Posted 3/30/2011

CEOs AMASSING ROYAL RICHES

Many corporate CEOs are getting really rich.

But it isn't because of their salaries, which are reasonable. And it isn't due to performance bonuses, because most performances have lacked star quality in recent years.

No, they're all getting rich through their stock options. And it doesn't matter if you are a good or bad CEO. It doesn't seem to make a difference if a CEO's corporation performs well or badly. Either way, almost all CEOs are collecting huge sums on their stock options.

What is this magic stock option that creates unparalleled CEO wealth, regardless of real performance?

Corporate boards offer blocks of stock to their CEOs according to a specific date. The stock sits there until the CEO buys it. He buys it when the current value vastly exceeds the dated value. (Although some CEOs have been caught cheating by post-dating their stocks to make their profits even larger.)

How do CEOs raise the value of their stocks? The good ones do it by increasing corporate sales and profits.

The mediocre and bad ones do it through other means. They increase the value of their stock options by:

• Lowering costs by cutting payroll to the bone. Almost all do this even though it's hard on their employees – and the economy. This is one reason corporate profits are enjoying a "recovery" today.
• In times of corporate recovery, saving money by making each employee do two, three or four jobs. This practice is widespread today, resulting in great savings for the CEO, but puts great stress on overworked employees.
• Reducing costs by shifting jobs overseas. Outsourcing is a highly favored way of increasing profits – and stock options.
• Eliminating payroll through automation. This approach has cost more jobs than all the outsourcing in history.
• Reducing product quantity. Ice cream cartons go from two quarts to 1.5 quarts. Cereal "serving sizes" fill only half a sugar bowl. Candy bars shrink. Ladies jackets are so short of material that fannies are on display (which can be a good thing or a bad thing, depending on the fanny). Reduced sizes and quantities are not accompanied by a reduction in price – so profits increase.
• Shifting assembly out of the factory and onto the consumer. When you buy something you have to assemble in your home, you are replacing paid assembly workers and providing the manufacturer free labor. This saves tons of money in manufacturing and shipping – which is great for profits and stock prices.

There many other ways for the mediocre CEO to get rich. But one of the best is "the stock buyback." Failing to achieve growth or profit increases, most CEOs will persuade their boards to authorize the corporation to buy its own stock on the open market. This reduces the shares on the market, which makes each share more valuable. Especially the CEO's stock option holdings.

ConocoPhillips, which has not had a stellar record of late, just announced it is selling some "underperforming" businesses in order to provide cash for a corporate stock buyback. The CEO claims, "We are going to shrink to grow." What he really means is that the corporation is going to shrink so his stock options will grow.

There are also a few dicier ways for a CEO to get his stock prices up. Enron cooked the books and spewed out phony numbers. Once discovered, the whole thing collapsed. WorldCom provided fake cost and sales numbers on its reports, only to be discovered, resulting in the CEO being convicted and sentenced to 25 years in prison. Many other companies have been charged with advanced booking of sales which would occur years later. (But this isn't considered as bad as issuing fake numbers for some reason.)

Well, that's the story of how the good, the bad and the ugly all profit from the stock option.

I have only one question:

How much of the current "corporate recovery" is real?

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