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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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December 10, 2008 12:01 AM ET
(InvestmentNews)—With the stock market in Palookaville, more companies are quietly bailing out executives holding “underwater” stock options. The moves are aimed at keeping executives motivated and their pay packages from being dinged. Maxim Integrated Products, a technology company in Sunnyvale, Calif., for example, recently filed plans with regulators to exchange employees’ underwater stock options for cash. Meanwhile, casino operator MGM Mirage of Las Vegas exchanged underwater options for restricted stock, and United Therapeutics Corp. of Silver Spring, Md., repriced underwater options for its executive officers. “The big comp issue for this proxy season is not say on pay; it’s R&R—repricings and resetting the bar,” said Patrick McGurn, special counsel at shareholder advisory firm RiskMetrics Group. “Those are the twin plagues of an economic downturn.” Executives at scores of companies hold stock options—which give them the right to buy shares at a preset price—that are essentially worthless. The problem with underwater stock options is that they provide little incentive for executives to meet performance goals or even to stay with the company. To change that, many companies are replacing those options with new ones at a lower exercise price or with restricted stock, or simply exchanging them for cash. So far, 38 companies have implemented exchange programs, compared with 14 in all of 2007, according to Equilar and Radford Surveys + Consulting, both of which specialize in tracking compensation. “The big thing that a lot of people are thinking about right now is option exchanges,” said Alexander Cwirko-Godycki, research manager for Equilar. “The biggest issue facing a lot of companies is underwater stock options and the loss of retention value.” Corporate governance specialists are sounding alarms about the practice. Fiddling with stock options rewards executives for poor performance. What’s more, companies are lowering the bar for future performance, critics say. “Performance pay is supposed to be just that,” said Amy Borrus, deputy director of the Council of Institutional In-vestors, which represents pension funds. “What’s the point if you’re just going to be lowering the bar at will when performance doesn’t measure up? It sends a terrible message.” Not to mention what it says to investors. “Millions of ordinary American investors have seen their retirement savings decimated by the financial crisis, and they’re not getting any sort of cushion,” Ms. Borrus said. “Except in unusual and extraordinary situations, the compensation committee should not lower the bar by changing performance targets in the middle of performance cycles.” However, in some cases, repricing stock options may be justified, some executive compensation experts said. “Companies are struggling to balance a bunch of competing objectives—the commitments they’ve already made and the fiscal issues that they’re facing right now,” said Paula Todd, a managing principal with Towers Perrin. A Towers Perrin survey of more than 450 companies found companies are focused on targeted work force reductions and spending cuts, rather than massive layoffs. That has led to an emphasis on retaining key talent, the survey said. “You may be able to take a stock option that you’re going to have to charge an expense for—and one the participant may view as worthless—and turn it into something that the participant perceives value from,” Ms. Todd said. Accounting rules require companies to recognize option expenses based on the value of the stock when the option was issued, whether or not it is exercised. Companies may be able to issue fewer new options to employees in exchange for underwater options, Ms. Todd said. “Those options motivate people more” if they are still in the money, she suggested.
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