The poor always envy stock option millionaires but not shareholders

Income differentials are growing, but why is it so hard to accept the wealth of a wage-earning executive?

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By Juha-Pekka Raeste
     
      The moral indignation at stock option earnings starts from the idea that seven-digit bonuses paid to the executives of successful corporations are unreasonable.
      The tough question for the proponents of options is: Would Fortum President and CEO Mikael Lilius have done his job differently had he been paid only a good wage rather than millions in options?
      It is justified to answer that a profit-sharing scheme often encourages employees or executives to try a bit harder. And a reward that is large enough can make an employee give his or her all for the company.
     
In this case, there is reason to ask an even tougher question: why is there no cap or cut-off point in stock option schemes?
      Would Mikael Lilius not remain motivated about his job if, for example, he received a maximum of one million euros in option earnings each year?
      In the present case, the Fortum CEO pocketed a good 2.4 million euros in the fall of 2004, and based on the current stock price, his option revenues should surpass nine million euros during the years 2005 and 2006.
      Besides, the huge increases in wealth enjoyed by executives dampen their motivation. For example, many people who grew rich with Nokia’s stock options have realised over the past few years that their drive is not what it used to be - it is more fun to stay at home when you are a millionaire.
     
Unfortunately, the debates about options often end here, and jealousy prevents a more analytical approach. The line of thought is more or less the following: because I envy the directors of Fortum, I want to investigate whether the persons who decided on the incentive package acted within their rights, or could they be accused of some wrongdoing.
      After all, it is unpleasant to see the management of a successful company grow rich.
      Especially since the rise in Fortum’s share price can be explained by general reasons: it is easy to raise the value of the only listed electricity company in the Nordic region when the market mechanism fails to work where the price of electricity is concerned. Besides, Fortum’s upward shift is based above all on worldwide energy price hikes, and not on the cunning of the management.
     
Does this type of thinking seem familiar?
      Or are you one of those who maintain that generous stock options in regular corporations are acceptable, but when we are dealing with a state-held company, different rules apply?
      There are many people out there who share this last view.
     
However, what is even more interesting than pondering the above arguments is the realisation that a similar feeling of envy or injustice is no longer directed at shareholders.
      It would be downright embarrassing to grumble at some investor who had the brilliant idea of investing ten million euros in Fortum five years ago.
      On the contrary, such an investor must be admired for such a patient, long-term investment. He or she could smell the winds of change.
     
In Fortum’s case, the value of the company today is more than five times higher than at the end of 1999, or 21 billion euros compared to 3.5 billion back then (Fortum and its divested subsidiary Neste Oil).
      Of the value added of 17.5 billion euros, Fortum’s 350 executives stand to receive stock option earnings totalling something like 500 million euros.
      That represents 2.9 percent of the value added.
      And we think that is wrong - even though the remaining 97.1 percent of the company’s new value will be enjoyed by the shareholders alone.
      For some reason, we all envy Lilius, not the group that owns the company.
     
At the same time we forget that the fundamental issue behind the division of income was the battle between capitalists and workers on how to fairly distribute the value added by labour.
      Nowadays this battle is primarily fought between the owners of capital and the owners of human capital.
      In other words, the anger of the people is targeted somewhat off the mark in the public option debate.
      The people are jealous of the wage-earning executives whom they see in the public eye and recognise. On the other hand, shareholders have been hidden for a long time now, behind the barrier of jealousy.
      Even small business owners are allowed to grow wealthy these days, but wage-earners are not.
     
Why is it so hard for us to digest the fact that Mikael Lilius, who started in his present post at Fortum in 2000 and has helped the company increase its value fivefold, has succeeded in negotiating for his 350-strong team of managers just under three percent of the value added?
      First answer: because we know he would have done the same job for less money.
      But let us try the following, if only as an exercise.
      What if Lilius is in fact the Robin Hood of intellectual capital? The pioneer who forces the capitalists to surrender to those who do creative work an increasingly large share of the earnings that they are entitled to.
      Since there is no longer a shortage of capital in the world, and cash in the bank earns only a couple of percent annually, should it not be worthwhile to reward those who produce innovations and concrete results? Through some other system than forcing them all to become entrepreneurs, that is.
     
The key question is this: if the size of incentive pay is linked to the rise in value of the company, how large a share of the increase belongs to the employees of the firm, or the producers of the intellectual and physical capital, and how large a share to those who have invested their money in the company?
      In Finland, the market value of listed companies is some 180 billion euros. Compared to this sum, a total of 3.4 billion euros have been distributed as stock option income during the 6-8 year history of stock options in Finland, or under two percent of the present value of the corporations. Of these option earnings, around 80 percent have been pocketed by Nokia executives.
     
Many orthodox capitalists believe that sellers of intellectual capital should not receive one cent as option revenue - they should just invest their money on the stock exchange if they so choose.
      But wise employees and managers will demand a reasonable share of the value added by their work for themselves.
      Two percent, for example. Otherwise the compensation for the work will be too small.
      It is a good idea for capitalists to learn that exploitation does not always pay. The new-found wealth of an employee may be a distressing experience, but good for business.
     
I would like to think that a cap that would limit stock option income would be a sensible solution. But this idea has an unsteady foundation.
      After all, the cap would be based on the idea that if manna starts raining down from the heavens to the joy of shareholders and employees, but to an excessive degree, wage-earners should, in all fairness, leave the shareholders to wallow in their money by themselves at some point.
      And that is a twisted idea.
      Twenty years from now, incentive rewards will perhaps be distributed evenly to all employees, just like in a large family.
      The differences in skill will then be reflected in wage levels.
     
Helsingin Sanomat / First published in print 29.9.2005


Previously in HS International Edition:
  Intense debate in Parliament over Fortum stock options during question time (30.9.2005)
  Political controversy over Fortum stock option perks escalates (29.9.2005)

JUHA-PEKKA RAESTE / Helsingin Sanomat
juha-pekka.raeste@hs.fi