The $300 billion Teachers Insurance and Annuity Association's College Retirement Equities Fund has criticized mega-grants of stock options to chief executives. My research shows the fund is right to do so.

In olden days, companies favored relatively modest annual option grants to top executives. Among other things, the annual grants allowed for a dollar averaging of strike prices, reducing the temptation to reprice the options later if the stock headed south for the winter.

But then a new practice began whereby the CEO, on a single day, received a stock option of such size that carpenters had to be employed a week before the grant to shore up the floor of the executive suite. The quid pro quo was that the CEO would not receive another grant for an unspecified number of years after the mega-grant. Sadly for shareholders, that number of years sometimes turned out to be as low as one.

To those who believe people in the business world would do anything to make another buck, a mega-grant held the promise of releasing as much energy as a 1,000-milligram shot of testosterone. Why, these folks argued, a CEO with an option mega-grant ought to be inspired to run circles around other CEOs who had to get along with your normal-sized option grants.

A little test

As a way of testing this theory, I went back to a database I created for the year 1996 containing pay data on 856 major-company CEOs. I focused on the 10 largest option grants made that year to CEOs who, as of May 12, were still in their jobs.

The biggest grant of all went to Walt Disney Co.'s Michael Eisner. On Sept. 30, 1996, he received options on 24 million split-adjusted shares in four different tranches. Options on 15 million shares carried a strike price equal to the then market price. The remaining 9 million shares, in equal portions, carried strike prices that were 25 percent, 50 percent and 100 percent above the then market price. I scored this option as having an estimated present value at the time of its grant of $180 million.

The smallest of the 10 grants went to Dell Computer Corp.'s Michael Dell. This grant, according to my calculations, had an estimated present value of $11 million at the time.

Setting aside for the moment the theory that larger options motivate more than smaller options, one might expect to see these 10 CEOs lap the field in total return of their stocks for no other reason than that CEOs typically call the shots as to the timing of their own grants.

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