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Sex, Drugs and Backdated Stock Options

June 6, 2008
Related Topics: Business Etiquette, Corporate Culture, Ethics, Compensation
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I’m always intrigued by bad executive behavior, because it flies in the face of the notion propagated by groups like the Center on Executive Compensation that the reason executives make so much money--an average of $10.8 million in total compensation, or nearly 350 times what the average worker is paid--is because there are so few good ones to go around. This is nonsense, of course. Although there are a lot of great executives who are worth what they are paid, there are a lot of bad ones too--and they seem to get the same kind of money. I’ve written about the bad ones (see ‘Bosses Behaving Badly’) a number of times, and the behavior exhibited by some of them is so egregious that you have to wonder: Who could possibly top this? Well, here’s one that tops them all: The stock option backdating scandal at Broadcom and the federal indictments against ex-Broadcom CEO Henry Nicholas. The manipulating of stock options is a serious charge, but the bad-boy executive behavior comes out in a story in the Los Angeles Times. “In a 21-count indictment, Nicholas and William J. Ruehle, 66, Broadcom’s former chief financial officer, were accused of backdating millions of stock options for five years to improperly reward employees,” according to the L.A. Times story. “A second, four-count indictment names only Nicholas, 48, and alleges that he maintained homes and commercial properties in Orange County [California] and Las Vegas for the ‘purpose of using and distributing controlled substances,’ including cocaine and methamphetamine.” But that’s not the worst of it. The L.A. Times story continues, “Among other things, Nicholas allegedly supplied Broadcom customers with prostitutes and narcotics he sometimes referred to as ‘party favors.’ He is accused of slipping drugs into some of their drinks.” Nicholas denies the charges, of course, and his attorney says, “He is confident that he will be fully vindicated.” That’s a possibility, of course, but the level of detail in the federal indictments makes you wonder how Nicholas will explain this away. This also gets back to my original point--that groups like the Center on Executive Compensation (a group launched and partially funded by the HR Policy Association, by the way) seem to mostly be apologists for out-of-control executive pay. L.A. Times columnist David Lazarus pointed this out last week, and a reader letter to the newspaper hit the issue square on the head. “There is nothing more annoying to me than statements such as ‘There are only so many qualified CEOs to go around, and they often demand top dollar for their services,’ the reader writes. “These people were not chief executives out of the womb. They became CEOs from working hard and gaining experience in their fields. There are thousands of people who fit that description and would jump at the chance to be a CEO--and probably do a fine job--for much less.” Entrepreneur (and Dallas Mavericks owner) Mark Cuban made this same point recently, and he makes a lot more sense than the Center on Executive Compensation does. Yes, executives should be compensated well, but too many get big pay no matter how they perform or what they do. Can anyone doubt that the executive pay system is broken and fosters too much of the bad-boy behavior revealed in the indictments against Henry Nicholas? Until we quit paying them like Tiger Woods or Tom Brady, and only give the big money to executives who perform like those guys, we’ll continue to read about bad-boy behavior and get lip service from the apologists who want to perpetuate it.

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