's report.
While public companies were obligated to report all insider loans of more than $60,000, the timing and extent of those disclosures varied widely. The result: Many such revelations came well after the loans were made, as in Microsoft's case, or were fuzzy on important details. Michael McNamara, chief operating officer at Flextronics (FLEX), borrowed $8.7 million from the electronics manufacturer between November 1998 and May 2002, at interest rates as low as 2.48 percent. The loans were disclosed in proxy statements, but no specifics about the collateral behind the loans or the reason they were given was ever spelled out. During a conference call last July in response to analysts' questions about the matter, a company official said Flextronics had made various loans for mortgages and tax payments but didn't address the McNamara loans specifically. Flextronics also disclosed that it had used insider loans to gamble on shares of tech stocks, including duds like Calico Commerce and Agile Software. Now, Flextronics CFO Bob Dykes says McNamara used the money to buy a house, and would have sold shares to raise the funds but couldn't because the company was in the midst of a stock offering that prevented him from doing so. Dykes defends the loans issued for speculating in tech stocks. "There were no conflicts," he says. "We were very careful." Dykes owes $2.6 million to the company himself.
Flextronics recently said it expects the loans to be repaid. There are ways to wriggle out, however. Last August, when Sonicblue CEO Kenneth Potashner asked three board members to repay $600,000 in loans for stock purchases, the board fired him, Potashner has publicly asserted. A Sonicblue spokesman confirmed that Potashner was "terminated" but denied Potashner's account of the reason for his dismissal and declined to discuss the matter further. Potashner couldn't be reached for comment.
In rare instances, it was the decision to borrow that took a bit of arm-twisting. In 1998, Comdisco (CDO) hosted about 140 of its managers at a retreat in Palm Springs, Calif. On a Friday night, after golf and a boozy dinner, Comdisco CEO Nicholas Pontikes offered the group an opportunity to load up on company stock with five-year loans secured by nothing but the stock itself, according to allegations in federal court filings in Chicago. He allegedly gave them 48 hours to decide. On the following Monday morning, a Comdisco press release hailed a $109 million investment by 106 managers as a "personal vote of confidence in the future of the company." One of the biggest borrowers, Thomas Flohr, Comdisco's European division head, took a $3.3 million stake.
Today, Comdisco is in bankruptcy, its stock is nearly worthless, and Flohr has filed suit against it and Pontikes in federal court, alleging fraud. (Comdisco, which guaranteed the loans made by Bank One for 100 percent of the stock's value at the time, has in turn alleged that Bank One violated federal margin rules in an attempt to void its guarantee.) Comdisco and Pontikes deny any wrongdoing. But dozens of current and former managers, some of whom say they face personal bankruptcy as a result of the debt they incurred, are taking legal action in bankruptcy court to undo the deal. "Comdisco," says a person familiar with their situation, "took advantage of the loyalty of these individuals."
Greater loyalty to shareholders seemed to be a major benefit of loans to insiders, until lately. Shareholder activists had harped at managers for years to own more stock in the public companies they ran; loans earmarked for the purchase of company stock were a way to achieve that. In a 1998 offering of AMC Entertainment (AEN) stock at $15 per share, the theater chain's chief executive, Peter Brown, borrowed $5.6 million to buy 375,000 shares, more than doubling his stake. AMC, which similarly lent a second executive $3.7 million, explained in its prospectus that the transactions would "more closely align their financial interest with other common stockholders."
But for most of the past three years, AMC's stock has traded well below $15. Last June, AMC's board forgave both loans and paid related taxes, taking a $19.2 million charge. Today, AMC faces a shareholder suit challenging the arrangement in state court in Kansas City, Mo. Brown, 44, got to keep the shares, now worth about $2.5 million. He declined to comment. Charles J. Egan Jr., who sits on the AMC board's compensation committee, which approved giving and forgiving the loans, says the original idea for them came from Goldman Sachs (GS), lead underwriter of the offering. Goldman representatives felt it would make the offering more attractive to investors, Egan says, but he declines to comment on the company's subsequent largesse, citing the shareholder lawsuit. A Goldman spokesman declined to comment.
Where will insider lending ultimately rate in the hierarchy of boom-time excess? Clearly, in dollar and moral terms, it's not up there with the alleged fraud at Enron and other center-stage scandals. But many critics still say it played a substantial supporting role. The executives who got insider loans "are the most solvent people on earth," says Nell Minow, the Corporate Library's editor and a noted shareholder activist. "They can get a loan at any bank in the country." Forgiving a loan used to buy shares that later cratered "completely undermines the idea of owning stock," she says. "Owning stock isn't supposed to be risk-free for a bunch of favored executives."
Plenty of executives understood that, of course. There are ready models for how companies can reshape compensation policies, avoid the excesses of insider lending and similar gambits, and still attract and retain top talent. Intel (INTC), for example, says it has never made loans to execs, a reflection of the egalitarian culture nurtured by the likes of co-founder and chairman Andy Grove. "Providing loans to executive officers would have been out of step with our values," says Intel spokesman Tom Beermann. Those values are themselves a selling point with prospective managers, Beermann says. Procter & Gamble (PG) likewise has never made loans to executives, says spokeswoman Linda Ulrey. At least 75 percent of its executives' pay is tied to financial results, not just stock performance. "Whether it's the CEO or a brand-new employee, we pay at the median level based on a review of companies we compete against for talent," Ulrey says.
Linking compensation to basic corporate values and reviewing pay frequently in relation to competitors, as Intel and P&G have done, should be a fundamental pillar of all corporate compensation policies, some experts say. Other guidelines for sensible and effective pay strategies include always having a backup candidate for top jobs, so companies don't feel pressured to pay whatever it takes to land the first choice. Moreover, the true cost of all potential aspects of a pay package, under all scenarios, should be carefully calculated in advance, so that if and when termination comes, companies won't be faced with paying unexpected windfalls. "No one ever does the math to see what it all adds up to," says compensation consultant Claude Johnston. Most important, corporate board members and compensation committees must do their jobs. "CEO overcompensation is just a bad idea," says business theorist Geoffrey Moore. "Boards have got to stand up and say, 'No dice.'"
Moore believes that many companies and their boards have gotten that message. Still, corporate lobbyists have been working the hallways in Congress and at the SEC, trying to persuade regulators and lawmakers to create exemptions to the Sarbanes-Oxley Act's ban on insider loans. SEC chairman Harvey Pitt has said he'll resist those efforts. Meanwhile, many compensation experts say their clients are beating the bushes for new pay techniques to substitute for insider lending. "Companies will be just as creative about getting around Sarbanes as they are at getting around everything," says Bob Damon, managing director at recruiter Spencer Stuart. Adds attorney Roger Stern, co-head of compensation and benefits at Wilson Sonsini Goodrich & Rosati, a top tech industry law firm, "It's a boon for our business, no doubt about it."
That may not be a comforting thought, given that the fallout from the insider loans already out there is far from over. Under the new law, insider loans made before the ban can still be forgiven. Fischer, the compensation expert, says we've only seen the leading edge of the loan forgiveness wave. She may be right. In late September, Microsoft disclosed that it had made another loan to an executive two years ago. This one went to senior vice president Richard Emerson. It isn't as big as the $15 million loan to Belluzzo. Emerson's loan is for $13 million. He is still with Microsoft, so the company hasn't had to write the loan off. But Emerson's loan is secured by stock options. And they're underwater.
I mean, who would manage to forget that MS actually makes money.
Come to think of it, glancing down that list of companies.... MS seems to be the only one making ANY money.
Sorry, ya'll, but it seems that 'appropriate' MS bashing will indeed get you an article on SlashDot.
And really, this isn't a troll, this is disgust at having actually read thru what I thought was going to be an interesting read.
compensation jumped from 45x to 500x, eh? Is that with ot without inflation?
Seriously, though, CEO compensation has historically been so high that increases are its far beyond the range of complaining. The difference between a CEO pulling in 100 million versus 500 million might be noticable to the CEO, but in relation to the average worker's salary, anything that high just gets muddied. It's like having a conversation with Einstein and all of a sudden he gets 2x smarter. Would you be able to tell?
These are the people who write the laws of the country. How about the big politcal machine behind those red light cameras? Country is turning into a cesspool of organized crime.
The "Thief-in-chief" today asked congress to cut by 27% the amount of money allocated to fight corporate fraud -- yet more evidence that this administration's main goals are a) ensuring that the rich texas oil barons get richer while the middle class sinks below the poverty line, b) the good old boy system remains firmly entrenched, and c) Saddam Hussein must die for humiliating George H.W. Bush.
