combination

1. Accounting: Amalgamation of two or more distinct firms into a single accounting entity.

2. Mathematics: Arrangement in which the order or sequence of the items comprising a group is unimportant. In contrast, permutation is an arrangement where their order or sequence is critically important.

3. Options trading: Arrangement involving two long positions (a long call and a long put) or two short positions (a short call and a short put) with different expiration dates and exercise prices.

It has become fashionable at public companies to describe almost every compensation plan as aligning the interests of management with those of shareholders. In our book, alignment means being a partner in both directions, not just on the upside. Many "alignment" plans flunk this basic test, being artful forms of "heads I win, tails you lose." A common form of misalignment occurs in the typical stock option arrangement, which does not periodically increase the option price to compensate for the fact that retained earnings are building up the wealth of the company. Indeed, the combination of a ten-year option, a low dividend payout, and compound interest can provide lush gains to a manager who has done no more than tread water in his job. A cynic might even note that when payments to owners are held down, the profit to the option-holding manager increases. I have yet to see this vital point spelled out in a proxy statement asking shareholders to approve an option plan.

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