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 Enron's Way: Pay Packages Foster Spin, not Results

By:  David Leonhardt
The New York Times, January 27, 2002

As the stock plummeted, investors and employees alike were left with big losses. But one group of shareholders came out ahead management. Many board members and top executives managed to sell millions of dollars of shares before the big fall and still have something to show for the stock's once-lofty price.

This is the story of Enron, of course, but it hardly ends there. Over the last two years, as the stock market has fallen about 30 percent from its peak, the description fits dozens of other companies as well.

For example, Roger G. Ackerman, the former chairman of Corning, sold $14 million of the company's stock last year, mostly when it was trading at about $57 a share, or seven times its current price. Donald R. Scifres, the co-chairman of JDS Uniphase, made $23 million selling company shares last year; the stock has lost nearly 90 percent of its value since January 2001. David R. Alvarez sold $14 million worth of stock in Providian Financial, where he is vice chairman, last year before the company acknowledged that its balance sheet wasn't quite what it was cracked up to be. The stock, which traded at $60 a share last summer, now trades at around $4.

Some of the biggest paydays have come at obscure companies that were once market darlings. John J. Moores, better known as the owner of the San Diego Padres baseball team, made $101 million last year selling shares of Peregrine Systems, on whose board he serves, before its shares fell by more than two-thirds. Richard Aube, a director at Capstone Turbine, made $51 million selling its stock last year, according to Thomson Financial. If you bought when he sold at around $30 a share, your investment would be showing an 80 percent loss now.

The contrast is obviously cringe-inducing. But it is more than that. Even when executives simply fail to live up to their own predictions — rather than break the law, as some people suspect that Enron managers did — the big insider paydays offer a good lesson in how economic incentives are askew in corporate America.

Corporate spin aside, executives do not always prosper most by making their companies great. They can often profit more from creating unrealistic expectations than from delivering consistently impressive results.

Consider two companies. One has a stock price that has appreciated slowly, starting at $20 five years ago and gaining $2 a year, to $30 today. The second company's stock also started at $20 five years ago, then zoomed to $100 after a few years but has since fallen back to $20.

By any reasonable measure, the leaders of the first company have done a better job. Their share price has grown 50 percent, and they have avoided making grandiose predictions that cause Wall Street analysts to set silly targets. The second company has a stock that has under performed a savings account over the long run, and scores of workers and investors have been burned by false hopes.

Yet if the top executives of both companies had received similar amounts of stock and both sold their shares on a regular schedule, the executives of the second company would actually be ahead. They would have made so much money selling the stock when it was trading near $100 that they would be multimillionaires despite the humbling decline.

HIS is the Enron model of pay for performance, and it has become common. Executives receive enormous grants of stock or options, saying they are simply aligning their own interests with those of their shareholders. But the packages are so generous that even a temporary rise in the share price, accompanied by the sale of a portion of an executive's stock, can leave him set for life. The appeal of overly aggressive accounting methods and manipulated earnings becomes obvious.

"You're providing C.E.O.'s with a perverse incentive," said Nell Minow, the editor of the Corporate Library, a research firm in Washington. "You're rewarding them for a goal that is not in the interest of long-term shareholders."

The executives who have made millions of dollars selling once-expensive shares say they have done nothing wrong. They simply followed a regular, legal schedule of selling stock, they say, and would be far richer if the stock price had not dropped.

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