The Conceptual Foundations of Executive Remuneration
The expected total benefits associated with the job or position (including the costs
This dimension influences an individual's workplace choice, as each person tends to select a job that offers the highest expected total benefits, factoring in both the risks associated with those benefits and the costs of changing employers The term "expected" reflects the inherent uncertainties in the costs and benefits of a job from the employee's viewpoint, highlighting the importance of the risk-adjusted expected value in their decision-making process.
Therefore, it is the expected total benefits that determine whether we attract and retain the right executives and encourage the right ones to leave.
The composition of the remuneration package
The composition of a remuneration package is crucial for maximizing employee benefits while minimizing costs for the employer This includes elements such as salary, performance-related cash, stock options, retirement benefits, and non-pecuniary perks An efficient remuneration structure ensures that resources are not wasted, aligning the total cost to the company with the maximum benefits for the employee Although aspects affecting employee productivity may complicate this process, the fundamental goal remains the same: to create an optimal balance that serves both parties effectively.
The relation between pay and performance (what for shorthand we call the pay-
This aspect outlines the actions and outcomes that receive rewards or penalties, influencing an employee's focus, effort level, and overall productivity.
Our analysis of the pay-performance relationship does not differentiate between rewards and motivation The rewards we allocate during this period establish a precedent for future expectations.
When evaluating the productivity impact of employee-valued benefits, employers must consider the net cost of such benefits by subtracting any positive productivity effects from the total incremental cost For instance, while providing medical coverage incurs significant expenses, it also leads to healthier employees, which benefits the firm Conversely, if generous health benefits attract less healthy employees, those additional costs must be factored in Furthermore, the relationship between current rewards and future incentives plays a crucial role in shaping employee motivation; if executives perceive no connection between present rewards and future compensation, the system fails to effectively motivate employees A random reward system lacks the necessary correlation to influence performance and incentives.
The remuneration committee is responsible for managing the three dimensions of executive pay, each carrying important policy implications It is essential to ensure that the composition of the executive pay package does not create a conflict of interest between the executives and the company.
A conflict exists between the executive and the company regarding compensation levels, as the committee aims to hire and retain the executive with minimal premium over alternative employment, while the executive seeks compensation close to their maximum value to the company Both parties recognize the importance of aligning pay with performance to drive value creation, but issues such as conflict, negotiation, and strategic maneuvering can complicate this relationship If not effectively managed, these challenges may result in value destruction and inefficient remuneration packages.
Effective remuneration packages strategically balance salary, retirement benefits, and other incentives For instance, two packages may offer the same overall benefits to an executive: one features a high salary with no retirement perks, while the other has a lower salary but includes substantial unvested retirement benefits Although both packages attract the executive equally, the latter option ultimately delivers greater long-term value.
Retention incentives play a crucial role in executive compensation, as a lower salary paired with a high bonus potential can motivate executives more effectively than a higher salary with limited bonuses, particularly when bonuses are tied to long-term value creation Additionally, the structure of the compensation package influences the type of executives a company can attract; packages offering substantial retirement benefits are likely to draw candidates looking for long-term stability, while those featuring significant bonus opportunities will appeal to less risk-averse, optimistic executives confident in their value-creation abilities.
Well-designed compensation packages must carefully balance the inherent risks associated with performance-based pay, such as bonuses and stock options, which can create volatility for executives Unlike diversified shareholders, executives are often risk-averse due to their significant investment in the company, leading them to prefer a stable base salary over riskier pay options with equivalent expected value This risk aversion can drive executives to demand higher compensation for accepting risk, presenting a challenge for firms that seek to motivate employees while attracting top talent cost-effectively Consequently, the common approach of increasing at-risk pay may be misguided; while it can enhance motivation, it also raises expected remuneration costs, which should only be pursued when the anticipated productivity benefits outweigh these costs.
Companies must ensure that the incentive benefits of executive pay packages outweigh the associated risks Additionally, structuring remuneration and employment plans effectively can encourage executives who are confident in their ability to generate significant value to join the firm, while those lacking such confidence may choose to leave These considerations are explored further in Section V.
Agency Problems and Executive Remuneration
When a manager owns 100 percent of a firm's shares, their decisions are expected to align with maximizing long-term shareholder value, eliminating the need for incentive plans However, in reality, decisions are made by managers who typically own a small fraction of the company’s stock, leading to an "agency problem." This issue is particularly evident in decisions that impose personal costs on managers, such as layoffs or selling divisions, where they bear a disproportionate share of the costs Conversely, when decisions favor managers, like purchasing corporate aircraft or renovating headquarters, they benefit disproportionately, highlighting the misalignment of interests between managers and shareholders (Jensen and Meckling, 1976).
