WASHINGTON -- Calling it a scandal that makes AIG's bonuses pale
in comparison, Senate Banking Committee Chairman Chris Dodd on Thursday
sharply attacked corporations that reset stock options for their
executives.
In theory, stock options are designed to reward executives for
performance. If the company's stock price climbs, the options become
more valuable. By resetting the options, executives at corporations
that have seen their stock prices plummet are essentially being given a
mulligan.
"It is disturbing to me," Dodd said. "And, it will pale to last
week's outrage." Dodd said he had learned of the practice through news
accounts and planned to send a letter to SEC Chairman Mary Schapiro
asking her to investigate. He is also considering legislation to
address the issue.
The Associated Press reported more than a week ago that almost 100
companies were making changes or contemplating changes to their
compensation plans that would increase the chance for holders of stock
options to make big windfall profits should the market turn around.
SunTrust Banks Inc., which has raised about $4.85 billion from the
U.S. Treasury under the government's Capital Purchase Program aimed at
helping troubled banks, has doled out massive new grants at lower
prices to its option holders, according to AP.
SunTrust CEO James Wells stands to reap a big windfall under a new
stock plan the company unveiled in a proxy statement released March 6.
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Hi everyone,
I don't often post comments or opinions on these articles, but this one has me concerned. I think Sen. Dodd needs more education on the topic (rather than the aforementioned news articles) before he starts writing legislation.
Perhaps this can be the ECE first foray into interacting with those who make the rules.
If you are interested in drafting helping draft a letter from ECE members to Senator Dodd, and others in Congress, please let me know. I think we need to explain that share numbers tend to go up when prices go down. Equity has proven effective in the majority of companies using it. Handcuffing companies who are in great need of attracting new talent and keeping old talent is probably not the best way to ensure they succeed.
Let me know if you think this is a good idea and if you are willing to help.
Thanks
Dan
Dan, I agree to some extent, but I also don't agree with replacing his options purely on a value basis - this burns through a significant number of shares. Lets face it, "consistent with what was done in the past" is not a strong rationale if you believe what was done in the past led us into this mess.
I also agree Senator Dodd needs more education on the topic - but I guess its good he reads the newspapers. He may need clarification on when "executives" are receiving the benefit of an option exchange and when employees below a certain pay level are, which should be described in the tender offer filed.
Karen
Karen,
Excellent points.
I have spoken to a few compensation consultants who argue that this years grants must have many more shares than last years since both are based on an option valuation model and price is the single bigeest driver.
I agree that just becuase a company used a specific methodology and valuation last year, that it does not predicate using the same process this year. In fact, the opposite may often be true.
Here are some interesting numbers:
Q. When does 10,000 shares = 1,567 shares = 50,000 shares?
A. In a falling stock market
I find it an intersting communication dilemna that a grant given last year for 10,000 shares at $50 (a rough "compensation value" of $219,500 at grant date) may have a current value of $6,400 given the current level it is underwater if the surrent stock price is $10. This means that the 10,000 share grant would be exchanged for a 1,567 share grant. Oddly a new grant given today using last year "compensation value" of 219,500 would require 50,000 new option shares.
More to come...I am sure
While I think many of us believe we have to make some fundamental changes in the way exec comp is being delivered, I also worry, like Dan, that we have legislators who don't understand this very complex topic. Here we are, taking a charge that, due only to its complexity, seems "valid," but in reality has no real connection to potential gain. Those charges stay on the books as though there continues to be real value in them! But then those same calculations are used to argue AGAINST a value-based granting methodology? Senator Dodd needs to be reminded that you can't have it both ways.