SEC chief offers ways to keep senior executives honest
By FLOYD NORRIS
Columnist
Stock options are all too often not working as they should, says a critic whose identity may surprise some people.
"If managers can reap profits from their options while shareholders are losing some or all of their equity stake, the options create conflicting, not aligned interests," said Harvey L. Pitt, the chairman of the Securities and Exchange Commission, in a speech earlier this month at Northwestern University.
What should be done? First, he thinks all option plans for senior executives should be approved by shareholders. Then, he said, a committee of outside directors should decide on option grants.
Finally, he suggests that "officers should be required to demonstrate sustained, long-term growth and success before they can actually exercise any of their options." That would, he argues, "help abolish perverse incentives to manage earnings, distort accounting or emphasize short-term stock performance."
The ideas are good ones, but getting them adopted will not be easy. The first one, requiring shareholder approval, would seem to be the most obvious. But companies have resisted it furiously. It will take a lot of pressure from Pitt to persuade the stock exchanges to force that reform on companies with shares listed on the exchange.
But then the effort becomes harder. To really align the interests of executives and shareholders means that both groups have to face the risk of declining shares. The commission could go back to the rule it imposed until 1991, which said top executives had to hold shares obtained through options for at least six months. In a telephone interview, Pitt said that idea was "on the table," but stopped short of endorsing it.
To make options really reward long-term performance, it would be necessary to base performance on something other than having the stock go up over a long period, a performance that could reflect a bull market more than anything else.
Options could be structured to be valuable only if the stock outperforms a stock index. But under current accounting rules, companies issuing such options would have to report a compensation expense when they granted the options. Conventional stock options are the only method of compensation that does not require a company to report an expense.
If all forms of compensation were reported as expenses, as they should be, companies would be able to structure options in creative ways. Companies might be more inclined to pay executive bonuses in actual stock, perhaps with rules that the shares could not be sold for a certain number of years. That could promote a real long-term outlook among managers, as Pitt rightly desires.
As it is, companies can operate in secrecy to maximize the chance that executives will become rich. Repricing options, so that option holders will not suffer when the share price falls, is one such tactic.
In October, with airline stocks depressed by Sept. 11, executives of Continental Air Lines canceled all their outstanding options, expecting replacement options would be issued in April. Since then, Continental's bosses -- including the chief executive, Gordon M. Bethune, who had 800,000 options canceled -- had reason to hope the share price would stay low until the new options were priced. Continental waited months to disclose what had happened.
In the interview, Pitt said he was concerned about repricings, and thought they should happen only with approval of independent directors and prompt disclosure.
Pitt got off to a rocky start at the SEC, prompting some to view him as a compliant regulator. It is too early to be sure, but his options speech could be the start of an agenda that would really help investors. It is a hopeful sign.
Floyd Norris is a financial columnist with The New York Times.
posted by Kelly Wednesday, April 10, 2002
For many workers, stock options have lost their allure
By Margaret Steen
Mercury News
Lawmakers are pushing to reform stock options at a time when their value, particularly in Silicon Valley's technology industry, has plunged.
Stock options once gave rise to stories about secretaries who became multimillionaires during the Internet boom. Now, however, many companies' stock prices have fallen dramatically, leaving workers holding options that are worthless, or ``underwater.''
For employers whose stock prices have dropped, options won't keep key employees from leaving. For rank-and-file workers, options no longer are a way to get rich quick. So why is Silicon Valley mustering its political clout to save them?
Although both employers and workers have lowered their expectations of options, it's too soon to declare that Silicon Valley's favorite compensation tool has gone the way of defunct dot-coms. Managers still think options are useful, and some workers see the downturn as an opportunity.
``In my mind, this is the time to get the options,'' said Chuck Mondave, a business development and marketing professional from San Jose who is looking for work. ``Hopefully the companies that are still around today are going to be around a year from now, because all the bad ones are gone.''
Stock options allow employees to buy their company's stock at a set price -- usually the stock market price on the day the options are granted. Workers have to stay with the company in order to use the options; they make money only when the stock price increases.
Tech options underwater
That's made some workers less willing to buy into the idea of options.
``Having had stock options, and having had them be worth nothing, frankly, I don't really care about them,'' said Diane Castro, a public relations professional who moved from San Francisco to Rohnert Park in February because she and her husband were out of work. ``A lot of times you have to wait six months or a year before you can exercise. Who knows what's going to happen to the market?''