The conflict between managers and shareholders mirrors the agency issues present whenever a principal hires an agent, stemming from incompatible interests in cooperative arrangements Agency problems are inherent in various contexts, including corporations, partnerships, non-profits, and families In public corporations, an additional layer of complexity arises as top executives are hired and compensated by boards of directors, who, while elected by shareholders, do not perfectly represent their interests Effective executive remuneration packages can help align the goals of managers and shareholders, while robust corporate governance policies ensure that boards fulfill their fiduciary duties However, since remuneration alone cannot resolve all conflicts of interest, strong corporate governance systems led by directors of high integrity are essential to address unresolved agency problems.
Remuneration decisions are not made by owners but rather by boards of directors (upon recommendation from the remuneration committees) In addition, as discussed at length in Section
Remuneration committees often lack the necessary information, expertise, and negotiation skills for effective contract negotiations with executives, leading to poorly designed pay packages that can exacerbate agency problems within organizations These inadequately structured compensation plans may attract unsuitable managers at excessive costs, retain ineffective leaders, and incentivize undesirable behaviors Given that managers act in their self-interest and remuneration committee members use the company's resources rather than their own, there is a significant risk that these dynamics will further amplify agency issues instead of alleviating them.
Corporate governance and remuneration policies are closely linked, as ineffective governance often results in detrimental pay practices, with many infamous pay excesses stemming from governance failures Consequently, our examination of remuneration issues and their solutions in Section V will encompass an analysis of corporate governance alongside insights into pay design.
In their 2001 study published in the Quarterly Journal of Economics, Bertrand and Mullainathan found that CEOs of well-governed firms—characterized by large shareholders, short CEO tenure, smaller board sizes, and a majority of outside directors—are less frequently rewarded for luck, such as gains from rising oil prices in petroleum companies Conversely, these CEOs are more likely to face reductions in other compensation forms due to option grants.
A Brief History of Executive Remuneration
Over the past three decades, significant economic, regulatory, and technological transformations have reshaped the global economy, marking what Jensen (1993) refers to as the Modern Industrial Revolution This revolution began during the conglomeration era of the 1960s, influenced by the oil-price shocks of the 1970s The subsequent two decades saw rapid technological advancements, reduced regulations, and the rise of global capitalism, which introduced billions of low-wage laborers into competition with Western workers These shifts resulted in substantial excess capacity across various industries, including automotive, retail, and textiles In response, corporate managers, reluctant to cut back on capacity and return excess cash to shareholders, engaged in excessive diversification and investment, ultimately leading to hostile takeovers, leveraged buyouts, and the use of high-yield debt as a financial strategy to compel managers to redistribute surplus cash.
The late 1980s witnessed significant transformations in US financial markets and global geopolitics, as court rulings and legislation effectively halted the hostile takeover market The high-yield debt sector suffered due to the indictment of Michael Milken and Drexel Burnham Lambert, alongside new restrictions on high-yield debt holdings by financial institutions and punitive changes in US bankruptcy law that discouraged reorganizing troubled firms outside of bankruptcy Conversely, the decade concluded with a surge in global capitalism, highlighted by the collapse of Soviet-backed regimes across Eastern Europe, the fall of the Berlin Wall, the reunification of Germany in 1990, and the eventual disintegration of the Soviet Union.
The 1990s marked the advent of the Internet, leading to the rise of the "new economy" and the proliferation of "dot.com" companies This era was characterized by a robust stock market performance, particularly in the latter half of the decade.
Free cash flow refers to the cash generated by a company that exceeds the amount needed for reinvestment at returns that meet or surpass the cost of capital This concept is explored in Jensen's 1986 work, "Agency Costs of Free Cash Flow: Corporate Finance and Takeovers."
The American Economic Review highlighted a surge in initial public offerings and large mergers primarily financed by equity, leading to a significant decline in dividend yields as companies favored share repurchases By the early 2000s, it became evident that many firms, particularly in the new economy, had overvalued shares, often supported by dubious accounting and financial practices This resulted in a dramatic drop in share prices, with major US companies like Enron and WorldCom facing severe accounting scandals.
