Asymmetrical Information

From the desk of Mindles H. Dreck:

Is there a story here somewhere?

David Cay Johnston of the New York Times writes a story that implies he has a tiger by the tail but he comes away with a handful of lint.

"Officers May Gain More Than Investor in Move to Bermuda" reads the headline. AH-HA, I knew it. Those damn overpaid executives have figured out how to rip off shareholder funds by moving to shifty offshore domiciles.

But I've read through the story twice, and damned if I can see it. All of the projections of increased compensation for executives he describes are based on compensation packages that vary with cash flow, earnings or stock prices. Well, god forbid we should pay executives for increasing earnings, cash flow or the company we own's stock price!

The only semblance of a story here is when he describes the forced capital gains some Stanley shareholders may have to pay to make the move. Of course, part of his argument about Stanley's CEO's pay is based on the stock price going up more than is necessary to pay for those taxes - due to a significant rise in after-tax earnings. Yes, there is such thing as a P/E multiple.

Johnston is also upset that these executives hold much of their stock in tax-deferred plans while many investors do not. But the investors' tax structure isn't really the corporation's major concern, especially when a 25% increase in after-tax earnings is possible.

To top off this sloppy non-story, the suggestions about retirement accounts, and the allegations of obscene variable payments related to corporate cash flow go unresearched and unsubstantiated. Read Johnston's scathing critique of Nabors Industries (with my comments in parentheses):

At Nabors Industries of Houston, the world's largest operator of land-based oil drilling rigs, Mr. Isenberg could see his pay rise by tens of millions of dollars each year if shareholders approve on June 14 his plan to incorporate in Bermuda ...

Mr. Isenberg is already well paid. Over the past two years, he made more than $126 million, including profits from the sale of stock options, from a company with $2 billion in annual revenues (that is a lot).

That is partly because his contract pays him 6 percent of the company's cash flow — a measure of profits before certain charges are subtracted (those "ceratin charges" are items that don't require cash payment! This is a measure of how much cash the company generates and a number Enron analysts might have looked at a bit more closely) — once cash flow exceeds a certain amount (which is? Will the taxes saved cross the threshold? ). The company's No. 2 executive gets 2 percent of this cash flow.

The company expects the Bermuda move to increase cash flow significantly (this is a bad thing?). Mr. Foley and five other compensation lawyers said that beginning in the year after the Bermuda move, the related payments to Mr. Isenberg and his deputy also should begin rising. (variable compensation - what a concept)

What is more, Mr. Foley said, details of the Nabors stock option plan indicate that Mr. Isenberg will make an additional $100 million on the exercise of his 10.3 million options of Nabors shares, currently at $42.99, rise (sic) by $9.72. (if "rise by 900.72" he'll make $10 Billion. Investors will make 14 times as much based on fully diluted shares outstanding, which are DEcreasing. Call the cops. )The company has said that lower taxes and higher cash flow should increase share prices, but has not said by how much.

Mr. Isenberg owns 1.1 million shares outright, but it is not known how many of these are in retirement and charitable accounts, which would shield his gains from taxes. (As long as we're speculating, maybe he's got some in his sock drawer too!)Mr. Isenberg declined to comment, as did a spokesman for the company.

Stop the presses - overpaid CEO may share 94% of increased cash flow with investors! May be availing himself of legal retirement vehicles and giving his money away to charity.

This is just silly. I have no need to defend Mr. Isenberg (I don't know anything about him or Nabors other than one press release I just scanned), but certainly we can find something more interesting in the era of Enron, Global Crossing et al.. Thanks for the laugh, Dave.

UPDATE: By the way, if companies adopted my performance-based pay proposal based on relative stock price, there would be no huge windfall in moving to a tax haven, except for the first mover. Plenty of incentive, but a payoff only for the executive whose company's stock outperforms its competitors.

Posted by Mindles H. Dreck at May 20, 2002 10:26 PM | Technorati inbound links