Hedge funds looking for accountants

According to this recent post on JobsintheMoney’s CareerWire blog, hedge funds are looking for accountants and paying top dollar for them:

The Rothstein Kass report, The Compensation Conundrum, makes clear that even for non-investment professionals, hedge funds pay better than both Wall Street and corporate America.

For instance, senior accountants at surveyed firms earned $71,000 median salary for 2007 and were expected to receive bonuses centering around 50 percent – adding up to total pay of $106,000. Total compensation ranged from $96,000 to $124,000, varying little with firm size.

Those are pretty impressive numbers. This is no doubt going to continue to create pressure on public accounting firms and companies trying to hang on to their professionals.

I don’t personally know anyone who has left public accounting to go to a hedge fund, but with salaries like those above, it won’t be too long before I do. Salary shouldn’t be the only reason one leaves public accounting, and indeed I don’t think it often is. There are certainly some for whom the almighty dollar is the sole reason to leave, but most go somewhere they believe offers a better long-term career opportunity, and possibly work-life balance improvement.

Work-life balance is one area where I don’t think hedge funds have an advantage, even over public accounting, which is notorious for the long hours and demoralizing “busy season”. At a hedge fund you still work for clients, as in public accounting, which is the main reason why things get as hectic as they do. My peers would be wise to keep that in mind when they consider the seemingly greener pastures of hedge funds.


Loading springs and dodging bullets

Two terms, “spring-loading” and “bullet-dodging” have reminded me of the tendency in business to put a positive spin on negative practices.

Spring-loading refers to the practice of granting options immediately before releasing good news that will likely increase the stock price, resulting in options that are not in the money technically when granted, but are, shortly thereafter.

Bullet-dodging refers to the practice of granting options immediately after releasing bad news that will likely decrease the stock price, resulting in options that avoid being further out of the money had they been granted before the news.

These practices are shady, dishonest, and similar to insider trading in that they take advantage of the difference in information that company insiders have compared to outsiders.

The use of options to motivate management and align their interests with that of shareholders is still relatively new, but it’s increasingly subject to manipulation that is unfair to ordinary investors.

Along with the ongoing SEC investigations into backdating of options, future investigations into spring-loading and bullet-dodging could turn up more violations of ethics in business.

The attractiveness of options continues to decline with every instance of abuse. As Jack Ciesielski points out:

What made them attractive in the first place was that they were “money for nothing” with little visibility into their disbursement.

Now that options are getting the publicity they deserve, and none of it positive, their use will stay in the spotlight until ethical use becomes the norm.

What do you think about the use of options as compensation? Is spring-loading and bullet-dodging really wrong, or am I up in arms about nothing?


Novell investigating its options grants

Another tech company has announced it is conducting internal investigations into their options grant practices. This time it is Novell, a company known for its NetWare network operating system and more recently as a Linux company.

Novell said its audit committee began the investigation because of news about irregularities in the way that dozens of other companies accounted for stock options grants.

So it appears that Novell’s corporate governance has identified the need to and benefits of resolving any doubt about the company’s options accounting. Tech companies are the most frequent user of options as a form of compensation and have been the primary focus of the SEC investigation.

Options have to be accounted for at fair value on the date granted. If the options are granted in the money, the company must recognize the expense as being the difference between exercise and market price times the number of options granted.

So in the case of options abuses, the options were granted in the money at a certain date, then backdated to when they were out of the money, thus allowing the company to avoid reporting the expense while giving management options that are already in the money.

Stock options have been used as compensation in order to better align the interests of management and shareholders. Shareholders want the stock to go up, so options should guide management in making decisions that increase the stock price.

From a compensation standpoint, backdating makes sense. To reward a manager for doing well in the past year, you could give options dated at the beginning of the year so the manager can take advantage of the increase in the price during the year.

This ignores the more long-term outlook taken by shareholders, however. As well, sound management decisions this year will lead to stock price increases in future years as the benefits accrue over multiple years from, for example, deciding to upgrade to more modern and efficient equipment that decreases costs over its useful life.


Options backdating investigation not making the SEC any friends

Tech companies are the primary focus of the SEC’s recently announced and currently ongoing investigation into options dating irregularities, which makes sense given their proclivity for awarding stock options as part of compensation packages with employees.

An article in BusinessWeek documents what tech company executives have recently termed a “witch hunt”:

Many executives are surprised by the breadth of the government’s probe, which has resulted in SEC investigations into 80 companies and criminal indictments against former executives at Brocade Communications and Comverse Technology.

I think that speaks to the rampant abuse we’re going to see coming out into the open as a result of the probe. The SEC wouldn’t investigate unless they were reasonably certain there was wrongdoing to be found.

One tech company executive, Daniel Warmenhoven of Network Appliance, is interviewed for the article. The exec spoke out publicly because the company has just performed a comprehensive review of their options practices and deemed themselves in the clear.

“I thought the SEC’s role was to build investor confidence. What they’re doing right now is destroying it, and I don’t see the purpose.”

Applying a statute of limitations to this sort of white collar crime (let’s call it what it is) would send an even worse message to investors and their brittle confidence than all this pesky investigating.

Improving compliance with regulations and GAAP will do more to inspire confidence in the markets than sweeping all this under the rug.