With most technology stock prices rising very slowly, if at all, the only people who stand to make a lot of money on their options in the near future are top executives. The reason is sheer volume: Even a small increase in the stock price can create a substantial gain for someone who has hundreds of thousands or even millions of options. Of course, if the options remain underwater, neither executives nor employees benefit.
The iQuantic research found that executives at the vice president level and higher receive about one-third of all stock options. Non-management employees receive 28 percent.
Employees usually have many years to exercise their options -- if they stay with the company. And long-term growth is what options are supposed to be about, at least from the employer's point of view.
``Options are not part of your current pay. They are part of your long-term pay,'' said Ted Buyniski, managing principal of iQuantic Buck's Boston office. ``For people who have been around since the early '90s, it's a return to options fundamentals. For those who have only entered the workforce in the last five or six years, it is a paradigm shift.''
But getting workers to think about options as a long-term investment may be difficult, especially after a year that saw thousands of layoffs.
When Manny Ramirez was laid off from a large local high-tech company in January, he was given three months to exercise his options or give them up. Although most of his options were underwater, he had planned to stay with the company, hoping the stock price would rise.
``Think about all those long hours I put in'' to earn the options, which were a reward for his performance, Ramirez said. He isn't angry at his former employer. But he has learned that just because he is willing to make a long-term commitment doesn't mean the company is.
When workers don't see the value in staying with a company for long-term gain, options are no longer a good retention tool. So many companies have issued new options with lower exercise prices.
For example, in March 2001, Intel gave additional lower-priced option grants to employees whose options were underwater. The company also gave out its annual grants, which normally would have been awarded this month, early to take advantage of October's low stock price.
``These two stock actions that we took helped very much cement in employees' minds that we were vested in their long-term career and employment with Intel,'' said Thomas Galvin, director of worldwide compensation and benefits at Intel.
Other companies have canceled existing options and regranted them later. Some companies exclude executives from these programs, though most of those in iQuantic's survey did not.
``Executives are always in the job market too,'' said Buyniski. ``Even though hiring has slowed, good people are still very much in demand.''
Shareholder feedback
Despite these challenges, companies still want to use options. One of the principal reasons is to align employees' interests with the shareholders'.
``There is nothing else out there that so elegantly links the employee and the shareholder,'' Buyniski said. ``If the employees win, it means that the shareholders have won.''
Studies have found that companies that give options have higher productivity than those that don't, although this theory hasn't been thoroughly studied in a down market.
``It's a great way of precipitating the creativity and innovation that's the hallmark of the technology industry, where people get paid for their results and their ideas,'' said Intel's Galvin. ``You need a long-term compensation vehicle for people to achieve that.''
posted by Kelly Monday, April 08, 2002
Ten area managed care groups had net loss of $12.7 million last year
By JULIUS A. KARASH
The Kansas City Star
Several managed care companies that operate in the highly competitive Kansas City health care market saw their financial results deteriorate last year.
Ten principal managed care groups with operations in the Kansas City area had an aggregate net loss of $12.7 million last year, compared with an aggregate net gain of $31.4 million in 2000.
"The cost of medical goods and services is increasing at double-digit rates," said Mark Whiting, a principal in the Kansas City office of William M. Mercer Inc., a human relations consulting company. "Premiums that these companies pass on to employers have gone up dramatically, but not always enough to compensate for higher cost and higher utilization."
The 2001 HMO financial results were obtained from filings submitted by the companies to the Missouri Department of Insurance. In the filings are results from operations in Kansas and Missouri, and other states were applicable.
The biggest financial reversal was posted by Humana Health Plan Inc., which lost $15.3 million in 2001 after earning $31 million in 2000.
Humana Health Plan Inc., a division of Louisville-based Humana Inc., merged with Humana Kansas City Inc. in 2001. In its results are figures from Kansas, Missouri and six other states.
Dick Brown, a Humana Inc. spokesman, said the 2001 loss for Humana Health Plan Inc. primarily was the result of an unfavorable restatement of claims from 2000. Also contributing to the loss were higher-than-expected medical costs for the Humana Gold Plus Medicare HMO in the Kansas City area, he said.
Coventry Health Care of Kansas Inc. lost $7.3 million last year, compared with a 2000 loss of $1.8 million. Janet Stallmeyer, president and chief executive officer, declined to comment on the results.
