Cover Story: Leaving Money On the Table

Stock options are supposed to align the interests of top executives with those of the companies they manage. They get rewarded only if the share price of their company goes up over time.

Perhaps. But an analysis of options trading over the past two years at some of the biggest U.S. media firms finds this instead: some of the best-known names in the executive ranks of large publicly held media companies are leaving big money on the table.

Perhaps more surprising, they seem to be doing this on purpose. The reasons: a sense that the shares will keep rising in value over time under their guidance — or a fear that Wall Street will see an executive cashing out in full as a sign of bad things to come. Or both.

“It’s the historic nature of the beast,” said Richard McHugh, a partner in Washington, D.C., law firm Dow Lohnes.

The idea is that executives with that kind of personal stake in the business are loath to send any signal, no matter how small, that they don’t believe their stocks will increase in value, McHugh said.

An executive compensation expert, McHugh said the practice may be more pronounced in the media industry given that several of the sector’s giants, such as Comcast, News Corp. and Viacom, are basically family-owned (or at least have one dominant shareholder who is also the founder).

Based on filings with the Securities and Exchange Commission, several CEOs appear to be leaving money on the table when it comes to stock awards, including:

Brian Roberts: The Comcast chairman and CEO sold restricted shares (shares usually issued to top executives that vest in increments over a period of years and have limits as to how and when they can be sold) and options worth about $19.6 million in 2007, but if he had traded all the shares available to him, that gain could have been $22.6 million.

Ralph Roberts: The Comcast founder and director sold restricted shares and option shares worth $793,616 in 2007; he could have reaped $1.6 million if he sold all shares available.

Richard Parsons: The Time Warner Inc. chairman sold stock acquired through options and restricted grants for a gain of $2.4 million in 2007; it could have been $3.2 million.

Jeffrey Bewkes: The recently appointed Time Warner Inc. CEO sold restricted shares and options for a gain of $3.2 million in 2006; it could have been a gain of $5.2 million

Les Moonves: The CBS Corp. CEO sold options and restricted shares for a $6.985 million gain in 2007; it could have been $9.5 million.

Holding on to the stock as a show of confidence could be a big mistake, though, according to Todd Milbourn, professor of finance at Washington University’s Olin Business School.

According to Milbourn, most executives at publicly traded companies exercise and sell their stock options as soon as they have vested.

“The reasoning for this is pretty straightforward,” Milbourn wrote in an e-mail. “As an employee of the firm, an individual already has a significant fraction of his/her wealth tied to the firm through his/her future labor income. From a purely diversification perspective, the executive would like to reduce [his or her] exposure to the firm’s ups and downs.”

TABLE MONEY: Top Executives and Their Options

Top media executives don’t always sell all the shares they acquire. To see how much money gets left on the table, in each executive’s case, compare the actual gain to the potential gain if all shares are sold.


Of course, stock sales by CEOs, no matter the industry, usually send a chill down Wall Street’s spine.

“Selling of stock by insiders is not good news,” said Drexel University Bennett L. LeBow College of Business professor of finance Michael Gombola.

One of the biggest examples of the reluctance to sell is Viacom and CBS executive chairman Sumner Redstone. In 2007, Redstone exercised options for 541,624 shares of Viacom stock and 566,000 shares of CBS stock, at a total cost of $18.8 million. He then sold about 412,911 shares of Viacom at prices ranging from $40.98 to $47.47 each, reaping a gain that year of $5.4 million. His CBS shares netted him a gain of $2.9 million in 2007.

Not bad, but it could have been much better. If Redstone had sold all of the stock he acquired on option for the lowest price — $40.98 — he would have reaped a gain of $11.9 million in 2007 from his Viacom stock alone. He left $6.5 million in option gains on the table.

Redstone’s second in command at Viacom, CEO Philippe Dauman, received about 73,000 shares of restricted stock in 2007 as part of his employment package. He sold only 34,000 shares, for a gain of $1.3 million, used to pay affiliated taxes. In 2006, Dauman was an acquirer of Viacom stock, buying 143,000 shares of Viacom stock at prices ranging from $34.34 per share to $34.77 per share. He sold none of that stock during the year.

Both Redstone and Dauman have been big proponents of tying executive compensation to stock performance — both men amended their pay agreements in 2007 to heavily rely on increases in Viacom’s stock price.

Viacom executive vice president of corporate communications Carl Folta declined comment, citing the company’s policy not to talk about individual employees’ finances.

Like Viacom, many public companies are trying to match executive pay with performance in so-called at-risk compensation plans, said McHugh. And the idea of CEOs holding onto their shares appears to jibe precisely with that premise.

“You’re seeing companies trying to design their compensation schemes to best compensate folks only when the company is riding up and not compensate them as much when the company is riding down,” McHugh said. “These things are disclosed. So you’ve done what you can to pay people as they do better, but definitely aligning them to the interests of the company and its shareholders on a regular basis.