A new company, feeling it was time for a shake-up, hires a new CEO. This new boss is determined to rid he company of all slackers. On a tour of the facilities, the CEO notices a guy leaning on a wall. The room is full of workers and he thinks this is his chance to show everyone he means business!
:0
The CEO, walks up the guy and asks - "and how much money do you make a week?"
Undaunted, the young fellow looks at him and replies, "I make $200.00 a week. Why?"
The CEO then hands the guy $200 in cash and screams - "here's a week's pay, now GET OUT and don't come back!" Feeling pretty good about his first firing, the CEO looks around the room and asks - "does anyone want to tell me what that slacker did here?"
With a sheepish grin, one of the other workers mutters - "That was the Pizza delivery guy".
_______________________________________________
printed from fullofjokes
hehe - have a laugh folks, people take this shiat way too seriously. The firm foundation theory is now in full swing!
"the average major-company CEO's compensation from 45 times that of the average worker in the early 1970s to about 500 times worker pay today"
But they are the main figureheads responsible for the astounding progress of our economy- they increase productivity, inspire workers, and set a shining example of moral clarity for all.
Oh wait...
It's the company's money - the people who control it can do what they wish with it. Don't like it? Don't invest in companies you're afraid might decide to offer their execs compensation for the hard work they do in leading their businesses to success.
.
Here's one for you socialist, tree-hugging tax-grabbing whiners
-------------
There's nothing wrong with Capitalism
There's nothing wrong with free enterprise
Don't try to make me feel guilty
I'm so tired of hearing you cry
There's nothing wrong with making some profit
If you ask me I'll say it's just fine
There's nothing wrong with wanting to live nice
I'm so tired of hearing you whine
About the revolution
Bringin' down the rich
When was the last time you dug a ditch, baby!
If it ain't one thing
Then it's the other
Any cause that crosses your path
Your heart bleeds for anyone's brother
I've got to tell you you're a pain in the ass
You criticize with plenty of vigor
You rationalize everything that you do
With catchy phrases and heavy quotations
And everybody is crazy but you
You're just a middle class, socialist brat
From a suburban family and you never really had to work
And you tell me that we've got to get back
To the struggling masses (whoever they are)
You talk, talk, talk about suffering and pain
Your mouth is bigger than your entire brain
What the hell do you know about suffering and pain . .
(Repeat first verse)
(Repeat chorus)
There's nothing wrong with Capitalism
There's nothing wrong with Capitalism
There's nothing wrong with Capitalism
There's nothing wrong with Capitalism
The PBS series "Frontline" did a show called "Bigger Than Enron" that has an excellent website to go along with the show. It contains interviews with many of the key players here, including former SEC Chairman Arthur Levitt, current chairman Arthur Pitt, and others.
It's acutally more robust than the B2.0 article, and goes into some detail about how politicians and businesspeople push for the SEC to have less power than it needs. At one point Levitt describes how the heads of different congressioinal committees were threating to pull funding entirely from the SEC if Levitt didn't quit pushing for accounting reforms, the exact reforms that turned out to be so necessary. This was in April of 2000, just before the all the shit started to hit the fan.
Coming on in conjunction with today's announcement by the Bush Administration that they don't want to give the SEC too much money, it's certainly not too much of a stretch to see a pattern develop.
And Slashdot's favorite whipping boy Microsoft
Don't forget, MS pays Slashdot to serve you this page.
Who needs who?
In July, shortly before the measure was adopted, a Senate committee led by Ernest F. Hollings, Democrat of South Carolina, passed a $750.5 million appropriations measure for the commission...
Uh-oh. Isn't he one of the Slashdot Bad Guys (tm)? And if it's him against Bush and his administration, other Slashdot Bad Guys (tm)...
I don't know which side to take! It's like Dracula vs. the Wolfman!
No, wait, it's like a corrupt, money-driven Dracula vs. an embarassingly incompetent, bald-faced lying Wolfman! This one's going to break my brain!
from the still-waiting-for-slashdot-to-loan-me-ten-million dept.
Well..maybe if VA was actually SUCCESSFUL, they'd have money to loan casually, and we'd be having this conversation about some other people. Working for Microsoft doesn't make someone evil, and working for doesn't make you a saint.
Sounds like more like a jealous pissy fit as seems to happen pretty much in this "community". Don't like them....beat em. If you can't...then who sucks? If you gave a rats ass about "Free Software" you'd be advocating the BSD license....GNU is pretty much just around to be a minor pain in the ass to corporations. If that's how you feel...be honest about it and call it what it is.
I know I'll get modded as a troll or flamebait, but I am being serious.
...and everything to do with unethical business practices.
Scan through that list on the first page of the article. You'll notice names like Enron, Dynegy, Tyco, WorldCom, and Adelphia. Executives are getting these loans, securing them with stock options, and when the options tank the companies have no choice but to write them off. Instead of profits going towards incrasing the skillset of their workforce, or dividends, or any other number causes that would actually benefit the company as a whole, this money is just being written off.
And these aren't small sums, either. We're talking about billions of dollars.
I wonder if you even read the article. If anything, it was somewhat favorable to Microsoft. They have had some executives who are no longer with the company but, through these insider loans, have been able to walk away with millions of dollars.
After seeing what i've seen out there, I don't think it's fair that someone on an executive level can justify shutting down entire sattelite offices of their companies just so they can get a new house.
Fuck you, I hope you get herpes from the whores you bought with the company AMEX card for your "Business trip" We all know the house is because you're so dumb you let your wife see the AMEX reciepts and you had to appease her.Rot in hell bitch!
--toq
Now, this is a serious question...exactly what does the CEO do? What is he responsible for that makes him worth so much money to these companies?
How good do you have to be at making decisions to be worth millions?
Twenties Retirement
Easy category. The answer is always "Downsize".
Why is Triangle Man so MEAN?
shoot man, when else will we find companies like InternetCash.com ???
These bozos ran around giving out samples of their "product" at awards shows for media outlets I've never heard of and lavish galas like their New Years y2k party. That one they rented an entire hotel on south beach, and got Perry Farrell and Mixmaster Mic to come and play. And play we did :) Free booze, grub, women, and . . . Their f%^& product was cash! They were just running around giving it away!
oh well, back to my personal austerity program
gs
"You never want a serious crisis to go to waste." - Rahm Emanuel
If only...
Why is Triangle Man so MEAN?
If you really look at differences between the pays of employees at various levels, in terms of % figures, it would be mindboggling. As we go up the ladder, the % seems monstruous. But, isnt that what capitalism is? The essence of capitalism is to make people envious of another person's achievements, and that makes society run, technology better, so on and so forth. The flip side of it is ofcourse, turmoil in times like this. :(
It has been happening ever since Veblen's days. We notice it now because we are prone to target people with a lot of money now, whereas we "the people who do all the work" dont have any
"Do something man. Right now."
Employees in the U.S. need to wake up! You don't live in the land of the free, you live in a modern Feudal state!
Go read the typical employee non-disclosure agreements and contracts: it is little more than thinly veiled modern day indentured servitude. You don't think so? Code for Microsoft for awhile, then try jumping ship to Sun.
Who are the robber barons? Why, our CEO's. Who are the knights in armor? Why, our fine, robe-clad judicial system, paid by the highest bidder! Who are the mercenaries? The congressional branch of the U.S. govornment, of course!
Seriously people, the U.S. is rife with corruption and apathy.
SEC's budget last year: $438 million
Budget under new law: $776 million
Budget after Bush cut: $568 million
So my question is, what does the SEC need so much money for?
$30 million / 100 new employees = $300,000 per new employee.
$438 million / 3,100 employees = $141,000 per employee.
$102 million / 3,100 employees = $33,000 raise per employee
$108 million / 3,100 employees = $35,000 per employee for computers and 'financing' to restore the agency after losing its New York offices.
Where is all of the SEC's money going?
It's not reported nearly enough that Bush Jr. (Jar Jar Bush) got his breaks through insider loans. The second article is worth reading through.
t m
http://www.american-reporter.com/1954/112.html
Another important provision included in the bill makes it illegal for corporate executives to receive loans from the company coffers. The President has acknowledged he received a loan from Harken in the late 1980s.
http://www.commondreams.org/headlines02/0712-06.h
In recent days, questions have resurfaced about the way Bush sold $848,000 worth of shares in Harken Energy Corp. just before the stock price slumped, and about Bush's delay in filing the required insider-trading report. The Harken deal helped Bush pay off the loan on his $606,000 investment in the Texas Rangers baseball team, for which he walked away with $14.9 million. In his defense, Bush has repeatedly noted that the Securities and Exchange Commission investigated possible insider trading but took no action against him. The investigation occurred during his father's administration. Bush's critics have sometimes joked - as they did of his father - that he was ''born on third base and thought he hit a triple.'' In fact, the full context of Bush's business dealings provides a somewhat different metaphor: This is the story of a man who struck out numerous times before being bailed out by big hitters who often were family members, friends, or supporters of his father.
