Is Exxon Mobil's $400 Million Retirement Package for Its Former CEO Justifiable?

[chroot]

For a gift, there would be a dilution effect regardless of whether the stock is performing well.

How many times do I need to tell you that option grants involve the creation of new shares?

- Warren

 

[Pengwuino]

When the investors (or Senators, I guess) are pissed off, you've crossed the line.

- Warren

Yah but Senators are just trying to get votes, they are worthless. The guy could have gotten a $40 million plan and the same reaction would have happened. Are the shareholders "pissed off"?

 

[chroot]

Do you read any investment literature? Magazines? The Wall Street Journal? Anything? Value Line?

Investors from here to Japan are pissed off about this. It's pretty much the grudge du jour.

- Warren

 

[russ_watters]

Let's say I directly buy a floating share of company X. I have no connection with Big Oil, but Big Oil is sucking money out of the entire economy, depressing the share price of its own stock, and thus depressing the capital that other people might use to buy my share of company X. The result: my share of company X is less valuable because Big Oil screwed many (or all) of my potential buyers.

Again, it's a "small" effect. If I own mutual funds or other financial products that involve Big Oil, I am assuredly still in the black -- just less so. Our economy is doing well these days, so we're not going to die of a thousand paper cuts. That doesn't mean investors should just let the paper cuts happen. They're still egregious market-screwing events.

The $400 million has to come from somewhere, after all. The shareholders are paying $400 million for an expense that does nothing but weaken the value of their investments. It's not a good deal for anyone but the piggie CEO.

- Warren

That's a tough scenario. The economy is doing well but could be doing better if Big Oil weren't turning so much profit. Ehh, sure, but how much? If Big Oil did only well enough that this ceo got $200 million (heck, or even $2 million), would it pump another hundred billion (1%) into the economy? Probably not, and that's about what it would take for me to care.

 

[chroot]

would it pump another hundred billion (1%) into the economy? Probably not, and that's about what it would take for me to care.

Who cares about the entire economy? I care most about my investments, which comprise a small percentage of my cash flow. I'm concerned about my retirement savings, even if you're not.

- Warren

 

[Pengwuino]

Do you read any investment literature? Magazines? The Wall Street Journal? Anything? Value Line?

Investors from here to Japan are pissed off about this. It's pretty much the grudge du jour.

- Warren

Well if they have a problem with it, they can sell the stock. Thats the beauty of the market.

 

[chroot]

Well if they have a problem with it, they can sell the stock. Thats the beauty of the market.

You still don't get it? The dilution of one company's stock removes money from the market. It removes money from the pockets of people who might buy my shares of another company. It makes everyone's shares of every company less valuable. It screws everyone with any kind of market investment.

- Warren

 

[russ_watters]

How many times do I need to tell you that option grants involve the creation of new shares?

- Warren

I'm having trouble verifying it with a Google, but I'll defer to your statement that they involve creation of new shares. That isn't all that important to the point though because if a stock doesn't go up, the options are worthless and there is no creation of new shares or dilution of the market. Dilution only happens with stock options if the stock gains value.

And it takes a lot of dilution to adversely affect the bottom-line for investors.

 

[Pengwuino]

You still don't get it? The dilution of one company's stock removes money from the market. It removes money from the pockets of people who might buy my shares of another company. It makes everyone's shares of every company less valuable. It screws everyone with any kind of market investment.

- Warren

But you're not taking into account the inflow of wealth the companies that can do that put into the economy, especially when it's a strong economy.

 

[russ_watters]

Who cares about the entire economy? I care most about my investments, which comprise a small percentage of my cash flow. I'm concerned about my retirement savings, even if you're not.

- Warren

When I said "the economy", I was talking about the market cap of the NYSE ($10 trillion) - your retirement savings - my retirement savings too. How much do stock options really hold it down?

 

[chroot]

I'm having trouble verifying it with a Google, but I'll defer to your statement that they involve creation of new shares.

Oh, give me a break. Am I arguing with an unarmed man?

Wikipedia

A benefit to the company's managers is that if options are exercised and employees make money, this is not an actual cash outlay by the company; rather, the money effectively is paid by the current stockholders, in the form of dilution. For example, if the company issues an extra 1000 shares of stock when an employee exercises his options, the company's value is now spread across an additional 1000 shares, so all the company's shares are made to have a slightly lower value.

That isn't all that important to the point though because if a stock doesn't go up, the options are worthless and there is no creation of new shares or dilution of the market. Dilution only happens with stock options if the stock gains value.

