When it comes to CEO pay, Wal-Mart definitely does not have always low prices. Wal-Mart CEO Lee Scott raked in almost $23 million in total compensation during Wal-Mart’s fiscal year that ended on January 31, 2004. Most of that was in the form of fixed price stock options and time-vesting restricted stock.
On Jan. 4, 2004, Scott received stock options worth an estimated $10.5 million. Stock options give an executive the right to purchase company stock in the future at a predetermined price. These fixed-price stock options provide executives with all of the benefit of share price increases, with none of the risk of share price declines.
This disproportionate upside gain can reward stock price volatility (a measure of risk) and excessive risk-taking. At their worst, stock options can create a strong incentive to manipulate a company’s stock price through questionable or even fraudulent accounting. In addition, many stock options can be cashed out after just one year, thereby encouraging short-term decision-making.
Scott also received $6.7 million in restricted stock grants. A restricted stock award is a grant of shares to the CEO by the company that cannot be sold or transferred for a specified period of time. Time-vesting restricted stock rewards executive’s tenure, not performance. Many institutional investors believe this type of compensation is nothing more than a giveaway of free shares to executives.
At the 2005 annual meeting, shareholders will be asked to vote on a proposal to reform Wal-Mart’s equity compensation practices. Instead of stock options or restricted stock, executives should receive performance shares. Performance shares are actual shares of stock that executives earn for meeting specified performance goals. After receiving this proposal, Wal-Mart started granting one-third of its equity awards in performance shares.
