I’m a shareholder in a handful of public companies and packages periodically arrive in the mail encouraging me to vote for boards of directors that are ladling out billions of dollars in money and stock that otherwise would have been retained by shareholders. I’m surprised to see that stock options are still mentioned in these proxy statements rather than restricted stock. This 2003 article discusses how restricted stock would be the next big thing for corporate looters because the stock market was then perceived as too risky for managers. This survey says that options are still the most popular way to transfer ownership of a company from public investors to insiders, but that restricted stock is making a comeback.
Corporate executive stock options were almost never tied to the overall stock market. If a company’s stock underperformed the index and competitors, an executive could still cash in with options simply because the market had gone up. What can make the market go up? Inflation, for one thing. So options were an almost guaranteed winner from 1970 through 2007 (and they got repriced in the cases when the options proved not to be winners). Now that inflation is low enough that the S&P 500 could be stuck indefinitely below its value of 1550 reached in March 2000 (the index is 1147 today, which means an investor at the peak has suffered a 26 percent loss of value after holding for more than 10 years), I’m wondering why we haven’t seen even more popularity for restricted stock. Perhaps it is because it is not tax-efficient compared to options.
Since we’re printing money left and right to pay for record deficits, that should mean inflation will skyrocket. Does that mean index funds would be exceptionally good investments over the next couple of decades or is that fallacious?
Drew: If you look at the spread between TIPS and ordinary Treasury Bonds, the markets are not predicting much inflation, at least for the next 10 years (this surprises me, but how can we doubt the wisdom of a market that priced subprime mortgages so well in the mid-2000s?). After that it could get ugly, certainly, when the government’s obligations grow dramatically for Social Security, Medicare, etc.
Is an index fund exceptionally good during inflationary times? Not really. A business such as GE or IBM should still have value despite inflation (unless the managers help themselves to all of the stock and dilute the public shareholders) and therefore it is not a terrible inflation hedge, but I think the stock market has not done well during the periods of the worst inflation here in the U.S.
options compensation at the fortune 500 company i work for got replaced with rsu’s this year.
A better question to ask would be: Why do we keep investing in these companies?