__ Someday, but not this morning, I'll finally learn to use the preview button.
I almost fell off my seat when I noticed the irony.
_khl
I find it amusing that you defend capitalism with rhyming poetry. What a waste of time. Why don't leave that to people who actually have a few million kicking around and buy another lottery ticket, wannabe.
I've got a bad attitude and karma to burn. Go ahead. Mod me down.
This message is for you: The Noble Person sitting behind a terminal at a major corporation, who at the press of a button, could cause widespread panic among government, capitalist and media power-centers.
A lawyer must pass board exams to practice law.
A doctor must pass board exams to practice medicine.
Many elected and appointed officials in government are required to take an oath.
Capitalists are not required to make any oath or affirmation prior to taking control of, in some instances, more wealth and industrial/financial power than exists in dozens of countries combined.
There are Noble people and their numbers are growing. The Noble people are fed up with the power mongers, the wealth mongers, and the media power centers which market their ideas to us.
The truth is plain to see. They want control of absolutely everything in the world: the environment, the banks, the government, the military-industrial complex, the future of you and your children's children.
Their actions are plain to see. They do what they please until someone finds out about what they have done.
The Noble peoples of the World see things differently. The Noble people are the ones whose labor contributes to the media and government power centers to surely influence our every thought and action.
The era of greed and selfishness will be easily dealt with by the BILLIONS of NOBLE PEOPLES who wish to live on this EARTH which sustains all of HUMANITY. The Earth is not the property of Capitalists. BILLIONS of NOBLE PEOPLES around this planet want to live in HARMONY with the Earth and as history shows time after time - they will eventually revolt against those that wish to enslave others for their own profits.
A wave of resistance is gathering strength now. You hear it in the streets. You hear it in the workplace. You hear it everywhere - except where the media power centers have control.
Why do governments and capitalists want so much to have complete control of the INTERNET? "to have control of you"
What do governments and capitalists give as reward for those who do their dirty work? "money"
This message is for you: The Noble Person sitting behind a terminal at a major corporation, who at the press of a button, could cause widespread panic among government, capitalist and media power-centers.
Inform Yourself and Take Action. Be Aware Of Agents.
When was the last time your *REALLY* sat down to read the US Constitution?
It might be of interest to note that, during the 1970's, the average pay of the worker rose faster than that of the CEOs. The gap between the two has been growing apart at an exponential rate starting in the 1980's. At least, that's what they tell me in my Senior Seminar class.
I think its supposed to go:
The only product Microsoft can make that wouldn't suck is a vacuum cleaner; it would blow.
siri
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So, do you really want to eliminate my incentive? Sure hope you like Junior...
No one is arguing that a CEO shouldn't make MORE money than other workers at a company. The question is why they are being given absurdly high compensation packages compared to every other country in the world.
It's insiderism, it's a sleazy money grab; they know it's wrong, why else would boards of directors try to hide these compensation packages from their shareholders? See the Jack Welch of GE's compensation scandal for only the latest such example.
You worked your ass off. You took risks, you got rewarded. But you can bet Jack Welch didn't climb any poles or take out the trash. Unless the trash was in Tahiti and he took the company jet. Most CEOs of large companies get a big payday whether or not their companies do well. Tying compensation to stock prices was supposed to fix that; instead they figured out how to fix their own stock prices until they could cash out.
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It's unfortunate that it's no longer legal, due to a bill passed into law last July: no more insider loans.
The reason it's unfotunate is that making unsecured loans, and later forgiving them was one of the ways you could avoid getting taxed twice on the same income. It was also one of the few ways an ordinary human whose last name was not "Heart" or "Rockafeller" or "Hilton" could afford a home in California.
I know people who killed themselves after the market crash in 2000, because their tax bill for their "Alternative minimum tax" exceeded $4M on stock whose value was far, far less than that (one of them was a Netscape employee, who exercised at the market high in February of 2000, and then was screwed, when the stock didn't go back up after falling later that year before April 15th of 2001,
when his tax bill came due.
These days, this is closed by a mechanism called "early exercise", where your company gives you a loan to buy the stock options at the time of grant, and then payment is due at the point you sell the stock, or you can surrender the stock in lieu of payment. This avoids the capital gains tax burden (in the form of state and federal AMT) in the case of a loss, by eliminating the appreciated value between the time of grant and the time of exercise.
Now this is illegal; so if you accept stock options and do an early exercise, and the company goes belly up (like 9 in 10 startups do)... well, the paper turns into a debt instrument, and they come after you for the value at the time of the exercise.
It's really assinine to tax deferred compensation in the form of stock or loans, and it's really assinine to tax-collect people to death over it: but now, this is the only option, for ISO grants to employees.
You may think "Good, we'll stop those Enron bastards!"; but the people you are really screwing over are line employees with ISO grants, who are generally taking a below market wage in exchange for a stake, and startups. The "Enron bastards" will just come up with a different approach to the problem, which is that we have a capital gains tax in the first place.
-- Terry
http://www.fullofjokes.com/joke.asp?ID=1659
This is funnier.
b) When you can set your own salary and compensation, wtf do you expect?
It's not just limited to the private sector.
Look at pensions/perks and associated abuses of elected employees - even after they have finished.Let's see (2 mins on google):
They say that absolute power...dang I always forget that one...
So does Anonymous Coward have good karma?
"And when and if it fails you are the one holding the bag."
The MONEY bag you mean?
There are a dozen CEOs better than you out there
/., on the 6 O'Clock news, or in any casual conversation) that they're not watching what's really happening, and they dont' realize who is really the bad guy. You're slamming a perfectly innocent guy because he started off with "I'm a CEO". So I'm going to slam you because you started off with "Well then you're an asshole."
/. reader: Beware, you may be blinding yourself with your ego as well. Think hard about it. I, for one, am thinking about it right now.
...who climb windmills at 4AM to install WiFi points? Sounds a little more dedicated than your average Balmer, I'd think...
You are hired help.
Self-hired help. This guy is an entrepeneur (sp, it's late and I dont' care). He built this business he runs.
The blame does not, of course, lie with greedy executives like yourself.
It does lie, however, with the blind, such as yourself, for not examining the facts before you judge others, not caring if you are right or wrong because you're "smart", you are a geek. You run Linux, you read Slashdot, and therefore you must be intellegent. Your first reaction is, therefore, always the correct one, due to your supierior brainpower, no matter how uninformed. You're only "correct" because you assume so, and we all know fiction leads to drama, and drama leads to bullsh*t, and bullsh*t is what is killing the f*cking world.
In other words, the actual greedey executives get away with what they do because the rest of the world is too busy "trolling" (be it on
Sounds kind of childish, insulting, and pompus, doesn't it? SOmeone sinking to your level kind of f*cking stupid, isnt' it? Well, i feel better because maybe I'll snap some sense into a few people with this little rant.
Please, smarten up a little.
Note to casual
The problem that has been developing, and has been more or less identified as a problem for the past 3 to 5 years, is that a publicly traded company no longer manufactures and sells products, but manufactures press releases and sells stock. The important capital equipment is no longer machines, but, as has been shown by Nike and most other multi-national corporations, savvy marketing departments.
This means that if your product is stock, then as long as the stock remains relatively stable with respect to the overall market your product is doing well. To help keep you primary product, your stock, stable it is useful to have stable sales of some sort of ancillary product that your marketing department can then use to promote your primary product, stock. Most dot coms had wonderful marketing but no real sales, so, eventually, the stock became worthless or was never bought at all. Enron had sales, but when investigated, proved to be fraudulent, which wasn't a problem in itself, but nobody wants to deal with a dishonest agent. M$ has sales, cash reserves, and an excellent marketing department, so it makes lots of money. This does, not, however mean that it is fundamentally different from Enron or a dot com.
The thing to remember is that Enron set up a complex financial structure based on it's stock. True, there were many people robbing the company of millions of dollars, and there was gross accounting fraud, but the thing that brought the company down was the stock. If the stock price had not fallen and triggered certain payment which then waterfalled into audits and investigations, it may have been years before we would have known how corrupt the organization, and on reflection, the industry was.
