Look for other ways to attract and retain top

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look for other ways to attract and retain top executives. The second is FAS 123R, is a regulation that requires the expens- ing of options—and, for all intents and purposes, removes their cost advantages of options versus other forms of long- term incentive compensation. In many companies, stock op- tions are being replaced with restricted stock as well as per- formance-based stock plans in the hopes that organizations will get a bit more for their money. Those companies who are still using options aren’t being so cavalier with them. As a matter of fact, they are being much more thoughtful when it comes to long-term incentives in general. Take Agilent Technologies, a measurements products company that did a study that showed half of their share price movement was driven by economic and industry factors, while the other half was driven by company performance. So Agilent changed its long-term incentive program to reflect their find- ings. Instead of being made up entirely of options, the com- pany split their long-term incentive plan evenly between op- tions and performance shares. Makes sense when you think about it, doesn’t it? CHAPTER 12: LONG-TERM INCENTIVES 319
Some investors are refusing to play with companies that grant options. After all, what better way to avoid the potential prob- lems of options than to avoid companies that grant options? We all know how much Warren Buffet, CEO of Berkshire Hathaway, hates options. Other companies, like the invest- ment-advisory firm Bastiat Capital, also avoid companies that grant options because they want to avoid the stuff that goes with it—difficult accounting, dilution, and of course backdat- ing. 4 Instead, Bastiat chooses to focus on companies like CompuCredit, who not only have stopped issuing options, but provide a thoughtful and detailed explanation of their compensation philosophy in general. Parlez-Vous CEO? With stock options, of course, came a whole new fun lan- guage. While we all agree that the main reason for granting options was to get managers and shareholders on the same page, I doubt even industry gurus suspected that stock options would have such a huge impact on our vocabulary. For example, we bandy about the word “backdating” like we’ve been using it for centuries. As a matter of fact, you would have to live in a cave not to know what it means. Okay, for those of you who do live in a cave, backdating is the prac- tice—widespread at times—of manipulating the dates of stock options grants to coincide with low points in their value. Chances are you know what backdating is because lots of com- panies have done it—Monster Worldwide Inc., Apple Computer, Comverse Technology, Affiliated Computer Systems, Brocade Communications Systems. And those are just a few that come to mind. Leave it to executives to come up with yet another innovative way to max out their pay. Is backdating illegal? Nope. But it’s not very nice either. Shareholders don’t take it well when they find out their highly paid executives are spending their time finding accounting loopholes that allow them to take lots and lots of money from the company cash flow—while shareholders pay the price. 320 EFFECTIVE EXECUTIVE COMPENSATION

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