Friday, October 20, 2006

Corporate crooks

Paul Krugman has this short piece providing perspective on how corporate executives are cheating the system. Its a welcome relief from political scandals and the war in Iraq.

In the 1960’s and 1970’s, CEOs of the largest firms were paid 40 times the average worker. But professors at business schools provided a theory that justified even higher pay. Executives had to be given a stake in their companies’ success to encourage performance so boards gave stock options. Executive pay rose to 367 times average worker pay. Options rose when the market as a whole rose, irrespective of performance, and after a downward move in the stock price could be repriced or swapped so the price at which the executive had the right to buy stocks could be reduced to the new market price. The CEO got another chance to 'flip the coin'.

The backdating scandal shows even this wasn’t enough. To ensure executives profited, companies pretended options had been issued when the stock price was lower. Executives were effectively paid for just showing up at the office.

But of course everything must be OK since the DOW has hit records lately – but as Krugman wryly remarks prices rose even faster in the 1990’s and the 1920’s. A good brief survey of the backdating scandal is here .


Anonymous said...

Harry, those of us not hooked up to a university library or the like can't read those Select columns unless we arrange a subscription.

What people sometimes do is to quote a reasonable amount of the column in the blog post.

hc said...

That's reasonable - I thought everyone could access the NY Times material - it is even posted on brouwser websites.

In fact quite a lot of the brief paper is sumnmarised in my post.