And the same is true of M$. Stock is a profit center. M$ pays in stock options instead of cash, thus saving not only the cash but also fabricating a profit by not reporting the cost of disbursing the stock option. Also, M$ saves a lot of money in taxes by deducting the stock options from it's revenue. M$ strikes deals with traders and directs M$ employees to use those brokers to trade options. The brokers make a lot of money not only on the trades but also on the loans. There was an article a year or two ago detailing the complex stock transactions, and questioned whether M$ would be profitable without using stock as a profit center. As long the stock remains high, we expect M$ to be a successful company.
So no, the fact that M$ is making money means very little. If it is padding it books with past and future profits to meet analyst expectations, if it is using stock as a profit center, if is neglecting it's customers to meet short term investor expectation, then it has all the same problems as any other doomed company, and, if it cannot handle the web of deceit, will fall.
"She's a scientist and a lesbian. She's not going to let it slide." Orphan Black
One of the things you can do to combat this (to some extent) is make things more transparent.
Is it true that it's only recently that these loans were to be disclosed?
So does Anonymous Coward have good karma?
I heard about this guy on a talk radio show. One of the things this article doesn't tell you is that he was REQUIRED to take those private jets by his health insurance. He had become such an influential man that the health insurance company didn't want to take any risks of him dying in a plane crash/terrorist strike.
Also, from the article:
During his two decades as GE's leader, the company expanded from a $13 billion maker of appliances and light bulbs into a $480 billion industrial conglomerate. It has 313,000 employees in more than 100 countries.
In fact, the article doesn't even suggest that he got more than his fair share. All it says is that it might be PERCEIVED in todays business climate that his 6 year old contract might be excessive. He probably deserved whatever perks he was getting, but at least he's now VOLUNTARILY giving up those perks. How many other CEOs out there could say the same thing?
Its fitting that Michael posted this story.
What the hell has happened to slashdot??!?!?!
Are your parents sure it was a good idea to let an eight-year old watch "Fight Club"?
... was this :-)
I thought boards were supposed to be held in check by the stockholders. When boards act irresponsibly wouldn't the board members be sued for malpractice? Surely not all all stock is owned by the insiders themselves or small investors that can't afford a lawsuit - a big chunk is owned by large institutional investors that were supposed to know better.
Were the stockholders so blinded by the inflation of stock values that they didn't check whether the company is using their money to create value instead of lining the pockets of management?
I guess I've answered by own question.
Stop worrying about the risks of nuclear power and start worrying about the risks of not using nuclear power.
This isn't very well known, but since 1987 a federal law passed by the US Congress has made loans backed by stock options restricted in a new format, usually referred to by accountant types as SBLT (Stock-based loan t-something, I forget).
SBLT loans are required to be approve by a small regulatory body. Once they've been approved, the entity receiving the loan can be held accountable for up to 50% of the capital put forth. This, of course, is all a subset of existing loan laws that the article talks about.
Companies like Enron have been abusing CEO power by using corruption in the SBLT authoritative body to pass loans that usually wouldn't have gone through, creating some loans with sketchy backgrounds. Unfortunately, the Bush administration's recent laws to enforce "corporate trust" have failed to address this situation, leaving many stock holders in the cold. Buyer beware!
If you think an apartment in NY is absurd compensation for the job Jack Welch did, then...
IF you think Jack Welch didn't work damn hard at GE then you are ignorant.
Hell, his efforts there are well known.
There's no excuse for you commenting on something such as that-- he well earned his compensation.
In fact, the whole reason he got the compensation plan he did was it benefitted the company to defer the compensation until after he retired.
That liberal idiots have managed to convince him to give back that money is a shame.
But he did nothing wrong. He earned what he got.
Sheesh.
What is this, russia?
Yeah, and you guys panned the ipod too: http://apple.slashdot.org/article.pl?sid=01/10/23
This is why the free market always fixes problems-- it took care of Enron, Global Crossing and Tyco rather fast, and exerted its maximum penalty- death, on the companies.
While congress is a bunch of jack asses that do more harm than good and never get anything done that actually helps people.
Its time for a constitutional ammendment that for every line of law added to the US Code, two lines of previous law must be removed, until the US code is no more than 5,000 pages in total (or some character count that's a better representation.)
This country was supposed to have a revolution every so often , and people were supposed to be the ones running it. Now we have a government out of control, trying to eliminate any participation of the people and eliminate our human rights.
WAKE UP!
Where are the americans? It seems the majority have lost sight of liberty, libertarianism and the idea that america was supposed to be.
Yeah, and you guys panned the ipod too: http://apple.slashdot.org/article.pl?sid=01/10/23
You may be worth then what, 10x your average, or 'most valued' employee, but not 500x times 5 years after you made your first million.
Simply working an extra say, 12000 hours, doesnt entitle you to leech of everyone else.
You might live like shit for 3 years and give stuff up, but the average joe has to live in a shit house for 60 years, loose his life savings in 401k deaths, and keep working making the CEOs richer and fatter.
Ill be happy for CEOs to get 500x saleries as long as they still paid an equal % tax rates as joe bloe, not have 90% of it refunded due to negative geering, 'fake losses', and 12 tier deep family trust funds.
SO earn well dude, but dont earn beyond a shiek of aly baba.
Final word: DO CEOs deserve to have 1 billion $ in real cash? while the workers still get piddlie 'just above average earnings' to not leave.
Liberty freedom are no1, not dicks in suits.
I wonder what would be the effect of making all shareholders in a publicly traded company proportionally liable for actions done with their money even if they do not serve as an officer or director of the company. "I didn't know" or "I wasn't involved" will no longer be an excuse.
This will make all investments more expensive by the liability insurance premium. In order to ensure that new inventments will not be stifled investors could be given a tax break on the returns of their insured investments.
When I give my money to someone in return for a percentage of the venture I expect them to take certain calculated risks and I know that I may not get my money back. I am free to take this risk. What cannot be ignored, though, is that by encouraging someone to take risks I put not only my own money at risk. Thousands of lives may be affected by these risks. Why should I be able to walk away from a failure and just write it off as a lost investment?
Stop worrying about the risks of nuclear power and start worrying about the risks of not using nuclear power.
During the boom market, the idea that the stock market could solve the big problems of Social Security after 2017 was rampant among politicians. More among Republicans, but many Democrats were in there, too. Lieberman was also among the politicians pressuring the Financial Accounting Standards Board to not require that corporate accounting be too closely connected to reality, and the rules have been loosened to the point where misleading accounting (fraud or artifice) that is illegal post-Enron is also just about mandatory according to FASB rules. No one wanted the SEC or FASB to do anything that might cause the stock market to stop ignoring the facts.
We may be getting more honest financial statements post-Enron, now that CEO's have to certify them, but they are only more honestly dishonest. CEO's aren't accountants and the accounting rules are so far through the looking glass that the accounting statements tell us just about nothing. The whole purpose of the system is to keep the suckers in the pews of the church of capitalism, investing so that the market god says we're prosperous and the suckers should be happy. Lieberman is part of the system.
You know, I might enjoy SlashDot a little more if the stories and posts concentrated more on general tech news and less on following up on every possibly questionable act that Microsoft does. I mean, yeah, it plays a major role in the industry, but it isn't the only player. And yeah, it was found guilty of abuse of monopoly power, but that doesn't automatically make every attempt by Microsoft to compete illegal -- just the specific ones outlined by the court. (And as far as that goes, please recognize that "abuse of monopoly power" is translated as "whatever the judge and the political powers of the day consider as bad behavior on the part of a business," which is by definition somewhat unknown -- there was no law against Microsoft's practices until the judge decided that they were unfair.)
In this case, a bunch of companies were taking advantage of loopholes. Some did so for reasonable purposes -- for example, attracting a talented executive when other methods would have cost the company more. Other companies did it for less productive reasons -- there is a lot of cash flowing by, so let's each grab a handful, and since this has to go on the books somewhere, we'll use the loophole of the week -- corporate loans. Or maybe all of the loans were some mixture of the two. Whatever -- it isn't important to the argument.
What is important is that it wasn't necessarily ethical, but it wasn't necessarily all vice and corruption, and it wasn't necessarily illegal. In this case, it seems that when Microsoft saw that other companies were getting in trouble for something that it had been doing as well, it came forward and put its cards on the table.
Another thing to consider is similar to a point I saw in some earlier posts (that Microsoft was making money, but Enron wasn't). That almost covers it, but I would prefer to say that "Microsoft could afford it, but Enron couldn't." Enron executives were taking cash even when they knew that the company was just scraping by, or worse, about to take a tumble. Microsoft made the loans when they knew that the company could afford to take the hit if necessary.
