Get Rich Quick!

To Juan Villalonga, the arrangement must have seemed fair enough. Shortly after taking over as head of the Spanish telecommunications firm Telefonica in February 1997, he awarded the company's 100 top executives--including himself--a bushel of potentially lucrative stock options that could be cashed out after three years. With Villalonga at the helm, Telefonica became not only the country's biggest company but also one of its most profitable: it reported a 38% rise in net income for 1999. Protests against the stock scheme by labor unions and leftist politicians did little to rouse the public, in part because for most of the '90s the term stock options didn't even exist in the Spanish vocabulary.

It does now. Telefonica's market capitalization has doubled to $80 billion on Villalonga's watch, and in February he reaped a $17 million windfall from his options. It put him at the center of a political tempest in the run-up to Spain's elections in March. The left-wing opposition to conservative Prime Minister Jose Maria Aznar, a boyhood friend of Villalonga's, attacked Aznar's coziness with the Telefonica chief and the Prime Minister's tacit approval of the stock-option scheme, which the opposition characterizes as a brazen display of corporate avarice. United Left party leader Francisco Frutos branded Villalonga a bad role model for Spain's youth and called for a ban on stock options. The Aznar government pleaded with Villalonga to renounce the profits on his options, but he refused. In the end, Aznar won handily; however, the Spanish government had long since responded to the looming Villalonga payday by doubling the tax on share-option gains.

Maybe that's another reason why Europe has been slower to enjoy the economic boom radiating from the U.S., where options are the common currency of the new capitalist elite. In Germany and Finland, it was illegal to pay executives in stock options until 1998, and in countries from Belgium to Britain, tax laws made option plans unappealing to corporate boards and executives alike. In the Netherlands, recipients have to pay income tax on options as soon as they are bestowed, which is often years before they are cashed in. But intense competition for employees from option-rich firms abroad--and from Internet start-ups at home--are starting to change that climate. And in Britain, stock options now make up about 50% of a typical top executive's salary, double the percentage of five years ago.

But queasiness still abounds over options and their tendency to make corporate fat cats even fatter. In Germany, where the culture places greater emphasis on making it to the top of a company than on lining your pockets once you get there, option giveaways still consume only about 5% of total corporate profits. At the German chemical company BASF, CEO Jurgen Strube collects about $300,000 worth of options a year. "In the U.S., you have CEOs who earn more than $100 million on their options," says BASF vice president Hans-Otto Brinkkotter. "We avoid that."

Any hint that European executives are unduly padding their stock portfolios can still inspire public outrage. In France, polls last year showed that 66% of French citizens wanted to own stock options--until the so-called Jaffre affair exploded. That scandal was sparked by oil giant TotalFina's successful takeover of rival Elf-Aquitaine, and the $35 million stock-option package paid to vanquished Elf CEO Philippe Jaffre to bless the union and walk away. Furious French leftists--who derailed earlier government plans to lower the tax rate on stock-option earnings from 40% to 26%--responded with an unsuccessful campaign to hike the tax rate an additional 10 percentage points, to 50%. A subsequent report by two socialist legislators recommended that the option tax rate be lowered, but also proposed new requirements for companies to open the books on executives' compensation--details that most French firms have long preferred to keep secret.

Tougher disclosure laws in countries like France and Germany would go a long way toward easing public suspicion of stock-option grants. It would also bring those countries closer to the more transparent corporate practices of the U.S.--a prospect, admittedly, at which many Europeans still bristle. As the equity-driven start-up wave of the new economy hits the Continent, the use of options by European businesses is bound to increase. And the larger debate will continue to rage: In a time of near ludicrous stock valuations, does anyone really deserve the fortunes gained through stock options? "If you're a new-economy kind of guy you would say yes--the value of the stock is a reflection of the company's worth," says economist John van Reenen of University College London. "If you're more skeptical, you would say that the market's going bonkers and overestimating the value of these firms. I happen to think the market's going bonkers. But I've been saying that for the past 10 years."