New Duke CEO to be paid only in stock

[surfermaw]

New Duke CEO to be paid only in stock
Anderson to get package of shares, options currently worth about $2 million a year
STAN CHOE
Staff Writer

Duke Energy Corp. will pay its new chairman and chief executive, Paul Anderson, only in stock and stock options, it said Wednesday.

The package is worth about $2 million annually, if Duke's stock price and dividend stay level; neither is a guarantee. With the deal, Charlotte-based Duke becomes one of about a dozen of Fortune 500 companies, mostly tech-oriented, to pay their chief executives with no cash or little of it.

Duke tapped Anderson, a former No. 2 Duke executive who left to turn around Australian mining giant BHP Billiton Ltd., to revive the struggling energy giant. He started at the beginning of this month.
Shareholders have grown more aghast as CEOs pull multimillion-dollar
salaries, even when stock prices drop or dividends are cut. Corporate
governance groups urge CEOs to take more of their pay in stock and
stock options, to closer align their interests with shareholders'. But some governance groups worry that may carry another danger: With so much of their pay entwined in the stock price, CEOs may be tempted to gun for short-term gains at the expense of long-term health, unless boards set proper benchmarks.
New Duke CEO to be paid only in stock
Anderson to get package of shares, options currently worth about $2 million a year
STAN CHOE
Staff Writer

Duke Energy Corp. will pay its new chairman and chief executive, Paul Anderson, only in stock and stock options, it said Wednesday.

The package is worth about $2 million annually, if Duke's stock price and dividend stay level; neither is a guarantee. With the deal, Charlotte-based Duke becomes one of about a dozen of Fortune 500 companies, mostly tech-oriented, to pay their chief executives with no cash or little of it.

Duke tapped Anderson, a former No. 2 Duke executive who left to turn around Australian mining giant BHP Billiton Ltd., to revive the struggling energy giant. He started at the beginning of this month.

Shareholders have grown more aghast as CEOs pull multimillion-dollar salaries, even when stock prices drop or dividends are cut. Corporate governance groups urge CEOs to take more of their pay in stock and stock options, to closer align their interests with shareholders'.

But some governance groups worry that may carry another danger: With so much of their pay entwined in the stock price, CEOs may be tempted to gun for short-term gains at the expense of long-term health, unless boards set proper benchmarks

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[surfermaw]

1. LINK

http://www.charlotte.com/mld/observer/business/7305595.htm?

[denverbill]

2. Let's see. Compare tax treatment.

$2,000,000 in wages = $700,000 in federal taxes.
$2,000,000 in capital gains = $150,000 in federal taxes.

[pw]

3. I want to know when he can sell

If he can just turn around and sell the stock as soon as he gets it, that does nothing for the long-term interests of shareholders. If he has to wait 3-5 years, it almost begins to make sense.

[AP]

4. He'll have to pay earned income tax rates on value of the stocks

when the options vest (high 30% on income over about 300K). However, if they increase in value, he'll pay cap gains rate on the increase in value (or take a loss on the amount they lose), which, if he holds the stock for more than a year, will be 15%.

At least, that's my understanding.

This is how so many people payed so little tax on such huge sums of money in the late 90s. And this is how people got screwed after the market tanked (they got a tax bill for a valuation that they could never get on the market once the stock value slid). What everyone should do is sell enough stock on the day the options vest so that they can pay their tax bills and then gamble with the rest.

Incidentally, another way a lot of middle class people got screwed: converting to Roth IRAs. They paid tax bills on 98-00 valuations of their IRAs so they could take the money tax free at retirement (rather than the opposite -- no tax now, pay taxes at retirement). But what happened? They paid taxes on unreal valuations, only to watch their IRAs tank.

Another thing about getting paid in stock options: If the stocks pay dividends, that income will be taxed at a very low rate too, now, thanks to Bush.

In the late 90s, everything was going up (by design, if you look at who was controlling all the pension funds and who was lying about equity values), so there was less risk in holding everything.

The lower LTCG rate was passed in 97 or 98. That's what fueled the stock option rip off in the first place.

[Grins]

5. This is a major mistake..

The key (and not much of one) is what did the Board determine as his objectives in order to earn the options.

If it was steady growth, fiscal management, and long-term stability; then maybe OK.

But, if it is to increase shareholder value, then I think the Board should be fired en masse for being so stupid and cutting the company’s and long term stockholders throats. You’d think after all the reports and scandals of the past decade a board would have learned something!!!

Without some clause for failure to do that, I fear it is the latter case rather than the former, and Paul Anderson will do what’s in his own best interests and maximize HIS equity over the long term health of the company.

Enough of this. We’ve had horrible management controlling incompetent boards of directors for far too long. (Good book on this is “Barbarians at the Gate”; RJ Reynolds and Nabisco, fast paced and scandalous – and true. One of the CEO’s primary objectives was to “own” the board, so they would give him a free hand.) It’s time for the SEC and the “new” board at the NYSE, and the NASDAQ to step in with standards for board membership beyond being best buddies of the CEO. Maybe they can bring a halt to having idiots like…uh…George W. Bush on the goddamn AUDIT Committee of Harken Energy!!! Of course, with a Bush family pal in charge of the SEC, I don’t see much hope in that happening.

The real way to do it is for the large pension fund managers to step up and demand it, and take their money elsewhere if the companies and exchanges refuse to comply. We have already seen their power on the NYSE and with Putnam. Now, hit'em again, harder, harder….

[AP]

6. Some reasonable ways to deal with this:

- the company has to expense the options
- more shareholder say in corporate actions like this (there should be more chances for shareholders to vote on things like this, or more democratic control of boards of directors)
- there should be some way to close the tax loophole -- either a mulit-tier cap gains rate, or a rule that gain from the sale of stock options provided by employers be declared as earned income, or something like that.