I guess what I'm trying to say is that with Microsoft at position -- what was it, 18 or 28 or something -- on the chart of companies with loans to executives, having given out $30 million in loans and not really causing a problem for its stockholders, I don't really see why the SlashDot community or the author of the article needs to single out Microsoft.
For what it's worth (probably not much)...
Time flies like an arrow. Fruit flies like a banana.
$452,890.
That's what a million dollars 40 years from now is worth in todays dollars.
Or put another way, thats what you'll have to retire on-- which is plenty enough to retire on.
This is for all the math challenged liberals who will post decrying your retirement plan claiming that a million dollars won't be worth nothing in 40 years.
Course, those who want to be poor will be.
Personally, if I had $452,890 right now, I could stop work today and retire. Travel the world and in 40 years my net worth would be at least $6,768,454.94.
People just don't do the math much-- as you pointed out, you can retire on only $150 a month in 40 years.
Imagine how much sooner if you invested the money in stocks returning %15+ and put in $400 a month?
But people would rather lease a car for $400 a month than retire in 10 years or so.
Yeah, and you guys panned the ipod too: http://apple.slashdot.org/article.pl?sid=01/10/23
"Insider lending added thrust to the long surge in executive pay that has pushed the average major-company CEO's compensation from 45 times that of the average worker in the early 1970s to about 500 times worker pay today."
That may be true, but there's only one driving force behind the gigantic pay for America's CEOs: Good Old Fashioned Greed. If USians didn't feel that the only way to prove their status in society was to amass a huge pile of money then this wouldn't have happened. I mean you can't really argue that a personal fortune of more than, say, a hundred million is actually going to help you live a happier life.
"The new wave is not value-added; it's garbage-subtracted" - Esther Dyson, Dec 1994
Joined IBM as CEO in 1993 and left in March 02. When he joined, the common perception was that IBM was a dinosaur overdue for extinction. Sure it had world class engineers and a huge patent portfolio and masses of installed fortune 500 customers, but mainframes were on the way out. The bottom line was that IBM weren't making products that people wanted to buy at the right price, and it was costing a lot to make them.
now fast forward to 2002. IBM is profitable and leading the way once more. Gerstner essentially turned the company around, and in doing so generated billions of dollars for his shareholders. So despite the fact that I can't justify the need to earn tens or hundreds of millions of dollars each year, from the shareholder perspective he was worth every cent.
"The new wave is not value-added; it's garbage-subtracted" - Esther Dyson, Dec 1994
What I would like to know is, how is it anyone elses business what the owners of a company pays their CEOs or other people?
If you're a shareholder, directly through actual shares in the company or indirectly through mutual funds and retirement accounts, what they pay the CEOs is your damn business.
---------
There is inferior bacteria on the interior of your posterior.
- "Fools who invetsed in crap are parted from their money"
Except that they didn't know it was crap. It was off-balance sheet debt in the case of Enron. Investors were none the wiser. There was no way they could know unless they were high up in the chain of command at Enron.Anonymous posts are filtered.
This is something I don't understand; You KNOW you are taxed on the fair market value of your options when you exercise, REGARDLESS of if the price goes down later... so why on EARTH would you exercise them without selling them immediately?
That's just BEGGING to get screwed.
Saying they had no 'real' value because you didn't sell them is absurd; they had an effect on the market, they DID have a real value.
Remember people, when you exercise stock options you incurr a tax liability IMMEDIATLEY based on the difference between your option price and the market price. It's NOT capital gains. If you hang on to the stock, and the value goes down... you cannot use that capital loss to offset the tax liability of your options (though you can carry it forward to offset other capital gains of course)
Maby people get screwed this way, and it's because they don't take the time to talk to a GOOD tax accountant or lawyer.
This is why the free market always fixes problems-- it took care of Enron, Global Crossing and Tyco rather fast, and exerted its maximum penalty- death, on the companies.
While congress is a bunch of jack asses that do more harm than good and never get anything done that actually helps people.
What about the "penalities" on those who caused those companies to die? Right now, I don't see anyone in immediate jeopardy of a long sentence in a "pound-me-in-the-ass" prison. Just a few token arrests of higher-ups. The "free market" requires some level of government regulation to insure that buyers of goods can be confident that they will receive what the seller has advertised. If the government doesn't do its best to keep fraud out of the marketplace, then the market itself will fall apart. This disillusion is part of the reason behind this most recent stock market crash, as well as others in the past.
Companies who, in an effort to keep their stock price high, fraudulently report profits as they're burning cash like crazy deserve to die. CEOs and others who develop and execute schemes to defraud shareholders to receive pay in excess of what they would have received if they were telling the truth need to be punished severely. I believe the government needs to do all three of the following things to such crooks: (1) seize all assets from those involved in the fraud and from those, including family members, involved in covering up the fraud (like the ImClone guy who couldn't sell his own stock, so he asked his daughter to sell hers), (2) send them to prison for many years (if those involved knew that they were likely to destroy the company beforehand, then they deserve a life sentence), and (3) after the long sentence prevent them from ever working again in any capacity at a publicly traded company.
People are really underestimating the damage that the managements of Enron and Tyco, among others, has done to the United States. It's probably going to take the country the better part of a decade to recover from this decline. And if history is any guide, the ones that inflicted the damage are going to get off lightly. A year in prison, a $1 million fine, and a promise not to do it again would be my over/under line on punishments on those like Ken Lay's. And after the ordeal, he'll still have most of his 9-figure fortune that he obtained largely through fraud.
If I go into a bank, hold it up, and walk out with $100K, I would be looking at a 10+ -year sentence, and no one would be dramatically hurt, either physically or financially. A couple of people who attempted to defraud Michael Jordan out of a few hundred grand are facing up to 25 years in jail for an action that would have not ruined the superstar's livelihood, let alone that of thousands. In neither case would the perpetrators expect to keep their illegally-obtained goodies.
If this type of fraud or extortion is grounds for a sentence of 10 years or more, then why isn't executive fraud held to the same standards when formulating a punishment. The MAXIMUM sentence in the new law passed by Congress for executive fraud is 10 years. Those at companies who have already collapsed will be subject to a maximum sentence of FIVE YEARS, because the actions in question took place before the enactment of the new law. And as far as a I know, there's no requirement that the sentencing judge of a guilty party include forfeiture of assets in the sentence. Does anyone else see something unjust in this picture?
Whether the U.S. government is overstepping its bounds and stomping all over its citizens rights is a debate for another thread. But I do believe that the government has been derelict in one of its few duties in a "free market" economy: keeping people honest. Would you really want to take part in a completely unregulated market? Ironically, the only such markets that I know to exist have been those that are outlawed by governments, such as the market for cocaine and heroin in the U.S. In markets such as these, fraud and violence is just as likely to gain someone additional market share as a supplier who produces a superior product. Would you call such a market truly free?
I perform LBOs. The hardest thing to find is the hard working, intellegent operating manager.
We may call him an executive officer, but at mid-market ($100MM-$1B) cos. the CEO runs day-to-day ops.
You have some pool of executive talent waiting to jump on a $250MM beef/poultry conversion operation? I can make you some money.
?sp
Half of what Americans pay for medical insurance goes to administrative overhead.
... a tithe would be better than this current corporate tax on healthcare.
Americans pay twice as much as other industrialized countries for healthcare.
Listening to antecdotal stuff like this is why people get hurt.
Although if you apply ordinary common sense about regular personal tax law, this would appear to be the case (you don't pay until you sell and your basis is the original price paid). However, this was considered a loophole where the rich could get deferred compensation without paying taxes (and thus getting the time-value of the money for free).
To address this loophole, the government created something called the Alternative Minimum Tax (AMT) which is a lower flat tax rate, but in addition to loosing a bunch of tax deductions you normally get, you also have to include the difference between the option price and the market price of exercised incentive stock options (ISOs) as ORDINARY INCOME. The rule is that you have to pay whichever tax (AMT or regular) is MORE!
The reason most people don't know about AMT is that they think it doesn't apply to them, but it certainly does. It used to only affect rich folks, but stock trickling down to the lower ranks wasn't forseen when the AMT code was adopted, so now it is affecting more and more people who don't even expect it (although turbo tax does this correctly most of the time)...
The non-qualified option is slightly different in that your estimated tax liability is always due immediatly (not just if AMT calculations turn out to be MORE) so the IRS code requires actual withholding (just like your W-2 exemptions), except it's at a fixed rate (to avoid people claiming too many exemptions).
Disclaimer, your tax situation may be different. Consult a tax expert to keep you out of bankruptcy due to AMT if you ever get into ISOs.
