Wednesday, September 01, 2010

Regulating Away Equality

Tax Notes Today (I think it might be gated, sorry) provides readers with 10 Executive Compensation Mistakes for firms. Most of them are details on how to structure contract details to conform with regulatory and accounting requirements. This one is particularly interesting in the second paragraph:

4. Treating everyone the same. It has long been standard operating procedure at many companies to treat all employees the same, for a host of reasons. Foremost among those reasons is that many companies find it hard to make distinctions among rank-and-file employees or senior executives.

However, current trends and regulatory reforms are forcing companies to distinguish some employees from others. Companies are now required to expense stock option awards, meaning that making option awards available to all is simply not financially feasible. Not everyone can be treated the same; not everyone can get big option or restricted stock grants.

Government mandated accounting standards and disclosure requirements are not the only reason to differentiate among employees. There are the important questions of incentives and retention: A company must provide a reward structure to motivate its employees to perform and to stay with the company. Each company must ask and answer why it cares about retaining a given person and how it plans to do so. Inevitably, employees are clearly going to be treated differently. Companies will have to learn how to manage the process of creating and calibrating an incentive structure.

1 comment:

John said...

It was gated for me.

This point doesn't really seem to make much sense to me. No firm treats every employee the same at all. In compensation, perks, responsibilities, the whole nine yards.

Further, all the expensing of options means is that instead of boosting EPS until the options are called, the company's balance sheet simply reflects the widely understood present value of the option. Companies that didn't do this before were essentially lying to their shareholders by not making it obvious how much they were paying their employees. If a proper accounting of options as compensation means that boardmembers (who are (in general) not that familiar with options valuation) will not approve the practice for all employees, then that simply means those members were not aware of how expensive the obligations were. I don't see how this is an issue...