A Typical Miscreant-II

The markets have finally had their say about the wonderfully overblown backdating scandal. When Apple filed its latest mea culpa on Friday along with a board expression of confidence in Steve Jobs's leadership, the company's shares jumped four bucks. Message: The market doesn't give a hoot about backdating. It gives a hoot whether Mr. Jobs might be run out of his job.

This ought to cast a light on whether the drop in market prices of companies in the backdating scandal reflects the shock and horror of investors at the details of backdating -- or shock and horror at the meal that trial lawyers, prosecutors and the media are making of companies caught up in this episode.

Whether Mr. Jobs is safely out of woods remains to be seen. It didn't help that just a week earlier, the Associated Press reported that SEC Chairman Chris Cox has been averring that, in sorting through dozens of backdating cases, his agency would save its legal firepower for "cases of serious fraud, with elements such as deliberately lying or forging documents."

Uh oh. In granting Mr. Jobs options on 7.5 million shares, somebody at Apple pencil-whipped a technical requirement of a board meeting to approve the grant. Of course, Mr. Jobs was already a billionaire. Does anybody think he engaged in theft to pad his net worth by a faction of a percent?

We won't remarket our column of last October, though it anticipated much of Apple's latest admissions. The company now says it "identified a number of grants for which grant dates were intentionally selected in order to obtain favorable exercise prices." It also acknowledges that Mr. Jobs had a role in "recommending" the favorable dates.

Having vouchsafed these eye-openers, Apple's filing proceeds to blur the matter amid a general discussion of how it chose to account for hundreds of option grants that were apparently misdated mostly through simple bureaucratic snafu. We never learn which grants were deliberately engineered by the CEO to award the recipient a "favorable" exercise price, or why Mr. Jobs found it useful to do so.

Apple's goal, obviously, is self-defense. Alas, this rules out trying to engage the media in a conversation about whether backdating is really the crime the media imagines it to be.

Backdating, let's recall, was simply an artifice to allow companies to issue "in the money" options (the terms of which were accurately reported to shareholders) without taking an accounting expense. That's all backdating is. Does it matter in the teensiest whether options are expensed? No, expensing has no probative value whatsoever for evaluating a company's shares or its compensation policies. Expensing creates a junk number, of zero analytical value.

Don't expect to hear any of this from companies actually involved in the backdating scandal. Apple proves you can never overestimate the shallowness of the media. That much is shown by the meretricious non sequitur, incorporated verbatim in many media accounts, that notwithstanding Mr. Jobs' role in backdating, "he did not receive or financially benefit from these grants."

Apple here shrewdly judges that what exercises the media are the large numbers involved in CEO compensation. Notice that Apple chooses to record an accounting charge for Steve Jobs options that were canceled and never exercised, but doesn't take a charge for other options that were canceled and never exercised. Does anyone doubt that this was a P.R. call because Apple judged it useful to be seen engaging in penitential accounting for Mr. Jobs's options?

We won't bore you with the findings of organizational psychology on "fairness" perceptions. Suffice it to say, "fairness" is an indeterminate thing, so people tend to look at process as a proxy for the fairness of outcomes.

This is called "procedural fairness" or "procedural justice." People naturally resent outcomes that leave some much better off than others. Procedural flyspecking is how we decide whether to put our resentment over such outcomes into abeyance or surrender to it.

Popular coverage of CEO pay is a perfect expression of this "fairness heuristic." It strives to meet a public demand for reasons to resent high CEO pay by constantly highlighting claims of cronyism, self-dealing, fraud, etc. to explain why CEO compensation is so high. By now this has become almost an unconscious conspiracy of obfuscation about the true source of ever-rising executive compensation. Try a thought experiment. If CEO pay were a real "problem," wouldn't it be a sublimely easy problem to solve? Just hire somebody who will do the job for less.

This society is full of capable, responsible people who take jobs for five- or six-figure salaries. Why don't boards wave off the demands of their first-choice CEOs and go for one of these less demanding folks? The question answers itself: Because boards believe their first-choice CEOs are worth it. Rationally, boards are prepared to bid away a sizeable sliver of a company's net worth to get the CEO they want. Take the gyrations in Apple's share price last Friday: At stake as investors worried about Mr. Jobs's fate was $3.4 billion in shareholder wealth -- many, many times Mr. Jobs's total compensation since returning to Apple a decade ago.

Now, not all CEOs are as pivotal to a company's performance as Mr. Jobs is perceived to be, but this has nothing to do with the CEO pay calculus. All CEOs sit at the switch: They make the calls by which shareholder wealth is preserved or squandered. Should a company sacrifice short-term profits in order to invest more in customer service? Should it embark on a bold product redesign or milk an aging product line a bit longer?

The market wants a CEO in whom it has confidence, and who is responsive to the share price. The media's relentless appetite is for evidence that CEO pay fails the "fairness heuristic." This basic disjunction is why one of the signal phenomena of the age, the towering increase in executive compensation, remains unexplained to the American people despite the massive amount of journalism spent on subjects like backdating.