Whimsies, fads, and lipstick on pigs: stay focused, and stick with what's important.

Author:Sutton, Gary
Position::SUTTON'S LAWS
 
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COMP COMMITTEE chairmen: You're now the most likely to be sued. And proxies will be withheld for your re-election if ISS doesn't like your decisions.

Just like sales commissions, there's never been a perfect executive comp plan. Penalties and rewards will never be absolutely fair. And so, comp plans are always fluid and subject to the fads du jour.

Restricted stock units are the latest fad:

* Execs like them because they get rewarded by RSUs even if the stock price drops. That's great ... but only if you believe your top people should be free from the pain that your shareholders suffer.

* Boards like RSUs because they can be made to vest over time, like options. That's great, but only if you want to retain disgruntled managers who might otherwise bail out.

* Many like them because the cost to the company is more straightforward than today's requirements for expensing stock options. That 's a reasonable but underwhelming advantage.

Stock options linger. They're not so bad, since management works for the shareholders. The problem is that they don't always relate to performance. For example, when your stock drops, it could be from any of seven reasons:

  1. A major shareholder has a liquidity crisis and starts dumping shares.

  2. Your respected IR professional leaves.

  3. A couple of analysts guess that the healthcare bill is going to ravage your earnings.

  4. Business Week sees that your earnings dropped, but missed that you're writing off an acquisition that doubled your cash flow and boosted revenues by 50%. They offer to print a letter from the CEO explaining this, but have no room to print until three issues later.

  5. Your numbers are all up but the market drags you down with it.

  6. Foreign exchange rates go against you.

  7. A short seller, not knowing that your major customer has doubled its commitment to you, whispers that you're losing that business.

These and other whimsies of the market can pop your stock up, but with the same level of deep irrelevance.

Stocks, by the way, vacillate because institutional investors game them. An institution may hold your stock for many years. But the institution's manager gets bored. He sticks with you through those years, but he sells some every time you hit 100 and buys every time you drop to 80. That cures his boredom. He's never entirely in or out. The net effect is that he turns over...

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