Slashdot Mirror
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.""
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.
...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.
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
I read the post--however I actually thought about it before replying.
If he has sold the stock (or most of the stock) in his company to someone else, then yes. He is only a hired hand. There is no room for gratefulness, only profit. He built a product, the company, and sold it for cash.
If he hasn't sold the stock to someone else, then he isn't really getting a salary, he is getting profits. Any salary he does get is actually coming out of those profits. In that case he doesn't have much room to speak on CEO salary.
If you have to ask, you aren't in government. :-/
I've worked in the government and it is not efficient.
In my experience, most of the money goes to administrative related stuff while some of it goes to equipment and such.
Generally, each agency is headed by political cronies that have no experience or little in the area they work in. This is especially true with government CIO/CTOs.
What usually ends up happening is the ranks in an agency ignore the political cronies as much as possible. Dosen't make for efficient or good policy.
So, don't be too surprised the SEC wastes that much money.
The SEC's money is going to tax lawyers and accountants. If you want to prosecute those who violate securities laws, you're going to have the pay the lawyers who are going to do the prosecution. And you're going to have to pay the accountants to figure out the numbers.
Unfortunately, to get good people for those positions, the government has to pay a fair amount.
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!
$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
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.
But Microsoft has a massive cash reserve that keeps growing (and zero debt). ~$40 Billion last I checked, enough to cover all operating expenses for years with zero (!) revenue.
Cash, you can't lie about (and get away with). Either you have that much money in your account or you don't, period.
Debt is a little more slippery, and its easy to fudge the numbers (as Enron did) when you have lots of it, but again, MS has zero debt, meaning no outstanding loans or bonds or other weird debt financing scheme. Lying about having zero debt is impossible (again, to get away with).
They may play some games with revenue numbers, but it hardly matters when compared to their warchest. MS isn't going chapter 11 anytime soon.
Tim