Gravy Train


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

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

Fortnightly Magazine - July 2006

This month’s cover story (“ Baby Boom Blues ” and “ HR Roundtable: Bridging the Talent Gap ”) focuses on how utilities intend to find the talent they’ll need over the next few years to replace all those retiring baby boomers. And part of that puzzle naturally involves executive pay: how to attract the best and brightest without going overboard on rewards for performance.

Yet beyond the impending workforce crisis, the task just now warrants an urgency all of its own. As many will already know who regularly read the Wall Street Journal and the Financial Times, recent weeks have seen scandals develop involving both the timing of stock options (, United Health) and shareholder criticism of excessive executive compensation (Home Depot, Exxon Mobil).

The way executives are being compensated today, some argue, often does not line up with company interests. In fact, the late 1990s Internet boom created perverse incentives that led to financial scandals such as Enron and WorldCom. Part of the reason corporations were so free with their stock-option awards was that options did not have to be expensed. Stock options granted to employees did not need to be charged as an expense on the income statement, although the cost was disclosed in the notes to the accounts. This strategy allowed businesses to exclude a potentially large chunk of executive pay from current year expenses, thus leading to overstated income.

Top execs at several large utilities recently have exercised options and grants, sometimes reaping huge financial windfalls that would qualify as exorbitant by any rational measure. Perhaps the recent decision of the Financial Accounting Standard Board (FASB) to require expensing of stock options as of June 15, 2005, will put a damper on such payouts. Yet many stock options come at year’s end, with expenses showing up only in first-quarter financials, so it may be too soon to gauge the full deterrent effect, if any, of FASB’s new rule.

Before reviewing some of the largest stock sales, the best solution would be to follow the lead of Duke Energy CEO James E. Rogers. In 2002, as CEO of Cinergy, Rogers made it corporate policy to prohibit executive officers and directors from selling stock acquired by exercising options until 90 days after having left the boardroom or the company’s employ.

The industry should go further. It should also prohibit the exercise of stock grants until 90 days after executive officers and directors have left the company or board, except in special circumstances or on a clearly delineated timeline (such as after 10 years of service). And some old-time corporate chiefs are not so lenient. They insist that senior company executives should never sell stock unless they are out the door.

Egregious Pay: A Debate With a Banker

After my February editorial criticized the multi-billion merger of Constellation Energy and FPL, I was accosted by a Constellation investment banker, Daniel B. More, of Morgan Stanley, who