The global economy has undergone significant changes that have notably impacted executive remuneration practices, particularly for chief executive officers (CEOs) in large US firms Over the past thirty years, CEO pay has surged, primarily due to a substantial increase in share option grants For instance, the average total remuneration for CEOs in S&P 500 companies rose from approximately $850,000 in 1970 to over $14 million by 2000, before declining to $9.4 million in 2002, when adjusted for inflation.
In their studies, Fama and French (2001) explore the phenomenon of disappearing dividends, questioning whether this trend is due to changing firm characteristics or a reduced willingness to pay dividends Similarly, DeAngelo, DeAngelo, and Skinner (2002) investigate the concentration of dividends and the consolidation of earnings, raising concerns about the future of dividend payments These research findings highlight significant shifts in corporate dividend policies and their implications for investors.
Economics and Organization (CLEO) Working Paper No 02-9, forthcoming in Journal of Financial Economics,
(available from the Social Science Research Network eLibrary at: http://papers.ssrn.com/Abstract18562 ).
Erickson, Hanlon, and Maydew (2002) explore the valuation of non-existent earnings in their University of Chicago working paper titled "How Much Will Firms Pay for Earnings that Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings." This research investigates the implications of allegedly fraudulent earnings and the associated tax consequences, providing valuable insights into corporate financial practices The full paper is accessible through the Social Science Electronic eLibrary.
Figure 1 Average Cash and Total Remuneration for CEOs in S&P 500 Firms,
Average CEO Remuneration (2002 dollars, in 000s)
Average CEO Total Remuneration including options valued at grant date
This analysis focuses on the total compensation of CEOs within the S&P 500, utilizing data from Forbes and ExecuComp Total pay encompasses various components, including cash salary, restricted stock, long-term incentive payouts, and the value of stock options granted, calculated using ExecuComp’s modified Black-Scholes method It's important to note that total pay figures before 1978 do not include option grants, and from 1978 to 1991, compensation is based on the realized amounts from stock option exercises within the year rather than their grant-date values.
Between 1970 and 2002, the average grant-date Black-Scholes value of options experienced a dramatic increase, rising from nearly zero to over $7 million in 2000, before declining to $4.4 million in 2002 The $7 million option grant value in 2000 contributed to a total compensation of $14 million, which included cash compensation, restricted stock, retirement benefits, and various long-term incentive payouts Additionally, cash remuneration, encompassing base salaries and bonuses, tripled during this period, with inflation-adjusted cash remuneration climbing from approximately $850,000 in 1970 to over $2.2 million by 2002.
Figure 2 Average Cash Remuneration for CEOs in S&P 500 Firms, 1970-2002
Averag CEO Remuneration (2002 dollars, in 000s)
Note: Sample is based on all CEOs included in the S&P 500, using cash remuneration (salary and bonus) data from
This section analyzes trends in executive compensation in the United States over the last thirty years, highlighting the relationship between these trends and concurrent shifts in the economic landscape.
In the 1970s, executive pay primarily comprised base salaries and performance-related bonuses, with nearly half of the variation in cash remuneration attributed to company size, typically measured by revenues The highest salaries were awarded to executives leading large conglomerates and major industries like steel, automotive, and oil These incentives to boost revenue led to unproductive diversification and investment strategies, resulting in excess capacity that negatively impacted company share prices.
Executives in the 1970s had little incentive to increase company share prices Executive share options, popular in the 1960s, fell out of favor in the 1970s following a prolonged depression in the
From the beginning of 1965 to the early 1980s, the Dow Jones Industrial Average remained relatively stable, experiencing a slight decline from 903 in January 1965 to 871 in January 1980.
From 1982 to the present, the number of options granted has remained relatively low, only exceeding 1050 on a single occasion in seventeen years During this period, numerous companies opted to "reprice" their existing options by reducing the original exercise price Additionally, some firms completely replaced their option programs with accounting-based long-term incentive plans, which offer more predictable payouts for executives.
Companies facing excess capacity often produce free cash flow, which exceeds the productive investment opportunities within the company or industry This scenario allows for value creation through downsizing and returning cash to shareholders, enabling them to invest in more promising ventures However, traditional remuneration practices of the time prioritized size and growth over actual value creation Additionally, non-monetary rewards such as power and prestige were linked more to firm size than to value generation Consequently, the shortcomings in corporate governance and remuneration policies during the 1970s contributed to excess capacity, paving the way for the capital market restructuring revolution of the 1980s.