The concept is supposed to be that people who get stock options have an incentive to make the company successful, not take the money and run. You used to have to hold for two years after exercise; now it's six months, sometimes less. That change fueled much of the dot-com bubble.
The people who went into debt to exercise Netscape options were taking a big risk. They were effectively buying on margin, which is usually dumb.
Your argument: "He deserved his pay. Everyone knows he worked hard." Well, so did lots of people. You need to argue that he deserved what he got. Kenneth Lay probably worked his ass off.
That liberal idiots have managed to convince him to give back that money is a shame.
Yeah, liberal idiots like the Wall Street Journal. Find me a public defender of Jack Welch's compensation package. It stank to high hell. The deal was negotiated in secret and kept secret from investors. It was buried in an obscure place in an SEC filing, and only came out because of his wife's divorce filings. If it was such a clever move for the company financially and if every knows how much he deserves it, then why not allow investors to admire your move?
Here's the big question to the "Go Back To Russia" types. Is there any amount of compensation that is undeserved, if it was negotiated legally? If your answer is "NO", then enjoy your world, this is more about your religion than anything. But even the biggest free-market booster would say, yes, there is, and the market will correct for it. Well, it can't correct for what is kept secret.
Here's a decent more critical summary.
I have bricks that are more insightful.
First of all, no one blames our current economic situation on the big name fraud cases. You act as if Enron and Tyco are responsible for telco death and the dotcoms. Our current economic situation is a necessary result of the idiocy exhibited by every single investor. Enron and co. didn't help, but they're not the cause.
Also. Destroying a company is not illegal. Seriously. There are cases where destroying a company could be in the best interest of the shareholders. The only issue in this discussion is fraud. You are correct; the penalties for this sort of fraud may be too low. Keep it straight.
I'm still hesitant to accept that it's the government's job to keep people honest. It's the investor's job to not invest in companies that aren't completely transparent. In order to have a stable economy, investors are going to need to insist on a much higher standard than fraud. Just because someone isn't fraudulent doesn't mean they're a good investment. Our current problem can be blamed on investors. Simple.
And, as a side note, your example of completely unregulated markets (heroin and cocaine) are actually the most heavily regulated markets. Obviously. They are illegal. If they were unregulated, then you could make heroin and cocaine in your back yard, and there would be no black market, no traffickers, and no violence. That's the most worthless argument I've ever heard. You don't know any free markets because we don't live in a free market. That's why all the free market capitalists are so ornery.
There are no trails. There are no trees out here.
offtopic: why so many loopholes in US laws? you gave one example, data protection is another. With 600-odd lawyers in congress, why so many laws to ban *one particular instance* of bad-behaviour, rather than a class?
Benefits, Remuneration, Salary + Stock options -- Why regulate the lowest-level?
Personal data, Private personal data, Credit databases -- Why regulate the lowest level?
"The problem that has been developing, and has been more or less identified as a problem for the past 3 to 5 years, is that a publicly traded company no longer manufactures and sells products, but manufactures press releases and sells stock."
This has been a problem since the birth of the stock market. The unscrupulous have been around for as long as humanity (and the stock market) has. You are mistaking media frenzy for a new phenomenon. Take a look at the actions of stock manipulators in the late 1800's and you'll see that today's problems pale in comparison.
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$400 per month for ten years at 15% interest comes to $110,086.82. Which will be worth $90,309.54 in today's dollars. I suppose you could retire to a wooden shack in the Montana wilderness...
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"He worked hard, he deserved it," is a BS argument, unless you think that everyone else who works hard deserves to be paid equally.
Note that I'm not arguing for equal pay (though I often think that might be better than the current situation). Some people do deserve to be paid more than others, but not thousands of times more.
"And thus, I leave slashdot."
What are you still doing here?
Yes, I'm sure that if the people living in the slums of Rio de Janeiro or starving to death in the middle of Africa worked hard enough, they would all become presidents of Microsoft. They just don't work, the lazy bastards.
It's called irony.
RMN
~~~
You? Worked at Microsoft? Hah! Doing what, cleaning the toilets?
"And thus, I leave slashdot."
GO AWAY THEN.
About "the idiocy of every single investor" --
don't you assign any blame to the people who
defrauded these investors? Or are you so far gone
in market worship that you think it's OK to do
that sort of thing because sooner or later "the
market will take care of it"?
Ben "You have your mind on computers, it seems."
Look at all the idiots here who think that
corporate fraud is peachy-keen. These aren't
original thinkers: wittingly or not, they are
parroting ideas promoted by the economic right
wing, from Rush Limbaugh to the Cato Institute.
These court philosophers to the kings of capital
have managed to shift discourse in this country
dramatically to the right over the last 30 years.
Largely with the help of the "liberal" media.
That's why you get more of a jail term for
stealing a pizza than for
participating in a crime ring that steals $1.1
billion.
Ben "You have your mind on computers, it seems."
My philosophy is that business men are evil, but politicians are stupid. We need to find a balance between the evil (but efficient) business men and the stupid (but well-meaning) politicians.
cpeterso
Only in the US are executives treated irrationally. Increases in executive pay has *far* outstripped inflation. The problem is the cozy relationship between the CEO and the board of directors. They are usually social/golf buddies. And they have done nothing to prevent the OWNERS (shareholders) of companies from paying ludicrous amounts of money for their "talent".
The US system is out of whack compared to every other nation in the world when it comes to executive pay, and that is in spite of US CEO's salaries pulling up the salaries of foreign CEO's. Owners can thank lax regualtions for allowing the help to rob public companies blind.
why they are being given absurdly high compensation packages compared to every other country in the world.
In much of the rest of the world, bribes, rewarding cronies / friends of the king/dictator, etc. is the way of things. Wealth is even more centralized in these societies and unlike the US system, middle to lower class persons have little chance of any upward mobility.
So you may be right - CEO's in third world nations don't do as well. But the leader's buddies do even better (look at the Saudi family, for example).
It's insiderism, it's a sleazy money grab
But is this unique to corporate America? I'd argue that sleazy money grabbing people exist everywhere, as does relativism. It's a mechanism for a lesser person to rule over a greater one, obtaining more resources with less work. Whether it's done with a gun or via a guilt trip (as is more common in our society), it's still parasitism.
they know it's wrong, why else would boards of directors try to hide these compensation packages from their shareholders
Because the company is in attrition/decline phase and the shareholders were in on the game. Seriously, we reelected a worthless, deviant parasite president because "the economy was good." I've seen greed in comm company boardrooms that everyone subscribed to, ignoring that it would kill the company eventually.
But as long as the shareholders got their increasing share price (or dividends), they went along with it.
Understand the only reason people are pissed now is that the market is down, profits are down (or gone), and the wheel isn't getting greased.
Tying compensation to stock prices was supposed to fix that
Let me throw out an alternative - promote a voluntary CEO standard:
- base pay less than $350K/annual
- bonus pay issued in stock grants or options
- inclusion of all benefits (personal use of jet, leased auto, housing stipend, stadium box, etc.) in pay package for base pay rule
- penalties that impact bonus pay for SEC violations, etc.
I'll promise you that at $350K, you're going to have some motivated CEO's in larger companies. Want that two million dollar vacation home? Get working.
Establish the CEO standard and list companies that comply with it. Put a notation next to the ticker symbol denoting complying companies. Sure, you can offer that $3 million base, but prospective investors will know you're not in compliance.
Thoughts?
*scoove*
Please pass the context.
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Listen - I take it back. Forget I ever mentioned Microsoft. It wasn't an article about Microsoft. I didn't intend to point out yet another thing they've done poorly, and they certainly aren't alone in this regard. I know this crowd (myself included) enjoys seeing Microsoft stumble (for whatever reasons) which is why I even mentioned it. But seriously - I take it back.
/.
The article has good information on how corporate loans BECAME a problem in the first place. Those loans aren't inherently bad. And when you have to pay them back, there's nothing wrong with them. I thought it was facinating that the loans weren't a problem for anyone, not even share holders, (even after they went from 'loan' to 'gift') until companies started failing becuase of them.
See, that's interesting. It's information. It's history, finance, and business ethics all rolled up into a nice article. Which seemed to me to be appropriate for
And I truely regret that so many people missed all that information because I spoke the unspeakable name. I'm sorry.
Ctimes2.
PS - I was only poking microsoft, not full on bashing. I was bashing the 'executives are evil' crowd.
My cube. My friend. My solace. My prison.
Well, yeah, the point is obvious to all but the most dense ones. Microsoft is 'making money'. So was Enron.
Employees being paid in stock options, for example, allows MS to squirrel away hundreds of millions a year in profit, which keeps its stock price high.
that's about as funny as Barbara Bush in a bobsled.
