Before the passing of the Sarbanes-Oxley Act, CEOs compensation through stock options was greatly abused. After 2002, however, stock options became one of the legitimate ways for CEOs to get paid, even though there is more accounting involved. One individual who believes there is a more efficient way to go about this is Jeremy Goldstein.
Stock Options Basics
The principle is fairly simple. A CEO will be offered stock options that enables him to purchase company’s stock in the future, for its previous price when the contract was made. This means that when stocks go up, the CEO will earn the difference. So, what are some problems that a large law-firm partner Jeremy Goldstein mentions?
The main problems that exist are stocks losing their value, employees selling their options massively and causing harm to the company, as well as the accounting implications. Goldstein advises that stock options can be unreliable as the value of the stocks can plummet. Also, recording the stocks on the income statement is mandated by GAAP (Generally Accepted Accounting Principles), which can be very tricky and complicated.
Jeremy Goldstein does not aim to completely get rid of stock options. He sees many benefits such as the simplicity, motivation to perform better, and comparability to other compensation packages that the IRS makes difficult to implement. Therefore, stock options have their shortcomings, but they are still one of the best ways to work out a good payment contract with high-level management.
Introducing the Knockout
Goldstein’s solution is to make stock options negligible if the company’s value declines. This “knockout” approach will save employees from losing their stock options when the stock price goes down enormously. Also, the options would be given a time frame to recover, so one would not just lose them immediately.
Who is Jeremy Goldstein?
He graduated with a bachelor’s degree from Cornell University, a master’s from the University of Chicago, and a Juris Doctor Degree from the University of New York. His professional career started in 1999 when he became an associate member of a notable law firm.
Currently, Jeremy Goldstein is a partner at his own law firm called Jeremy L. Goldstein & Associates that specializes in the executive compensation. A fruitful career of over 20 years has helped this individual become one of the leading experts in his field.
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