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Gravy Train

Utilities must trim the fat from excessive stock options, stock grants and executive pay.

Fortnightly Magazine - July 2006

stock analysts predict that utility stock valuations will edge lower as interest rates rise, which will make lavish stock options and stock grants more difficult and put a white-hot spotlight on executive compensation and performance.

From the Oracle of Omaha

Famed investor Warren Buffett believes that stock options do not align the interests of recipients with those of stockholders, as executives don’t experience the same pain that stockholders do if the share price drops. Furthermore, he has said in public that options are given away too freely without sufficient regard to the dilution suffered by stockholders. Not to mention, he is concerned that companies sometimes unwisely spend money on a stock repurchase to reverse the dilution caused by the exercise of options. Clearly, another method is needed to provide the right incentives to lure bright executives to the utilities industry without creating perverse results.

Fellow billionaire Bill Gates, CEO of Microsoft, agrees. In 2003, the company announced that all Microsoft employees would be granted stock awards instead of stock options. The Microsoft stock award program offers employees the opportunity to earn actual shares of Microsoft stock over time, rather than options that give employees the right to purchase stock at a set price.

The utilities industry is long overdue to change how it rewards top executives. Let’s hope that the rewards will always outweigh the pay.