"I don't see how it's directly related to the AMT"
That's easy: the tax he owed that he killed himself over was AMT.
AMT comes due at the time of exercise; basically, the government wants its money as if you were realizing a short term capital gain, even if what you are really realizing is a long term capital gain. The gain is not in fact realized at the time of exercise, it's realized at the time of sale. But you are taxed at time of exercise, as if that's when you realized the gain.
The gain in question is the difference between your strike price and the price at the time of exercise, times the number of shares.
As a simple example, say you are granted options with a per share price of $0.50/share. You do not vest immediately, and you wait until you have vested in order to exercise, to turn the options into stock. Now the stock price has been going up; why? Because it's an SEC requirement that the increase in price be amortized in a graduated fashion over the period of time that you hold the stock, uf to the point of the company's IPO: they are not allowed to have the value "come from nowhere", because then they would not be taxed on accumulated value "early enough": the government wants its cut as soon as it's a realized gain.
So say it gets to be $5.00 at the time you vest, and you exercise. The company has still not IPO'ed, yet. But you are looking at a "realized capital gain of $4.50/share". It's not really money, it's fake money. You can't sell the stock, because the company has not IPO'ed; your only possible method of realizing gain from it is to sell the stock back to the company, or to offer it in what's called a "private placement". The board of directors gets first option, and can veto either sale (it's in their interest to veto any sale prior to the IPO, unless it's a sale of founder stock, back to the company, in order to convert preferred stock into common stock).
And if you don't hold the stock for 1 year from the date of exercise anyway, you get to pay short term capital gains tax on it anyway. In California, between the state and Federal, this comes out to around 62% of the value of the gain; if you pay AMT, it's "only" 54% of the gain, and you get some of it back when you actually sell the stock, after holding it for more than a year.
But it gets better: normally, you are in a lock up period following an IPO; that means that you can't sell the stock, even if you own it outright, until at least 6 months from the IPO date, because you are an "insider".
So no matter how you look at it, you are stuck with it for 6 months to more than a year.
The normal "fox" for this is to exercise the options early after the first of the year, and then wait a year and then sell them between the time you exercised, and April 15th, to allow you to pay taxes on the gain. It's about the only way an average person could ever afford to pay taxes on the "gain"... which is still only a paper gain.
So what does "early exercise" get you? It gets you the ability to lock in the strike price at the grant price. What this means is that you don't end up with a capital gains or AMT tax on the difference between the strike and exercise price -- because the difference is $0.00, and no matter what percentage they wanted of it, the government's cut is still $0. You only realize a capital gainst when you sell the stock.
Early exercise also has the effect of starting the 1 year "long term capital gains clock"; since most vesting has a 1 year cliff, and goes month-to-month after that, you're in the clear at the point you can actually do anything with the stock.
At the point you are vested, the company may or may not start charging you interest on the loan they gave you to do the early exercise.
Only now the loans are illegal, so the company didn't grant you a loan.
So now, you get to pay out of your pocket, up front, for the early exercise (assuming you have the money to do that... in which case, why are you working in the first place?), OR you get to get locked up for a year from the point you vest, and the options are basically worth about 38% of what they would have been worth, because you are paying the difference in capital gains or AMT taxes.
Further, if the company is not public, you are screwed: you get to hold the stock until the IPO or sale or other profitable exit for the company, or, you get to eat the loss along with the other investors, if the company goes belly-up. Unless you are sleeping with a board member, then maybe you can sell the stock back to the company, or to one of the major investors/VC's, in a private placement, assuming they want to own more of the company than they already do, and that they are willing to take common stock instead of preferred, in order to get it.
So the most common situation is that you no longer get a company loan for early exercise, and then you exercise the stock, have a capital gains assessed on it as an AMT, or you pay short term capital gains rate on it instead. So you sit on it for a year to make it a long term capital gains tax burden, and meanwhile, the stock tanks. Now it's after the first of the year, so you can't realize the loss in the same year you realized the gain, so you are on the hook for an AMT that is about 6 times the value of the stock, were you to sell it now.
And you can't bankruptcy out of owing taxes (taxes are the one area of finance in the U.S. where debter's prisons still exist), so you basically go to jail over the tax bill, and the IRS goes after your family, with you in jail as a hostage, to pay an AMT on money you never got, except on paper.
Now do you understand?
-- Terry
"you shouldn't exercise your unqualified options until the company has some degree of stability."
This is a nice argument for a company like Autodesk, which failed to offer early exercise to its employees in order to avoid phantom capital gains between option grant and option exercise (a 1 year vesting cliff is fairly industry standard).
It also works for a company like Autodesk, which is already public, and for which stock options are going to be a small percentage of your compensation.
For a startup, stock options is a large portion of your overall compensation: it's what they have on hand to be able to pay you, and cash is a scarce resource.
So, for example, if I made $180K/year in salary, not considering other income, at a large public company, and then went to work for a startup, I might find my salary dropping to $100-120K/year, with the promise of more money from ISOs.
The "I" in "ISO" stands for "Incentive"... the intent of ISOs is to incentivize good people to work in places they would not normally work, were it not for the added incentive.
If 66% of that incentive goes to tax because I'm eating short term capital gains tax in California on it (38% federal, 28% state), then the value of the options are actually 1/3 of what they appear to be.
The normal way to deal with this is to convert it into a long term capital gains burden, instead, but AMT opens you up to risk on this, because it's due in the tax year in which you exercise.
The best way to deal with this is to avoid the AMT by exercising immediately, and then vesting into ownership. That's normally handled by the (now illegal) company loan for the exercise amount, to be paid back on sale or through surrender of the stock (one of the executives in the article surrended stock that was worth much less than the loan made to purchase it; this was supposedly "cheating the shareholders").
The assumption here is that the stock will always be of a value equal to or greater than the value at the time of exercise.
In other words: the reason your stock options are worth less, and you can use the strategy you are talking about, is because they are a much smaller fraction of your compensation, compared to what they would be in a startup.
-- Terry
Step 1. loan money to an executive
step 2. executive buys company stock with the loan money
step 3. the loan's collatoral is the stock with no ties back to the executive
So, the executive looks like a big owner of the company's stock and:
1. has no dowside risk if the stock goes down because the stock will be taken back as collatoral for the loan
2. if the stock goes up, he gets all of the upside profit with only the loan to payback.
I don't know what planet you live on, but back here on earth, Microsoft's share price has been on a downward trend since the end of 1999, and has been hovering around its pre-bubble levels for some time (without even factoring in inflation).
That whole Bill Parish site (which, oddly, uses charts that end in 1999) is such a laugh. Even if it was true in 1999 (I doubt it), it sure as hell isn't now. Any share options Microsoft issued after mid-1998 or so are totally worthless, so you can be pretty sure it's not 'paying' anyone with them. I frankly doubt share options are even considered a significant incentive these days.
You don't appear to know much about why Enron collapsed either. The Enron house of cards was built by making loss-making deals and hiding the losses with dodgy/fraudulent accounting practices.
...is that it is subjective.
;)
How much money am I allowed to make or want to make before I'm "greedy"? If you ask 1,000 people, you'll get 1,000 different answers.
If USians didn't feel that the only way to prove their status in society was to amass a huge pile of money then this wouldn't have happened.
And what if I want to amass a huge pile of money for a reason other than to prove my status in society? Is it still "greedy"?
I mean you can't really argue that a personal fortune of more than, say, a hundred million is actually going to help you live a happier life.
I disagree. Each person creates the standards for her/his own happiness. If a person decides that $100M is the one and only thing which will bring a happier life, then what can anyone argue to dissuade them from that belief? People constantly attach "happiness" to all sorts of external objects.
But now I'm getting a bit too Buddhist.
I don't make the rules. I just make fun of them.
"That's easy: the tax he owed that he killed himself over was AMT."
Yes - I got that. My point is this:
The problem he had was he either
A) Received bad advice, or
B) Thought he wouldn't get caught.
C) Didn't wholely consider the implications of his actions
There were widely apparent methods(less than a majority of options holders have been bankrupted after all) which would have protected him from the trap of the AMT. He chose not to exercise his options in this manner, for whatever reason choosing a manner which would give hime potentially higher returns, by holding his position. If he had instead sold some of his shares immediately (as most financial advisors would recommend for portfolio diversification reasons) and paid the AMT with the proceeds from this, he would have had no problem.
In this case the trap was the AMT from stock options. For others it's their 401k, in other cases it's Commodities, for others it's Short (or Long) positions. All of these have acknowledged risks, and benefits. If you plunge in not knowing the risks - you take your life in your own hands, as your subject did.
