On September 26 former WorldCom Inc. chief executive Bernard Ebbers, once an Alberta boy, drove his Mercedes to a Louisana medium-security federal prison to begin a 25-year sentence for orchestrating an $11-billion accounting fraud that made him rich but drove his company into bankruptcy and hurt millions of investors, customers and employees.
That same day, one-time Enron Corp. finance chief Andrew Fastow, who got off lighter because he co-operated with prosecutors, began a six-year term for masterminding the crooked schemes that toppled Enron. His C-suite cohort, then-CEO Kenneth Lay, was looking at 30 years but died of a heart attack last summer just before the jail cell doors slammed on him.
The events leading to the convictions of these “barons of bankruptcy,” as the Financial Times called them, forever shredded investor naiveté regarding the integrity of big corporate honchos. And a lot of other things in North American business changed in the wake of 2001, the annus horribilus when these bad boys were first caught. One of the most significant was the widespread searing of the once laissez-faire attitude companies and investors had about stock options being rewarded as a significant chunk of executive compensation.
Except in Alberta, it seems.
Here in the oilpatch, we’ve headed the opposite way. We’re downright giddy about options, even though they’ve been criticized as the shiftiest component in a badly broken North American corporate compensation process.
A stock option gives the recipient – in the past it’s usually been restricted to senior management – the right, but not the obligation, to buy stocks at a fixed price (the strike price) by a certain date in the future. If, for instance, an individual is granted options at a strike price of $10 when he or she accepts a job, and three years later they’re worth $20, he can then purchase a pre-determined amount of the stock at the original $10 price and, if he so chooses, immediately sell them on the market for $20, doubling his money. Together this process is known as exercising the option. Though the practice is now frowned on, some companies gave executives huge interest-free loans to purchase the stock, which were then paid off after the options were exercised.
In the 1980s through the ’90s stock options were handed out to executives like so much candy, especially in the technology and energy sectors. By the turn of this century, the typical CEO of a U.S. financial firm got stock options worth a whopping $55 million a year, more than 30 times their average salary. Kenneth Lay liquidated more than $300 million in Enron stock between 1989 and 2001 – most of that from options – before his company’s shaky dealings were uncovered. As Nortel Networks’ fortunes dramatically shrank when shares were dropping from a high of $124.50 to $25, then-CEO John Roth earned the vast bulk of his compensation by cashing in $88 million US worth of options.
Post-Enron, U.S. and Canadian companies in nearly every industry – consumer goods, financial services, telecommunications and aeronautics – started shifting away from options as a major instrument of compensation to ease the concerns of investors who increasingly felt granting options was like leaving a diamond in the care of a jewel thief.
In the oilpatch, though, stock options continue to flourish as part of executive compensation packages. Really, they hardly ever left, say local compensation and human resources experts. So what’s going on here? Did Alberta companies miss the flurry of memos regulatory bodies like the Securities and Exchange Commission in the United States and our own Canadian Securities Administrators regularly fired off? That stock options, lavishly doled out to CEOs, CFOs and other key executives, are emblematic of corporate greed and wrongdoing, and that form of compensation needs reform?
Simply put, what happened in Alberta, says Deborah McNeil, director of operations at McNeil Group, a Calgary HR and compensation consulting firm, is “the oil and gas market went crazy. And when the market goes crazy you tend to see companies realizing huge increases from year to year. And when that happens, especially at the beginning of the growth stage, when executives are brought in to really drive growth, they are going to look for a substantial amount of compensation based on meeting or exceeding their objectives.”
So, as the price of energy increased, the memories of Enron, WorldCom, Tyco, Adelphia and others in the rogues gallery of corporate fraud seemed to fade. In fact, in Alberta, in stark contrast to everywhere else, the stock option pool has been widening as more of them are granted to increasingly lower echelons of workers as an incentive to anchor them to their jobs and keep headhunters at bay.
“I think the trend right now,” says Douglas Baine, president of the Petroleum Accountants Society of Canada (PASC), “is all employees have a pretty good chance at obtaining options.” He says PASC is seeing options spread “right down to the truck driver.” That’s how it is at Progress Energy Trust, the 75-person company formed in 2004 where Baine is manager of accounting operations. “In the energy sector just about every company that I know of had to turn to offering options if you wanted to keep people, or to attract key people…. So there is huge amount [of options] in the energy sector.”
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