July 19, 2006

Expires Tomorrow: Early Bird Discount for Executive Compensation Disclosure Conference

Warning! Tomorrow is the last day for the Early Bird Discount for the important conference: “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” Check out this detailed conference agenda to understand the types of challenges you should expect to face from the new rules.

The Early Bird expires tommorrow, July 20th – so take advantage of the huge savings while you can. For example, the Early Bird member rate for a single attendee is only $495, after July 20th – it goes up to $750 (which is still reasonable, but 50% more than the Early Bird rate).

Practical Guide to Tax Accounting Under FAS 123(R)

Tune in tomorrow for the NASPP webcast – “Practical Guide to Tax Accounting Under FAS 123(R).” Among other topics, this program will cover:

– How to account for excess tax deductions and shortfalls under FAS 123(R)
– Special procedures necessary to account for disqualifying dispositions of ISOs and ESPPs
– How to account for tax benefits (or lack thereof) of grants to overseas employees
– Administrative considerations, including practice pointers and internal controls for period-end reporting
– The FASB’s alternative approach for calculating your FAS 123(R) paid-in-capital starting balance

The Trending of Stock Option Grants

The Sunday NY Times included this article that confused me because it described a new academic study that indicates that stock option grants to executives continue to trend up – the study even claims that grants are now at the highest level since the end of the Internet boom in 2000. Since this is contrary to loads of anecdotal commentary I have heard about how option grants are down, I decided to poll some of the compensation consultants on the Task Force. [By the way, the study is unpublished.]

The universal response was that the consultants were also confused by the article, as they noted that the surveys and studies they have seen (as well as their daily experience) show that option grants are down significantly and that restricted stock grants are up by roughly the same amount. They noted that long-term incentive (LTI) values overall have been fairly level – and that there has been a pronounced shift away from time-vested restricted stock to performance-vested restricted stock.

Many of the consultants expressed a view that a major problem with the study is that it focused on the number of shares awarded, not the value – and that it is unclear how anyone could conclude options are expanding if they only looked at the number of shares. For example, if a company splits its stock and grants twice as many shares to provide the same value, the Professor would have concluded the company doubled the amount of an executive’s awards.

Here are some more specific thoughts from the Task Force:

Jim Reda of James Reda & Associates says: “This is definitely flawed data. He is using number of shares. Most companies award to value. If stock price goes up, number of shares go down. Moreover, a lot of companies are phasing in LTI strategy. You will not see effect until 2006. The study looked at 2005 data. In fact, most companies’ fiscal year did not begin until 1/1/06. The strategy was to award stock options, vest them immediately or front load to avoid future expense.

Our experience shows a dramatic drop in LTI value from 2002 to 2005, depending on the industry. Some industries experinced 50% drop in LTI multiple and others 30% drop. Combined with stock price increases, this can translate into substantial drop in shares of stock options. But, as stated, companies were taking advantage of last days of expense free option awards.”

Robbi Fox of Hewitt states: “I obviously would have to look at his study in more depth, but I believe his conclusions are flawed. I don’t know how he calculates “value” – that may not be done correctly. One can’t really look at the number of options granted to determine change in stock option granting practices because if the stock price is declining you would expect a company to issue more options in order to have the same economic value. We know for a fact there has been a large shift of option value to full value shares as well such as restricted stock and performance shares. Also, just looking at SEC filings is misleading because most of the takeaway has been at the lower levels. Lastly, many companies are moving to a portfolio approach so options still make up some piece of the long-term pie so prevalence of companies granting options should not change much.”

And Myrna Hellerman of Sibson Consulting notes: “My clients have been trying to wean themselves from purely stock option grants but have encountered some obstacles including: (a) plan documents that allow for only stock options or they are bumping up against available quota of full-value shares and they don’t want to go back for more authorization because they fear they might not meet ISS tests, and/or (b) a culture within the company (especially those in the growth mode) that options are the way to go. Companies seem very cognoscente of the expense associated with option grants and are concerned that they are not getting sufficient “value” for that expense.(especially true in companies whose stock has high volatility thus causing a high Black-Scholes value for FAS 123R purposes).

Another consideration about what’s happening with stock option grants is that while the size may be the same (or bigger) we’re also seeing more conditions attached to the grant [e.g. premium pricing, more rigorous vesting (performance vesting rather than time, vesting over a longer period of time -for instance 0% first two years 20% next two years, 60% last year), holding requirements, etc.].

Admittedly not all grants are done as thoughtfully as suggested above, but I have found that at least with the Compensation Committees I serve, there has been an increased focused on the ‘what, why, how, how much, how often’ of equity grants.”