SEC chairman calls for stock option re-think

Executive stock option plans should be approved by shareholders and used to reward long-term success rather than short-term performance, said Harvey Pitt, chairman of the Securities and Exchange Commission (SEC).

“Our primary concern is to ensure that management’s interests are aligned with shareholders’ interests,” said Pitt in a speech to the Kellogg Graduate School of Management and Northwestern Law School, Chicago.

He said granting corporate managers stock options does not necessarily harmonise their interests with those of shareholders. “Options can align those interests, but if managers can reap profits from their options while shareholders are losing some or all of their equity stake, the options create conflicting, not aligned, interests.”

He recommended companies submit stock option plans to a shareholder vote as a “fundamental step”. He also said independent committees of directors should decide whether to grant options to senior management. They should also structure the terms of awards.

“Corporate boards would do well to consider whether officers should be required to demonstrate sustained, long-term growth success before they can actually exercise any of their options,” added Pitt. “This would help abolish perverse incentives to manage earnings, distort accounting or emphasise short-term stock performance.”