The Get Rich Quick Option

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To Juan Villalónga, the arrangement must have seemed fair enough. Shortly after taking over as the head of the Spanish telecommunications firm Telefónica in February 1997, the 46-year-old Villalónga awarded the company's 100 top executives--including himself--a bushel of potentially lucrative stock options which could be cashed out after three years. With Villalónga at the helm, Telefónica became not only the country's biggest company but also one of its most profitable: last week the company 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.

But it does now. With Telefónica's market capitalization having doubled to $80 billion on his watch, Villalónga last month reaped a $17 million windfall from his now fully matured options. It has put him at the center of a political tempest that has damaged the re-election prospects next week of conservative Prime Minister Jose Maria Aznar, a boyhood friend of Villalónga's. The opposition has attacked Aznar's coziness with Villalónga and the Prime Minister's tacit approval of the stock-option scheme, which they characterize as a brazen display of corporate avarice. United Left party leader Francisco Frutos has branded Villalónga a bad role model for Spain's youth and called for a ban on stock options. The Aznar government pleaded with Villalónga to renounce the profits on his options, but he refused. Now seeking to save his political skin, Aznar has begun distancing himself from Villalónga in the press. Gloats Socialist party official Alfonso Perales: "No member of the [ruling] party has dared to defend him."

If only Aznar were running for office in the United States, where lavish stock-option bonuses are as much a staple of an executive's diet today as the three-martini lunch used to be. Not unusual is the largesse of a company like Apple Computer, which this year awarded CEO Steve Jobs--who earns a salary of $1 a year--10 million stock options, already worth $200 million. Such plans allow execs to sell their stock at market value after a prescribed period of time and pocket the difference between that selling price and the stock's price at the time the options were granted. For shareholders, the logic is simple: making a CEO's pay contingent on how well the company's stock performs provides a built-in incentive for the boss to "spend more time working in the interests of the company and less time on the golf course," according to economist John Van Reenen of University College London.

Europe is just starting to buy into that thinking. In Germany and Finland, stock options for executives were illegal until 1998, and in countries from Belgium to the U.K., tax laws made stock options unappealing to corporate boards and executives alike. In the Netherlands, for instance, recipients have to pay tax on options as soon as they get them, which is often years before they see any actual returns. But intense competition for employees from option-rich firms abroad--and from Internet start-ups at home--have increased the clamor for stock options in much of Europe. In the U.K., stock options now comprise about 50% of a typical executive's salary, double the amount of five years ago.

But queasiness still abounds about stock options and their tendency to make corporate fat cats even more rotund. In the U.K., Europe's most option-friendly nation, institutional investors zealously oppose hefty gifts to senior managers because they feel they dilute share value; as a result, the stock option packages given to British moguls like Vodafone's Chris Gent (whose total options are worth about $9 million) are puny by U.S. standards. 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 only consume about 5% of total corporate profits. At the German company BASF, executives are allowed to invest a maximum of 30% of their non-salary income in stock, and can exercise options only if the company meets certain performance benchmarks. The CEO, Jürgen Strube, collects around $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 Brinkkötter. "We avoid that. You can double your compensation if you invest the whole (variable) amount--but that's it."

Any hint that European executives are unduly padding their stock portfolios can still inspire public outrage. Last year the Spanish government responded to the looming Villalónga payday by ordering a doubling of the tax on share-option gains. Similar reactions have taken place in France, where mistrust of affluent senior managers runs high. For a while, the promise of the new economy seemed to break down the old resistance: polls last year showed that 66% of French citizens want to own stock options. "Public opinion and Socialist officials were well on their way toward finally making peace with stock options," says Elie Cohen, an economist at the National Center for Scientific Research, "but then the Jaffre affair exploded." That's when former Elf-Aquitaine CEO Philippe Jaffre acceded to a takeover by rival TotalFina, collected $35 million in stock options in the new company and walked away. Furious French leftists-- who derailed earlier government plans to lower the tax rate on stock-option earnings from 40% to 26%--responded by unsuccessfully attempting to hike the tax rate another 10%. A subsequent report by two Socialist parliamentarians recommended that the option tax rate be lowered, but also proposed new requirements on companies to open the books on executives' compensation--details which 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 Europeans still bristle. The stock bonanzas handed to American CEOs like Jobs and Disney's Michael Eisner--who in 1998 hauled in $570 million from the 22 million Disney shares he had exercised over the past decade--strike many Europeans as unseemly. But globalization is a two-way street; and as European businesses start to imitate American ones, there is also the chance that more U.S. companies will adopt European-style "indexed" stock-option plans, in which options are worthless unless the company outperforms its peers in various categories. That way, underachieving ceos don't get rewarded for simply watching the stock market soar. Meanwhile, American officials like Federal Reserve chairman Alan Greenspan have echoed their European counterparts in warning against stock-option excesses.

Still, as the equity-driven start-up wave 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 they gain 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 Van Reenen. "If you're more skeptical, you would say that the market's going bonkers and overestimating the value of these firms." Asked in which camp he places himself, he says with a laugh, "I happen to think the market's going bonkers. But I've been saying that for the last 10 years."

With reporting by Bruce Crumley/Paris, Jane Walker/Madrid and Steve Zwick/Berlin