February 18, 2001
It’s true, and it’s now public knowledge: Charlie McCreevy is a Marxist. Yes, we all know he’s been disguising it for many years, but now it’s out in the open. Our Minister for Finance, champion of the free market, is in fact a commie. Karl Marx, Fidel Castro, Vladimir Lenin, Tito, Mao — all communists (and dictators) but, according to the Finance Bill, all were right. If this smacks of heresy, well let’s be heretical.
According to Marx, the great evil of the capitalist system was that workers slaved away generating profits that were then trousered by the owners of companies. The capitalists benefited from this unfair and unreasonable profit while the workers, who generated the profit in the first place, had to make do with meagre wages. The harder the workers worked, the more profits they generated and the finer the lining on the fat cats’ dinner jackets.
Furthermore, according to Marx, the point at which profits were maximised was precisely the point where wages were pushed down to subsistence level, keeping workers forever subjugated. Thus, workers and capitalists were locking into a permanent and irreversible battle for profits.
At the beginning of the last century, Marx asserted that the only lasting way to right this inequity was to reward workers for the toils of their labour. For Marxists and revolutionary communists, this process typically demanded a violent uprising to overthrow the power and share out the country’s wealth. And the rest, as they say, is the history of the 20th century.
Fast-forward to the 21st century and we see that Marxism is alive and well and living in the boardrooms of corporate America. Stock options are revolutionary Marxism without the revo-lution.
Stock options are a perfect tool to reward workers for the toils of their labour. By co-opting the interests of management with those of their workers via the share price, options achieve the Marxist solution of lining up the interests of management with those of the workers, while at the same time putting the financiers — the ordinary shareholders — in their place.
By issuing preferential options to staff at the present share price, stock options also guarantee that financiers subsidise workers from the outset.
Most business schools and management gurus have bought into the idea that options are a very positive thing, but the jury is still out on whether share options actually work. Do options make workers and management work in the interest of shareholders to generate maximum return? Or are options just a sophisticated way of robbing shareholders’ money in a bull market?
In a bull market, most investors do not really notice the huge option packages paid by management to themselves. However, only total blindness can disguise the fact that in the US, senior management is taking the Mick.
For example, one of the kings of options is Larry Ellison, boss of Oracle. According to the Financial Times, Oracle set aside $2.7 billion, in 2000, to cover possible dilution associated with staff exercising options.
In 1997 Disney’s boss, Michael Eisner, exercised options worth more than the combined annual pay of the top 500 chief executive officers in Britain. I’m sure Michael works hard for his shekels, but that’s a bit over the top.
When prices are rising, investors can live with this type of largesse. When prices are falling or static, excessive options are hard to justify from a financial and a theoretical standpoint.
Theory suggests that options create an incentive to make the company perform better. But only the most brilliant of managers can move stock prices by their efforts alone.
As for the workers, it is reasonable to suggest that they will not work any harder after option issuance, because most workers cannot see any connection between their daily chores in Leixlip and the share price of a multinational on Wall Street.
Another argument is that options help companies to retain staff in a tight labour market. But this can only make sense when no other company is issuing options.
Take the high-tech sector, for example. The only way that stock options in Intel can act as an incentive for staff loyalty is if the competition is standing still. If Intel’s competition offer existing or prospective staff a similar package, then worker loyalty will only be bought via an option auction between both employers.
This is like trying to attract workers with generous, or even excessive, wage increases. The crucial difference is that over-generous options do not appear in inflation figures and are paid for directly by the shareholders.
It is very difficult to see how options can change the performance of any company in the high-tech sector when (a) all companies are at the same carry-on and (b) the recent slump in share prices has got more to do with macro issues such as investor fashion and a fall in the global demand for PCs than micro factors like specific firm productivity.
If we are entering a bear or even a stagnant market, it is difficult to see how shareholders, those who grease the wheel of the entire system, can come out of this option frenzy smiling.
Mr McCreevy, by treating gains on options as low-taxed capital gainsrather than high-taxed income, has shifted the cost of a tight labour market from the employers to the shareholder. This is a smart move, but there are no free lunches — someone has to pay for it.
For the moment, the move will be heralded by all proponents of the free market. It will be seen as a great leap forward for capitalism. However, if global liquidity ensures that stock markets remain flat, far from promoting a shareholder democracy, the stock option provision in the Finance Bill guarantees that shareholders will just be robbed democratically.
Since I’m constantly being told ideology is dead, I suppose we have to conclude that we’re all Marxists now.