Thoughts on Stock Options feat Buffett
Recently, I read Warren Buffett's Warren Buffett's shareholder letters. Shareholders really disliked reckless Stock-Based Compensation. In these letters, he gave a few examples.
Damage to Shareholder Value
It goes without saying, but generally, Board of Directors maintains a good relationship with the CEO. Therefore, even if the CEO takes a lot of stock options, there are not many cases of opposition to this. Also, since no money is spent right away, there seems to be no problem at first, but ultimately, the increase in supply provides a factor that lowers prices.
Flawed Compensation System
Most stock options are focused on the stock price rather than performance, and it is not difficult for a CEO to artificially raise the stock price. Simply postponing dividend payments and increasing retained earnings will raise the stock price through an increase in per-share cash value. In such cases, he noted that management could raise the stock price simply by retaining earnings, rather than increasing ROE.
Of course, stock options can be used to create a corporate culture that induces management to think like shareholders. However, stock options cannot be a perfect method. Shareholders bear losses when the company's performance is poor, but management that received stock options does not bear any losses. Therefore, Buffett warns shareholders that this imbalance exists in the stock option plans proposed in the proxy statement.
In conclusion, Buffett believed that cash compensation was better than granting stock options.
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On the other hand, Peter Thiel thought it was better to give Stock-Based Compensation rather than cash compensation for management. Of course, Peter Thiel only spoke about the early stages of tech stocks. The companies I invest in also issue quite a lot of stock options. I really don't know how to view this.
Topics: Stock-Based Compensation
Category: Blog