Executive Comment: PMC-Sierra CEO on stock options

The recent debate over the expensing of stock options appears to be a red herring. The real issue is the limited number of stock options that public companies are being allowed to grant to their employees. While this might not have a negative impact in the short-term, I believe over the long term it will have an adverse affect on the competitiveness, innovation, and productivity of our economy.

Today, many experts are arguing that the best way to solve the recent corporate scandals is by restricting the use of stock options. The indirect consequence of such an action will be to reduce the number of stock options that will be made available for middle management and rank-and-file employees.

At a time when we need to retain our best talent, align their efforts with shareholder interests, and remain competitive internationally, we may be doing just the opposite. Passing onerous bills and policies that will turn back the clock on the democratization of wealth creation in this country -- and serve to concentrate more wealth in fewer hands is not a good thing. This is not the American way -- and the consequence of such actions will not be good for our economy.

In the early '90's, the compensation committees of public companies came under fire because executives and employees were paid base salaries and bonuses that were too generous while their companies' stock prices were in decline. The problem was addressed by shifting compensation packages to 'performance-based' models. This, in turn, brought about the implementation of executive and employee stock option incentive plans.

But now--given the recent scandals and irresponsible executive behavior at some corporations--many advisors and lawmakers are suggesting the root of this evil is stock options. They say we need to limit them, expense them, and tax them more. Lacking a mechanism to directly control CEO salaries, they are moving quickly to limit the number of stock options contained in many company option plans. As the CEO will typically continue to get his, or her, share as a result of increased negotiating leverage due to higher levels of personal liability and a premium being placed on experienced management, it's the rank-and-file employee that gets short-changed.

But why should we as Americans care? The reason is that over the past 30 years, the U.S. economy has become increasingly dependent on intellect property rather than natural resources and commodity products. Microsoft, Intel, Cisco, Pfizer, and Merck all were born from ambition, innovation, and the sharing of the pie. The "deal" that was struck with employees in the last couple of decades was the following: no more pensions and no more lifetime employment.

In return, you will get a small piece of the equity action of the company and a 401(k) that you can self-manage. If the company fails, you get nothing except your base salary. If you help make the company successful, you can pay off your mortgage, send your kids to a better university, and retire in comfort. This deal is typically offered to employees at all levels of the corporation. The people eligible to participate are not exclusively Ivy League educated executives or the politically connected. In fact, some of them do not have a college degree at all.

Many also happen to be immigrants similar to our parents and grandparents except they don't work in mills and farms but clean, safe, work environments that produce the break-through innovations in pharmaceutical drugs, communications technology, or clean energy.

Prior to the stock market bubble, if a company and its Board were irresponsible in how they managed compensation the shareholders would dump the stock. This market-based governance mechanism became dysfunctional during the late 90's when all stocks went up regardless of managements' compensation policies or business fundamentals. The market is back to punishing companies for irresponsible behavior by voting with their feet and dumping the shares of poorly run enterprises. In other words, today the market is fixing the problem all by itself.

What will be the eventual cost to the U.S. economy if it loses its competitiveness to Asian rivals? The fact is our Asian business partners are well educated on the benefits of capital markets. They are now offering stock options at close to zero tax rates to entice skilled American-trained technologists to relocate to Taiwan, Hong Kong, and Mainland China.

We must beware of legislation and policies that turn back the clock on our economy--and our employees. We need incentives to increase our innovativeness, to take risks, and to share the upside potential with people at all levels within Corporate America. When people talk of a few egregious acts of CEO greed, or when they talk of stock option accounting theories and want to "fix" the situation, realize they are speaking in code.

There are those that want Congress to change "the deal" for American workers. They want management and employees to innovate and take risks without job security, a pension, or potentially a small piece of the equity pie. I believe that we need to continue to utilize the wealth and job creating process that stock options and innovation provides. When done properly and responsibly, it can work to everyone's advantage.