Last year's HMO results also feature some success stories. Mid America Health, formerly known as HealthNet, earned $4.3 million in its HMO business last year after losing $1.5 million in 2000. Last year's profit was the first by the company's HMO group.
George Pagels, a physician and Mid America Health's president and chief executive officer, has credited the turnaround to improved efficiencies and better service.
There is no longer a separate filing for the Blue-Advantage HMO group that was operated by the former TriSource Healthcare Inc. Blue Cross and Blue Shield of Kansas City last year bought out its two partners in TriSource in a transaction worth $56 million.
The results for Blue-Advantage are now combined with Blue Cross preferred provider organization results in a filing that showed a loss of $7.7 million last year, compared with a 2000 loss of $3.9 million.
John W. Kennedy, executive vice president of Blue Cross and Blue Shield of Kansas City, said much of the 2001 loss was caused by one-time write-offs related to the TriSource buyout and losses in Blue-Advantage 65, a Medicare HMO that Blue Cross shut down on Dec. 31.
Blue Cross continues to submit a separate filing for its Blue-Care HMO, which earned $1.4 million last year, up from 2000 earnings of $28,472.
Randy McConnell, a spokesman for the Missouri Department of Insurance, said the Kansas City area HMO market is more competitive than that of cities such as St. Louis, where there are fewer players.
That makes it tougher for the companies that operate here to make money, he said.
"The department has said for some time that there is room for more consolidation in the Kansas City area," McConnell said.
Mercer's Whiting said HMO losses will probably lead to more premium increases.
"We don't see any change in sight," he said.
posted by Kelly Monday, April 08, 2002
Retail sales figures due Friday
By JERRY HEASTER
Columnist
More good news of economic recovery is expected Friday when the March numbers for retail sales are reported. The consensus call is for an increase of 0.5 percent for overall sales and 0.4 percent when auto sales are excluded. If the experts are right, it would be one of the best gains since the economy went into recession. It also would be strong proof that a recovery is well under way, because consumer spending accounts for two-thirds of all economic growth.
posted by Kelly Monday, April 08, 2002
Amended Enron lawsuit casts net across Wall Street
By Edward Iwata and Greg Farrell, USA TODAY
A lawsuit being filed Monday casts the most widespread blame yet in the Enron debacle, alleging that leading Wall Street banks and others took an active part in the energy giant's collapse. Until now, most of the attention has focused on the role of Enron's top executives and its auditor, Arthur Andersen. But the amended class-action lawsuit outlines the roles allegedly played by others in the financial shell game that led to Enron's collapse.
posted by Kelly Monday, April 08, 2002
Levi Strauss to cut 3,300 jobs
SAN FRANCISCO (AP) — Jeans maker Levi Strauss said Monday it will shutter six U.S. manufacturing plants this year and cut 3,300 jobs, or about 20% of its workforce.
The company, whose sales have been sagging, has said it wanted to have others manufacture its clothing and move toward marketing the finished product.
"There is no question that we must move away from owned-and-operated plants in the U.S. to remain competitive in our industry," said Philip Marineau, chief executive officer.
The plants will close in three phases, Levi Strauss said in a statement.
In June, the company will close plants in San Francisco and Blue Ridge, Ga.; in August, plants in Brownsville and San Benito, Texas; in October, plants in Powell, Tenn., and El Paso, Texas.
The privately-held company said it will continue to operate a sewing plant and a finishing center in San Antonio, though it will cut about 300 jobs there too. Levi Strauss employs 16,600 people overall.
A poor sales start this year put Levi's on track for its sixth consecutive year of declining revenue.
The San Francisco-based company's sales totaled $935.3 million for the three months ended Feb. 24, a 6% decline from a year earlier.
Laid-off employees will receive a "separation package," the company said.
posted by Kelly Monday, April 08, 2002
ENRON COLLAPSE LATEST DEVELOPMENTS
• The government's top energy regulator met with senior Enron executives last fall and received a phone call from Enron's chairman, continuing a series of contacts that began when he was head of Texas' public utility commission, documents disclose.
• Baseball's Houston Astros started peeling away signs displaying Enron's name or tilted ''E'' logo after buying back the naming rights for Enron Field.
• Pension Benefit Guaranty Corp., the government's pension insurance program, might have to pay guaranteed benefits for the seriously underfunded Enron pension plan, according to the program's executive director.
• Motorola Corp. said that one of its directors, Ronnie Chan, who also served on Enron's board, will not seek re-election
posted by Kelly Monday, April 08, 2002
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