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It's a simple equation: When corporate big shots overpay themselves, that money comes out of the pockets of shareholders.
And it's even worse when it comes to executives who pay themselves with stock options. A fat paycheck is paid in cash and is reflected in a company's results almost immediately -- so investors have a pretty good idea of what they're buying. Big options grants will keep a company paying for years to come, often in ways tough for shareholders to detect.
Indeed options can be so costly to shareholders that some professional investors go out of their way to avoid companies that use them to excess. Money manager Albert Meyer of Bastiat Capital begins all of his stock research with the proxy statement -- where savvy professionals can root out the real cost of options.
Meyer favors companies where options represent less than 5% of the shares outstanding. "It's a good signal that you are dealing with a management team that respects shareholders," he says. He finds this information in companies' annual reports in a table that summarizes stock options outstanding. (You can find that by searching on "stock options outstanding" in the annual report.)
Recently, four companies came up high on Meyer's buy list partly because they use few, if any, stock options: subprime lender CompuCredit (CCRT, news, msgs), coal-specialist Alliance Resource Partners (ARLP, news, msgs), Seaboard (SEB, news, msgs), which sells pork, and Tootsie Roll Industries (TR, news, msgs). Meyer owns the first three, and he says Tootsie Roll will look like a buy if it trades below $26.
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Just because these companies' executives aren't sitting on big batches of options doesn't mean their interests aren't aligned with shareholders. All four of Meyer's favorites are run by executives who own big chunks of company stock, so they should be plenty motivated to get their shares moving.
- Seaboard Chief Executive Steven Bresky owns 70.9% of Seaboard through a family-owned company called Seaboard Flour.
- Managers and directors at Tootsie Roll own 40.9% of the regular shares, and 80.2% of Class B "super-voting" shares, which have 10 votes each compared with one vote apiece for the regular stock.
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- At Alliance Resource Partners, a coal company set up as a limited partnership, directors and officers own 44.7% of the shares.
- CompuCredit Chairman and Chief Executive David Hanna owns more than 14 million shares, or 29% of the company. Vice Chairman and Chief Operating Officer Richard Gilbert has 1.9 million shares. All told, senior managers own about 60% of the shares.
These executives aren't shunning options just to be good corporate citizens. The more options they issue, the less control they have as majority owners. The best scenario for them is to make their stock prices rise without handing out ownership stakes.
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