How many CEOs write options that they know will be worthless? Many executives take advantage of macroeconomic events or key company milestones to write options that they know will be incredibly valuable. Often, the board of directors goes along with sneaky tactics like the acceleration of vestment to guarantee option grants are as valuable as possible.

After all, option grants aren't accounted as expenses, so they don't even hurt the company's (pretend) earnings numbers.

And it takes a lot of dilution to adversely affect the bottom-line for investors.

If one key employee is given a $100 million retirement package every year, for 1000 US companies, the impact will be $100 billion removed from the market every year. Again, not everyone agrees on what's a "big number" and what's not. You're entitled to your opinion, but I think this kind of market-screwing is worth some consideration.

- Warren

 

[russ_watters]

My point in all this is just that if the company is performing, the CEO is worthy of a big paycheck and him getting a big paycheck affects my bottom line very little. I'm much more concerned with companies giving big paychecks to CEOs who fail (see: Disney).

 

[chroot]

If you invest in Big Oil, and you think Big Oil's CEO did a fine job and deserves $400 million in retirement compensation, that's fine by me -- so long as the company pays it in cash instead of writing options and pulling it out of the market and forcing me to contribute. The US government (or at least one vocal lawmaker) appears to agree with me.

- Warren

 

[russ_watters]

Oh, give me a break. Am I arguing with an unarmed man?

Wikipedia

Well, thanks for the link, but maybe we'll need to call that one a draw. It also says:

Simply granting stock, rather than options, would achieve this same effect, but this would cause a more immediate dilution of stockholders' equity, and would usually give away some voting rights (which option holders do not have).

So it seems that a grant isn't just like cash, as you said: it also requires an issuing of new stock. (edit: ehh, or is it - giving cash removes profit from the company, also reducing its value. So whether you give cash or issue new stock, it works out about the same. Either way, though...)

Or then maybe it isn't a draw: Wik seems to agree with me that a grant is worse because all else being equal, a grant dilutes the value of the stock whether it rises or not (and does it now) while the option dilutes the value only if it rises.

Again, I think that's kinda a side issue, though. We don't disagree by much here in any case...

 

[chroot]

You're being sloppy with the word "grant," Russ. If a company grants you a share, it created the share and handed it to you. That's quite different than a company buying a share of its own float and handing it to you. Furthermore, if the recipient of the option chooses to sell-to-cover instead of executing a same-day sale, s/he has new floating shares and all the voting rights applicable to them. Not everyone executes same-day sales, though, admittedly, most people do.

- Warren

 

[Art]

You're being sloppy with the word "grant," Russ. If a company grants you a share, it created the share and handed it to you. That's quite different than a company buying a share of its own float and handing it to you. Furthermore, if the recipient of the option chooses to sell-to-cover instead of executing a same-day sale, s/he has new floating shares and all the voting rights applicable to them. Not everyone executes same-day sales, though, admittedly, most people do.

- Warren

Share options convey a right but not the obligation to the recipient to purchase shares at a predetermined price at a future date.

How companies finance this can vary. If they have not already reached the limit of their authorised share issue they can indeed issue new stock (resulting in stock dilution). To avoid dilution they may also buy an equivalent amount of shares and retire them or the company can simply buy the stock on the market at the current price and sell it to the share option holder at the option price. The price difference being funded from retained earnings.

That is why many very large companies which have made huge profits for years never pay a dividend. The profits earned are used to finance their employee stock option schemes.

 

[JasonRox]

I see what you're saying chroot.

I don't know much about stocks, but I understand how it affects the whole market. 400 million dollars might be a small chunk of the overall market, but having it happen in most companies or everytime a CEO retires is a problem.

I remember seeing some numbers for large Golden Parachutes and they were usually around 20-50 million dollars. Those were for the top 5. The mere fact that someone got 400 million blows my mind. You are literally letting money leak out of the market/economy.

I'm looking at the economy as some big piggy bank full of cents. Let's say it takes one cent to pay this, then one cent is taken out. Everytime that happens another cent is taken out. After about 25 cents, the difference in weight of the new piggy bank should be noticeable. That's basically saying if everyone has money in there, then everyone will notice the change. It's putting a dent in everyone's wallet. Sure the stock went up, but it shouldn't have.

 

[daveb]

Not to put a monkey wrench in the works, but not everyone has a choice on whther to buy gasoline, that is, if they want to actually live. Some people live too far from their place of employment to bike, there is no public transportation, etc., and they also don't make enough to buy or even rent a place closer to their place of employment. Thus, they have no choice if they want to keep working.

