Jim, as you have pointed out Harry has not sold a whole bunch of stock yet. As far as implying that the shares sold in his retirement plan really don't count towards his effective compensation is incorrect. Most small business retirement plans favor the owners. There are anti-discrimation rules but the lions share of small business retirement plans still favor the owners. My guess would be Harry will receive at least 40-50% of the assets in that plan. This is not meant as a knock, just to clarify the facts.
As far as Harry's selling goes, you are correct that to date he has not sold a whole bunch of stock when compared to what he has. I totally agree with his sale last year of the 40,000 shares strictly from a tax perspective. These shares were part of a restricted stock grant that vested on the date that he sold. 80,000 shares vested the day he sold and he sold half of them. The reason I totally agree with this sale is because he had taxable income on the total value of the 80,000 shares. The income tax due on this grant would have amounted to at least 40% of the total grant so he sold enough to cover his taxes on the grant. In addition it started the clock ticking as to the holding period for long term capital gains treatment. There is nothing at all wrong with his sales to date.
The thing that is wrong is not that he has been given the shares in exchange for cash it is the number of shares that he has taken and the number of shares he has doled out to other executives. These shares will one day go into the float and dilute our ownership which will keep a lid on the stock price. If Harry had limited himself to 10,000 or even 20,000 shares each year, would he have tried any less to get the Ericy situation resolved? No way and if he would not have tried as hard with this "small amount" then he should have been replaced.
The potential is enormous for what he will get even if instead of the million shares he has it was only 100,000 - 200,000 shares.
For all that are supporting Harry and what he and the rest of management has accomplished after the Motorola verdict, there is definitely a lot to be said for them. We are on the verge of becoming very wealthy since the company has survived.
My whole point is that the company would still have survived and management would still have tried AND MAYBE EVEN TRIED HARDER had they been given less shares and options. Once you have as many shares as Harry has been given, will it matter to him as much if the settlement produces a stock price of $50 or $75? If he had fewer shares you can bet it would make a difference and he would probably try even harder. After a while the number of shares he has will have a reverse effect of what we ordinary shareholders want.
If you don't believe excessive pay produces lackluster performance just take a look at most highly paid sports figures. They try much harder when they are paid less than when they finally sign that huge multi million dollar contract. Just one look at college basketball shows what I mean about trying harder.
The other problem with doling out options each and every year is that it really is then part of compensation and as such the executives will then sell them. The whole theory behind stock options is to align the interest of shareholders with management.
Long term shareholders are not constantly being given more stock each year in which to sell so they tend to hold until they decide to get out. Management on the other hand by taking options when cash is readily available are increasing the negative perception on the street which in turn keeps the price lower. This is not aligning the interests of shareholders with management. Option grants should not be an annual event. They should be a one time event with long vesting periods other than additional grants for achieving specific goals. In this way it would align management interests with those of long term shareholders.