The US-led Option Explosion
Over the past thirty years, executive remuneration in the US has surged significantly, largely driven by the rising grant-value of option awards While recognizing options as a primary factor in this pay increase raises questions, it ultimately prompts a deeper inquiry into the reasons behind the substantial growth of the option component in executive compensation packages.
The increase in option-based pay can be attributed to a growing emphasis on equity-based compensation, as advocated by shareholder groups and researchers like Jensen and Murphy (1990a; 1990b) Their findings indicated that CEOs of large companies were compensated similarly to bureaucrats, primarily rewarded for organizational growth rather than superior performance, with minimal penalties for failures and limited variability in bonus components of their pay packages.
The rise in executive pay may be attributed to recent changes in disclosure and tax regulations, which have strengthened the connection between stock performance and compensation New disclosure rules promote share options by focusing on shareholder returns and mandating that companies report only the number of options granted, rather than their value, in the Summary Compensation Table of their annual proxy statements Additionally, the updated tax regulations classify share options as “performance-based,” exempting them from the $1 million limit on deductible compensation.
Recent trends indicate that the increase in option compensation for U.S executives is influenced by two key factors Firstly, the grant-date values of options have shown a systematic correlation with market share-price movements, suggesting a deeper relationship than mere market fluctuations Secondly, this rise in option-based compensation is not exclusive to CEOs; it has permeated throughout the corporate hierarchy, affecting lower-level employees as well While the rationale for increased equity pay is primarily aimed at incentivizing top executives to enhance shareholder value, its extension to lower-tier employees raises questions about its overall effectiveness.
24 The discussion in this section draws heavily from Hall and Murphy, 2003, "The Trouble with Stock Options",
Journal of Economic Perspectives, V 17, No 3: p 49+.
Figure 5 Dow Jones Industrial Average Cash and Total Remuneration for CEOs in
Average CEO Pay ($000s) Dow Jones Industrials Average
Average CEO Total Remuneration (including options valued at grant-date)
Note: Dow Jones Industrials based on monthly closing averages Sample is based on all CEOs included in the S&P
According to data from Forbes and ExecuComp, the total pay for CEOs encompasses cash compensation, restricted stock, long-term incentive payouts, and the value of stock options granted, calculated using ExecuComp’s modified Black-Scholes method It's important to note that total pay figures prior to 1978 do not include option grants, while those from 1978 to 1991 are based on the realized amounts from stock option exercises rather than their grant-date values Additionally, disclosure and tax explanations pertain specifically to the top five executives, excluding those in lower-ranking positions.
The analysis reveals that CEO cash compensation shows a weak correlation with overall market trends, while total CEO compensation exhibits a strong correlation with the stock market, as depicted in Figure 5 Additionally, Figures 6 and 7 highlight significant trends in stock options awarded to S&P 500 firms from 1992 to 2002 During this period, the average value of options granted per company surged from $22 million to $238 million by 2000, before declining to $141 million in 2002 Notably, employees and executives outside the top five positions have increasingly received a larger portion of total option awards, with their share rising from below 85 percent in the mid-1990s.
1990s to over 90 percent by 2002 Figure 7 shows average annual option grants as a fraction of
Before 1992, total compensation data primarily reflected amounts gained from exercising options, which played a minor role during that time, resulting in a close correlation between average amounts realized and average amounts granted However, from 1992 onwards, total compensation figures shifted to being based on grant-date option values calculated using Black-Scholes methodology, with no clear rationale for firms to increase the value of options awarded as market conditions improve.
Figure 6 Grant-Date Values of Employee Stock Options in the S&P 500, 1992-
The figure illustrates the grant-date value of stock options, measured in millions of 2002-constant dollars, awarded to employees in an average S&P 500 firm, using data from S&P's ExecuComp Grants for employees below the top five executives are estimated based on the "Percent of Total Grant" disclosures, while companies that did not grant options to any of their top five executives are excluded from the analysis The grant values are derived from ExecuComp's Black-Scholes calculations, with the accompanying numbers indicating the average fraction of the grant awarded to specific employee groups In 1992, S&P 500 companies granted options amounting to approximately 1.4 percent of their total outstanding shares, but from 1998 to 2002, this figure rose to over two percent, despite a bull market that boosted share prices and the value of granted options.
