October 28, 2003
Disclosure of Option “Run Rates”
To gain shareholder approval of option plans going forward, companies will have to do a better job of explaining the purpose and objectives of such plans. So far, General Mills provides one of the best examples of what this disclosure should look like, as its latest proxy statement (filed 8/8/03) includes disclosure of useful data to investors, such as how grants will made under the proposed plan to maintain a specified “run rate.” [The “run rate” is one way to track dilution; its a calculation to determine the net option usage at a company.]
From what I hear, General Mills approached some of its largest investors and asked what type of information they would like to see disclosed to assist them in analyzing the company’s plan – then, General Mills included that information in its proxy statement. Below is an excerpt from that proxy statement:
“2003 Stock Compensation Plan
At the 2003 Annual Meeting, stockholders will be asked to consider the proposed 2003 Stock Compensation Plan. The key features of the Plan are set out below:
1. All employees are eligible to participate in the Plan. It is a two-year plan with a 15 million share authorization. The Company’s past stock plans have been for longer duration and generally authorized more shares.
2. Management and the Committee intend to make grants under the proposed Plan so as to further reduce the Company’s stock usage rate (or “run rate”) from 4.2 percent in fiscal 2002 to 1.6 percent at standard grant levels. In a year when the 25 percent performance adjustment is applied, the run rate could be as low as 1.2 percent or as high as 2 percent. In all cases, this represents a sharp decline from the Company’s prior share utilization for management stock compensation.
3. A blend of stock options and restricted stock will be offered under the Plan. In the past, stock options had been the principal form of long-term compensation.
4. The Plan continues the use of a performance adjustment on the size of the stock grants, providing a +25 percent upward adjustment in years of competitively superior performance and a -25 percent downward adjustment in years of below par performance.
5. The Plan reflects the Company’s strong compensation and governance practices, including:
a. Prohibiting stock option repricings, discounted stock options, reload stock options and loans.
b. Limiting the number of shares authorized under the Plan to 15 million shares (there is no “evergreen” provision) and the number of shares that can be issued as restricted stock to no more than 25 percent of shares authorized under the Plan.
c. The Plan will be managed by the Compensation Committee, which is comprised solely of independent, non-employee directors, and has engaged an independent executive compensation consultant to advise the Committee on compensation matters.
d. The Plan provides for four-year cliff vesting on all restricted stock and stock option grants. This provides for a strong retention incentive in an industry that is very competitive for top talent.”
Shortly, the NASPP will be announcing a November webcast regarding shareholder approval of equity plans.
Desperately Seeking Guidance on Revenue Recognition
The Financial Accounting Standards Advisory Council (known as the “Council”) provides guidance to the FASB about what its priorities should be. In its just-completed 2003 survey, Council members most often mentioned revenue recognition as one of the five most important issues that the FASB should address. Indeed, five members of the FASB also included revenue recognition as one of the most important issues to address.
Personal anecdote – “Desperately Seeking Susan” is one of my favorite movies; I grew up in Chicago and played with Rosanna Arquette in my neighborhood til 1st grade when she came to her senses – my 15 minutes…