“This holding of shares by executives after they exercise options, or as they’re holding the restricted stock units they got, is 100% consistent with that and exactly what this at-risk compensation program is supposed to deliver.”

According to SEC filings, that is playing out in spades in the media sector, with stock awards making up a growing percentage of corporate compensation. For example, in 2006, stock awards made up 53% of Parsons’s $22.5 million in total compensation (it was 41% the year before). For Bewkes, 51% of his $18.7 million in total pay in 2006 was in the form of stock compensation (it was 43% in 2005).

Time Warner did not return calls for comment.


By holding onto these shares, executives are betting the stock price will appreciate over time. But there are some who believe that is most often not the case.

In a research paper issued in 2004, Stanford University Graduate School of Business assistant professor of finance Ulrike Malmendier and University of Pennsylvania Wharton Business School professor Geoffrey Tate looked at options trading between 1980 and 1994 by 477 CEOs from Fortune 500 companies who neglected to exercise their stock options until close to their expiration date. What they found: While these executives might have perceived holding onto those options as proof of their confidence in the stock’s future prospects, the shares performed no better than the Standard & Poor’s 500 Index.

Gombola took a contrarian view: Instead of leaving money on the table, Gombola said that even though those executives may not reap the immediate cash rewards of a full sale, they are still adding stock to their portfolios.

“Remember, the game is to get rich and not necessarily to have the most cash on hand,” Gombola said.

Gombola argues that these executives may never sell those shares. If they need access to quick cash, they can always borrow against the stock, he said.

But by holding off on selling shares, some executives are taking a risk that the value of their stock will decline. For example, Comcast’s Brian Roberts exercised options for 561,205 shares at prices ranging from $14.94 to $16.94 each on Nov. 16, 2006, but sold only 363,883 shares for $40.02 apiece. Through that sale, Roberts gained $5.6 million, mainly to pay taxes on the award. But if he sold the remaining 197,322 shares at the same price, he would have gained an additional $7.9 million.

Had he waited a year, when Comcast stock dipped 40%, a sale would have reaped just $5.3 million — less than half of the $13.5 million he would have realized had he sold all of the stock in 2006.

Comcast senior vice president of corporate communications D’Arcy Rudnay declined to comment on the sales, citing company policy not to talk about the stock-trading policies of its executives.


Gombola agreed that holding on to stock presents its own risks. But he said that many CEOs are steadfast in their belief in their company’s health.

“I don’t want to call it a prejudice or a bias, but there’s oftentimes the belief that particularly for companies where the founder is the CEO, that the founder or CEO is overly optimistic about his own company,” Gombola said. “I don’t know Brian Roberts personally, but I wouldn’t be too surprised that he has a whole lot of faith in Comcast, and even if the price is high, that he would think that the company is still undervalued and is going higher.”

Not every executive is quite as skittish. News Corp. chief operating officer Peter Chernin exercised options for a gain of $11.03 million in 2007 and for $4.8 million in 2006, selling all of the options he could exercise. In addition, News chief financial officer David DeVoe took the same path, reaping a gain of $4.3 million from options sales in 2007 and $5.7 million in 2006.

Cablevision Systems chief operating officer Tom Rutledge sold options for a $10.3 million gain in 2007 and vice chairman Hank Ratner reaped a gain of $10.1 million from option sales that same year, according to SEC documents.

While both men were well within their rights to fully exercise their options — and options are becoming a larger and larger part of overall compensation — their bosses at Cablevision appear to have taken the opposite tack.

Cablevision CEO James Dolan withheld restricted stock worth $8.8 million in 2007 to pay taxes on restricted shares. His father, chairman Charles Dolan, withheld restricted shares that same year worth $3.9 million, also for tax reasons, according to SEC filings.

One exception to this rule, at least in the media space, is Time Warner director Ken Novack. Novack, a lawyer by trade who joined Time Warner’s board after its merger with America Online in 2001 — he was a close adviser to AOL chairman Steve Case for years — has exercised and traded his options fully practically every week for the past several years.

In 2007 alone, Novack made 47 transactions, exercising options for 632,572 shares (between 12,000 and 16,372 shares in each transaction) and selling the same amount for a profit of about $4.9 million that year. In 2006, Novack conducted 36 transactions for 552,000 shares of stock, reaping a profit of $3.3 million.

Novack has an automated trading plan and is well within his rights to trade his stock as often as he wants. He declined comment through his secretary.

Gombola said the amount of shares is not large enough to raise concerns.

“You should take that with a grain of salt,” Golomba said. “Here’s a guy selling a little bit of stock every month. The big signal for the market is either a large purchase or a large sale.”

But that big sale, at least on the executive side, may never come. And media investors who have chafed at CEO pay in the past — mainly when the stock is trading down — can at least take some solace in the fact that the stewards of their investments are backing up their optimism for the future.

By not taking money off the table and putting it right into their wallets.