 

[chroot]

Not to put a monkey wrench in the works, but not everyone has a choice on whther to buy gasoline, that is, if they want to actually live. Some people live too far from their place of employment to bike, there is no public transportation, etc., and they also don't make enough to buy or even rent a place closer to their place of employment. Thus, they have no choice if they want to keep working.

Of course, this is true. It would be silly to make blanket statements like "everyone should ride a bike and sell their car." At the same time, it is an ineffective argument, since most people really could get by just fine without a car.

The main reason people cling to their automobiles is simple: fear of the unknown. For example, most automobile trips in this country are shorter than two miles; these kinds of rides would be easy on bicycles. Why don't Americans ride bicycles?

Most Americans are:

- unsure of their own fitness.
- unsure of how exactly one must ride a bike in traffic.
- unsure of where the good bike-friendly roads are, or how to find out where they are.
- unsure of distance; is 5 miles on a bike easy? How about 30? Most Americans don't have a clue.
- unsure of speed; I literally had a friend ask me why it wasn't possible for cyclists to keep up with car traffic, since he thought that cyclists could hold a good 40 mph if they only tried.
- unsure of the effects of heat, cold, inclement weather, or darkness.
- unsure of how their bicycles will fit into their corporate culture, since they don't want to arrive at a business meeting in sweaty spandex and have people take them for a joke.
- unsure of the logistics of bringing a laptop, a change of clothes, or other business necessities with them on a bike.
- unsure of how a bicycle will limit their freedom to change their mind halfway through their commute and hit up the burrito shop all the way across town.

I know all these insecurities first-hand, because I personally had to overcome each and every one of these mental obstacles when I began commuting on a bike. They are, nine times out of ten, wholly mental obstacles. Compared to the confusion of trying to sort out all these unknowns, the good ol' automobile is much more familiar, and thus more attractive.

Keep in mind that people will drive halfway across an unfamiliar city just to get to a McDonalds so they can eat food that is familiar, if mediocre. This facet of human nature is what's keeping many people in their automobiles. Add in some pure laziness and some petty vying for perceived social status, and you've got 21st century American car culture.

- Warren

 

[Cyrus]

At the same time, it is an ineffective argument, since most people really could get by just fine without a car.

I don't think that is true at all. Perhaps, single people in good shape could. I ride my bike, but not to school or work. It's simply too far. I am not going to ride my bike to work and take 1.5 hours, when it's a 30 min drive. It's just not practical. Similarly, I don't expect most American's, or anyone for that matter to ride a bike when they have to bring kids, take groceries, or elderly people. I don't see your justification for your argument. I would say that most people could take a bus places, but not a bike.

 

[chroot]

I have to point out one more thing that I think is really sad: The US is one of the least densely populated countries on the planet. At the same time, we're the vanguard of the telecommuting movement, largely because our traffic is so bad we can't even get to work.

- Warren

 

[SOS2008]

We have debated the cause of increased prices at the pump (it is not just supply and demand), the impossibility of a truly free market (unless you crave anarchy and complete brutality), increasing pressure on the middle class, etc., but here we go again presenting the facts against continued delusion...

As I always say, I favor a fair market, not free market because there can be no such thing as a truly free market. There MUST be regulation just to retain competitiveness (the Sherman Anti-Trust Act, which in itself has been denigrated due to anti-regulatory movements). If energy had been nationalized, we would have a NASA-style program in place and America would be efficient and independent at this time. This will not and cannot happen in the private sector because it is profit driven only (i.e., ruled by capitalist greed), and not about the general good or any such ideal.

About this thread specifically:

The growing wedge between the wealthiest 1% and the rest of the population is why many Americans find the Exxon CEO's income to be appalling. Especially at this time of increased housing and medical costs in addition to the price for gas, for which incomes are not keeping pace, and many are wondering how they will retire as their pension plans disappear because of CEO's like him.

The other related issue is that of record profits of oil companies. The oil companies sold off the retail side long ago, so now are no longer held to so-called free market pressures. The tax benefits recently approved by Congress should be repealed, because these companies have done little to nothing to provide alternative energy for the world, and have no real care to do so.

We need complete focus on all alternative sources of energy, renewable, hydrogen and ethanol, nuclear, etc. We need tax incentives for more energy efficient automobiles, homes, appliances, etc. We need to take action immediately. That's what Bush should be demanding for the short term, not his usual lame pie-in-the-sky BS.