Plans to buoy exec stock option grants may sink shareholders - 14 Jan 2009 -

Roughly four in 10 companies expect to dilute the holdings of this year
in a bid to maintain the value of stock option grants made to senior
managers last year.

A
survey conducted by consultancy Mercer of 200 large companies found
that about half plan to maintain the value of the grants they made last
year. But with equity markets down around 40% in the past twelve
months, many companies will have to issue a much greater number of
shares to their executives to maintain the value of grants issued last
year, risking substantial shareholder dilution.

In a report
issued last month that preceded the survey results, Mercer cautioned
that dilution from a sharply higher “run rate” in share issuance “may
not be tolerable for shareholders in a declining market.” If, on the
other hand, equity markets turn around, Mercer pointed out that the
practice of issuing more shares could potentially result in an
unintended windfall for top execs.

The firm predicted, however,
that a growing number of companies will rethink such practices and
reduce their use of long-term incentives this year. “Many companies are
anticipating long-term incentive values that are lower than 2008
levels,” Bruce Greenblatt, a principal in Mercer’s compensation
practice, was quoted in a press release announcing the survey results,
noting that he expected that the reductions could be as large as 30%.
“The early deciders are telling us that 2009 may be a game changer for
long-term incentive granting practices,” Mr. Greenblatt added.

Still,
the survey found that approximately 40% of companies expect share usage
levels to increase in 2009, with slightly over one-quarter expecting
their run-rates to rise by more than 10% from 2008 levels.

On the other hand, only 5% of the respondents said...

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