The increase in option compensation can be attributed to board members and executives who mistakenly view options as a low-cost payment method, overlooking the fact that their value—and thus their cost—escalates as the company's share price rises This article will examine the fundamental differences between the actual cost of granting options, the value that risk-averse employees assign to them, and the perceived cost from the viewpoint of corporate decision-makers.
Figure 7 Grant-Date Number of Employee Stock Options in the S&P 500, 1992-
Average Option Grant (% of common)
The figure illustrates the proportion of options granted on the grant date as a fraction of total common shares outstanding for all employees in an average S&P 500 firm, utilizing data from S&P’s ExecuComp Grants for positions below the Top 5 executives are estimated using "Percent of Total Grant" disclosures, and companies that do not grant options to any of their top five executives are excluded from this analysis The numbers in parentheses reflect the average fraction of the grant awarded to the specified employee or employee group The results for fiscal year 2002 are derived from the April 2003 data cut.
ExecuComp, which includes only companies with fiscal closings in December 2002 or earlier.
The Cost and Value of Options
The expense incurred by a corporation when granting an employee stock options is equivalent to the opportunity cost of not selling those options in the market This cost must be reflected in the company's accounting statements as an expense.
When a company provides an employee with an option, it incurs an economic cost comparable to the price an external investor would pay for that option By applying the Black and Scholes formula, while making necessary adjustments for factors such as early exercise and forfeiture, companies can obtain a reasonable estimate of the financial impact of granting employee options, excluding the influence of any confidential information held by executives.
26 See Bulow and Shoven, 2004, "Accounting for Stock Options", in Stanford Research Paper Series Paper No.
In March 2003, Bodie, Kaplan, and Merton published an article in the Harvard Business Review titled "For the Last Time: Stock Options Are an Expense," emphasizing the importance of recognizing stock options as a financial expense This article is essential reading for understanding the implications of stock options on financial reporting Additionally, Merton's 2004 summary of Robert's oral testimony further explores these themes, highlighting the ongoing debate surrounding stock options in financial practices.
C Merton, H.R 3574: Stock Option Accounting Reform Act", March 3, Washington, DC , Integrated Finance,
Employees, being risk-averse and unable to diversify their investments or hedge against risks, tend to value stock options less than their cost to the company Consequently, this discrepancy means that stock options can be an expensive form of compensation for risk-averse employees Therefore, it is crucial for the remuneration committee and board to ensure that the anticipated productivity benefits from granting these costly options outweigh the additional pay premium required to compensate employees adequately.
US companies often overlook the true cost and value of stock options, treating them as virtually free to grant When an option is awarded to an employee, the company faces no accounting charges and does not spend cash upfront Upon exercising the option, the company typically issues a new share to the executive without any cash outlay, while benefiting from a tax deduction based on the difference between the stock's market price and the exercise price.
Corporate Scandals and the Agency Costs of Overvalued Equity
The recent surge in corporate scandals has led to the downfall of numerous reputable companies and a record number of senior executives facing imprisonment, significantly damaging public perception of business leaders This crisis has exposed weaknesses in governance systems and prompted the introduction of stringent regulations, including the Sarbanes-Oxley Act in the US, revised accounting standards, and new rules from exchanges like the NYSE and NASD.
In 2002, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) convened their inaugural joint meeting to collaborate on harmonizing accounting regulations By January 2005, it was mandated that European firms adopt international accounting standards.
To effectively address current issues, it is crucial to identify their root causes, which often stem from systemic factors rather than individual misconduct by executives While acknowledging the role of the system, it is important to hold executives accountable for their actions The challenges emerged when the equity of numerous firms became excessively overvalued, leading CEOs, CFOs, and boards of directors into a detrimental cycle of escalating stock prices This cycle ultimately undermined the fundamental values of their organizations, as noted by Jensen.
In 2002, it was identified that "agency costs of overvalued equity" arise from detrimental managerial and organizational incentives when a company's equity is significantly overvalued—often by 100% or even 1000%, as observed in numerous firms during the recent market bubble.
Equity becomes overvalued when a company's stock price exceeds its intrinsic value This overvaluation indicates that the firm is unlikely to achieve the performance necessary to meet market expectations Consequently, managers and the board of directors face a challenging environment filled with confusion and mixed signals.
Jensen's works from 2002 and 2004 emphasize the significant impact of overvalued equity on agency costs within corporate finance His keynote lecture at the European Financial Management Association and subsequent research papers explore these themes, providing critical insights into the relationship between equity valuation and corporate governance For further reading, these papers are accessible through the Social Science Research Network eLibrary.
