Executive Compensation, Stock Options & Fiduciary Responsibilities

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Executive Compensation, Stock Options & Fiduciary Responsibilities
In the movie Pirates of Silicon Valley, there is a scene where co-apple founders Steve Wozniak and Steve Jobs have a discussion regarding the $116 million worth of stock options granted to Steve Wozniak. In the film Wozniak complains to Steve Jobs that the amount of stock granted to him was just too much for him to fathom, given his meager upbringing and current simple-lifestyle. Woz, as he is commonly referred to in the movie even informs Steve Jobs that he is going to give (transfer) some of his stock ownership rights to other early employees like Daniel Kottke, Apple’s first official employee. Although this was generous decision on behalf of Wozniak, according to Prof. Jeanne Calderon, Apple and it founders are not legally required to issue IPO to its original employees (Daniel Kottke) as long as the information expressed in the “IPO prospectus and the SEC registration process precisely corresponds with actual conduct of the company.” Since, Steve Jobs and Steve Wozniak were the founding members of the Apple it is reasonable for them to profit substantially from the company’s initial-public-offering (IPO). However, it is still interesting to note that the discussion of excessive stock option grants precisely followed the induction of John Sculley as Apple’s new CEO. The movie is historically inaccurate because it suggests that Apple’s IPO occurred, specifically, in tandem with Steve Jobs relinquishment of power to Sculley, when in actuality the Apple went public in 1980 whereas Sculley officially became Apple’s CEO in 1983. What is even more concerning about this scene was Steve Jobs close affiliation and integral influence in recruiting John Sculley as Apple’s CEO.

Essentially this scene is a great example of the excessive compensation packages executives at major corporations are commonly granted (IPO, Stock options), while lower ranking employees are granted none or their options become worthless because their executive administration is corrupt. Following numerous corporate scandals and bankruptcies in the last decade, excessive executive compensation has become a major issue in contemporary law, business, and society. This portion of the paper will attempt to analyze the evolution and current status of executive compensation as to how it is applied and interpreted from legal, social and corporate perspective.

In recent decades, stock options plans have become the largest factor in structuring executive compensation packages. A stock option is a flexible way to share ownership with employees of company. Stock options are also an efficient means to attract, retain, reward and motivate employees because they are form of payment that preserves the company’s cash flow reserves while tightening the alignment of an employee’s economic interests with cumulative shareholder interests. Stock options, essentially, give the person who is granted the option (the optionee) the right to buy a certain number of shares at a fixed price for a specific number of years (the exercise period). The price at which the optionee can exercise the option by purchasing the stock is called the grant price or strike price. This price is generally defined as the market value of a single share of stock at the precise time the option was approved. Corrupt executives will commonly back-date (re-price) these option contracts, in order to receive a higher-market value spread when they decide to exercise their options.

For instance, last year, former United Health Group (UHG) Chair & CEO, William McGuire, had to resign for engaging in this unethical practice. He recently settled with the SEC and the UHG Special Litigation Committee which required McGuire to return more than $420 million in stock options and other compensation to settle issues related to his involvement in back-dating (re-pricing) his stock options during his tenure as CEO of the company (Dash). The payback...
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