One can argue the need for the AMT, or other taxes - but people are only victimized by these if they allow themselve sto be victimized. After all, there are plenty of sources to ask questions of if you don't know - particularly if your looking at a windfall in the millions of dollars. If you choose not to ask, you take your life in your own hands.
I thought that the point was that every Fortune 500 company has been guilty of some or all of these sleazy business practices.
Microsoft is just one of the more conspicuous examples!
There isn't a single Fortune 500 company that I have any desire to invest in right now. As far as I am concerned, these are all weasel slimeballs unless they can prove otherwise to me. As an investor, I can demand this or I won't invest, this is not a court of law!
Lets just lend him the money, and he can pay it back when the stock market goes up some. Great. No problems.
One problem is with perverse insentives. Basically, the CEO will be greatly rewarded for short-term strategies that will pump up the stock price to the maximum. Then, he sells the shares, pays back the loan, and jumps ship before the big crash happens. The ultimate pump-and-dump strategy.
"If he had instead sold some of his shares immediately (as most financial advisors would recommend for portfolio diversification reasons) and paid the AMT with the proceeds from this, he would have had no problem."
Good theory, except:
1) You would pay short term capital gains, not AMT, if you sold shares immediately. You only owe AMT on shares you exercise, but *do not sell before the end of the year*.
2) After an IPO, there is a minimum of a six month lockout on sales of stock by insiders, to allow the VC's to get their money out. It's in the contract.
3) The SEC enforces what are called "trading windows"; if the window is not open, you can't sell.
4) The AMT in question only occurs if the exercise price exceeds the strike price; to relate this discussion back to the article (like it should be), avoiding this was just made illegal in July.
We should therefore expect more people to be put in the same position: pay the money out of pocket, if you are already rich; go to jail as a hostage so that your family can be made to pay it; or kill yourself to avoid the burden on your family, since you can't bankrupt out of taxes.
Face it: AMT is a tax on paper profits that may or may not turn into real profits.
Even if we pretend capital gains are the same thing as income (they aren't) so we can tax the heck out of them and "rob from the rich and give to the poor", we should not be taxing people on unrealized capital gains. Gains or losses are not realized until the asset is sold.
-- Terry
"1) You would pay short term capital gains, not AMT, if you sold shares immediately. You only owe AMT on shares you exercise, but *do not sell before the end of the year*."
Yes - thats why you sell a portion of the shares, to cover a) the short term capital gains tax on the shares sold and b) the AMT due at years end on the shares left unsold. And to diversify your portfolio from the concentrated illiquid risk that a large block of restricted stock is.
"2) After an IPO, there is a minimum of a six month lockout on sales of stock by insiders, to allow the VC's to get their money out. It's in the contract.
3) The SEC enforces what are called "trading windows"; if the window is not open, you can't sell."
Yes - as a company employee your position has limited liquidity. Your investment actions should reflect such - and this should be planned for (see earlier point).
"4) The AMT in question only occurs if the exercise price exceeds the strike price; to relate this discussion back to the article (like it should be), avoiding this was just made illegal in July."
It would be a truly unjust tax if it applied to options that are under water......
"We should therefore expect more people to be put in the same position: pay the money out of pocket, if you are already rich; go to jail as a hostage so that your family can be made to pay it; or kill yourself to avoid the burden on your family, since you can't bankrupt out of taxes.
Face it: AMT is a tax on paper profits that may or may not turn into real profits."
I'm not going to disagree with you that the AMT as applied to stock options is a punitive tax - thats liability outweighs its benefit. I simply disagree with the heartache stories that people bring up in regards to it(the San Jose Mercury News being particularly disgusting) The tax laws were there beforehand - and there were people available who knew & understood the problem. Because people abdigated their responsibilities and allowed themselves to be victimized by the AMT does not make it a tax that should be repealed (as much as the liberal press would have us cast out anything that allows for victimisation)
Of course, fraud is wrong. People who commit fraud should be punished. The current punishments for this sort of fraud may be too low.
But I do not believe that fraud caused our current economic problems. Dumbass investors did. Most of their mistakes were not the result of other people's fraud.
I don't really understand how you got to those questions from my post. I thought I was pretty clear.
There are no trails. There are no trees out here.
The recession is not due to investment mistakes
made by individual investors, regardless of where
one places the blame for those mistakes.
Whoops, gotta run.
Ben "You have your mind on computers, it seems."
Yeah. Well. VCs and investment bankers are a much bigger problem than individuals. But that's still idiotic investors.
There are no trails. There are no trees out here.
"Yes - as a company employee your position has limited liquidity. Your investment actions should reflect such - and this should be planned for (see earlier point)."
Yes, and insurance should be unnecessary, and Social Security and Medicaid should be unnecessary, because everyone should have planned their lives down to the most insignificant detail, mitigating all risks, by the time they hit the age of 7.
(No, I don't want to buy a bridge, either).
It used to be that the downside of working for a startup was that you took a lower salary, and risked either not making the money back, or you would make it back many times over.
The risk was that the return would be zero, not that it would be negative.
None of the risks that the VC assumes are potentially negative; the worst they get is "zero return". This used to be true for the employees, as well. Now it isn't.
With these new laws "designed to stop CEOs from profitting unfairly", we now have an environment of greatly increased risk for the average worker.
First, we had AMT, that put everyone at risk of a large tax liability, with nothing to pay it. Then we issued a patch for that risk: early exercise, using a company provided loan to pay the basis price of the stock, with an option to surrender, incase the options were under water.
Now such a company loan is illegal, so the risk is back.
The reward has to be proportional to the risk.
What we are doing here is getting rid of the reward, but increasing the risk.
This is not the way to stimulate a down economy; it is a way to ensure that extablished businesses don't get competition from new ventures.
It raises the marginal cost of labor for startups, while leaving it unchanged for large comanies, which don't offer stock options to any but their highest tier of emplyess anyway (e.g. in IBM, you have to be in "band 10" to get an offer of stock options, or you have to be management, above band 10).
AMT is asinine. The rule against the loans, which were a way to work around AMT being asinine, is itself asinine. The two are exactly analogous, because the one was intended to address the problems caused by the other.
-- Terry
So you think there are no structural problems,
it's just a matter of poor allocation of resources
due to telecom hype?
I don't find that very convincing.
Ben "You have your mind on computers, it seems."
Um. Not hype. Structural problems. You're right. I just feel that those structural problems are due to idiotic investors. Companies were/are not sufficiently transparent for investors to see their structural problems. Greed lead executives to fraud in several companies. That's illegal, and it should be. Greed also leads large investors to accept an unnacceptable level of corporate transparency. That's not illegal, it's just stupid. And it's the way our markets are run. I'm just trying to say that I don't think our current problems aren't due to illegal behavior.
There are no trails. There are no trees out here.
Nobody is talking about the guy that takes risks.
We are talking about the guys that engineer with financial trickery the way to riches without contributing anything to the company that hired them.
Unjustified redundancies, lack of innovation, unnecessary outsourcing and shorttermism in general, even fraud, financial shenanigans, whatever it takes to inflate the stock price, quality, dividends, reinvestment be damned.
Some entrepreneurs end as CEOs. Not all CEOs are entrepreneurs and the only thing they bet is the obscene size of their severance package.
IANAL but write like a drunk one.
You're probably right, but only because so many ;-)
things that ought to be illegal aren't.
If investors were willing to be deceived, managers
were more than willing to oblige them. So why
blame investors -- for that matter, why blame
managers? The system provided incentives to
stupidity to both groups.
When I referred to structural problems, I meant
in the economy, not in individual companies.
Ben "You have your mind on computers, it seems."
You haven't been paying attention. The feds are on the case and are working their way up the ladders, prosecuting those who committed fraud.
Justice may be slow, but that doesn't mean its non-existent.
In this case both the market and the feds are prosecuting the fraud...
Yeah, and you guys panned the ipod too: http://apple.slashdot.org/article.pl?sid=01/10/23
Fraud is illegal.
Please point me to the Cato institute study where they advocate decriminalization of fraud.
Or admit you're just a marxist who can't stand people LEGALLY making money.
Yeah, and you guys panned the ipod too: http://apple.slashdot.org/article.pl?sid=01/10/23
You're an idiot, you think everyone's fraudulent just because some people are.
And so you seek to eliminate human righs to fit your bigotry.
And you have the nerve to accuse me of promoting a religion.
You aren't worth the air.
(And yeah, you should go back to russia.)
Yeah, and you guys panned the ipod too: http://apple.slashdot.org/article.pl?sid=01/10/23