In a 2002 article, the Wall Street Journal highlighted the FASB's initiative to explore the unification of accounting rules, emphasizing the importance of addressing significant accounting issues A subsequent piece in 2003 discussed how the Accounting Standards Board is tackling critical challenges in a timely manner, underscoring the difficulties firms face in preserving their core value amidst a widespread lack of awareness regarding the risks of overvaluation.
The massive overvaluation of equities in the late 1990s and early 2000s can be attributed to a combination of societal tendencies to overvalue new technologies, particularly in high-tech and internet sectors, and significant market errors This catastrophic misvaluation was exacerbated by misleading information from corporate managers, a surge of inexperienced investors, and failures in agency relationships across companies and financial institutions Many players, including investment banks, commercial banks, and audit and law firms, knowingly contributed to the misinformation and manipulation that fueled this overvaluation.
Manning the helm of an overvalued company can initially feel rewarding, similar to the high from heroin, as it creates misleading signals for the organization and its leadership With capital markets readily accessible, managers often receive favorable media coverage and enjoy substantial increases in personal wealth due to equity-based compensation However, just as drug users eventually face significant consequences, the allure of overvaluation can lead to painful repercussions for the company in the long run.
Managers in organizations facing high stock prices increasingly struggle to deliver the expected performance, knowing that failure to meet these expectations will lead to a decline in stock value To mitigate this risk, they often resort to tactics that create the illusion of strong performance, such as using overvalued equity for acquisitions and leveraging cheap capital for risky investments Additionally, they may adopt aggressive accounting practices that defer expenses and accelerate revenue recognition Ultimately, when these strategies fail, the mounting pressure may lead to further manipulation or even fraudulent activities.
Actions that merely create the illusion of value can ultimately harm a firm's core value, as the market may initially be misled before the true results emerge This presents a challenge for CEOs and CFOs when trying to convince their boards to take steps to lower the stock price, especially in an environment where the understanding of long-term value creation is often conflated with short-term stock price maximization.
Managers often face challenging dynamics with their boards, as illustrated by the case of Enron At its peak, Enron's market value reached approximately $70 billion, despite its actual worth being closer to $30 billion While Enron was an innovative company with solid business operations, its perceived value was inflated by overly optimistic predictions, such as one analyst's claim that it would dominate the global wholesale energy market Rather than correcting the market's inflated expectations, Enron's management chose to defend the unsustainable $40 billion overvaluation, ultimately undermining the company's true core value of $30 billion.
When a CEO suggests reducing the company's market value by $40 billion, the board often reacts negatively, viewing it as a significant loss rather than a necessary correction Investors perceive this as a genuine decline in value, while the board lacks a clear grasp of the overvaluation issue, leading to a defense of inflated values that undermines the company's core worth The fear of the repercussions associated with market value adjustments discourages boards and managers from addressing the overvaluation, often resulting in CEOs being dismissed for not meeting expectations This issue is exacerbated in sectors like technology and telecommunications, where widespread overvaluation complicates the ability to identify individual firm performance, as competitors also struggle to meet market value expectations.
Top managers and board members often lack the terminology to effectively discuss the risks associated with overvalued equity, leading to a widespread misunderstanding of the issue Even those who recognize the problem struggle to break free from the prevailing mindset For instance, when eToys experienced a significant surge in stock price on its debut day on the NYSE in May 1999, CEO Toby Lenk was quoted as instructing his CFO to continue navigating the situation despite the apparent risks.
“This is bad We’re going to live to regret this.” 35 An interesting comment given that the value of Lenk’s stock had just reached $850 million on the opening day.
33 Tirello, 2000, "Enron Corporation: The Industry Standard for Excellence", Analyst Report, Deutsche Banc Alex Brown, September 15, 2000, New York
34 See Swartz and Watkins, 2003, Power Failure: The Inside Story of the Collapse of Enron, New York: Doubleday
35 Sokolove, 2002, "How to Lose $850 Million And Not Really Care", New York Times Magazine, June 9.
Lenk sensed that something was amiss, yet he and his management team, likely influenced by external pressures to prolong the decline in stock prices until they could offload their shares, developed the necessary capacity to provide support.
$500 million in sales, and advertised similarly But sales peaked at $200 million and in February
2001, just 21 months after that first day of public trading the company filed for bankruptcy and was eventually liquidated 36 This did not have to happen.
Failed Governance and Failed Incentives