Options valuation in executive compensation policies

by on June 30, 2009 · 0 Comment POSTED IN: HR Info Center

Options in executive compensation policies have regulatory advantages and disadvantages

123R provides some systematic method to value the options as part of executive compensation policies. Therefore, we can say executive A got 4 million of value. Executive B got 100,000 of value. Executive C received 200,000 of value. And we can compare apples to apples.

As a result, we’re going to see some short-term downward pressure And obviously, as you look at these expenses associated with it, with the 123R, that’s going to continue to put pressure on the option component as well.

The board since were getting pressure on the dilution value and we still need to grant the overall market value in options, boards tend to use restricted stock. And that’s because you have to grant one share of stock to the equivalent of let’s say three or four options.

The dilution factor and the burn rate count as one share instead of four. It also aligns the incentives with the executives and the shareholders with the downside as well as upside risk. We’re seeing a lot of changes to option terms in executive compensation policies as a result of all these accounting issues.

Disclosure trends in executive compensation policies
Again, we’ve talked a little bit about the disclosure trends. All this is in there. It’s now very, very easy to compare peer groups. We can line these things up and its very easy to compare. We know what somebody’s going to get when they die, when they retire. If they were involuntarily separated, if there’s a change in control, we know exactly what that is now. All came about as a result of the disclosure changes occurring a couple years ago. And as we continue to get more and more transparency, what will happen is the star performers will make more and more money.

The million dollar compensation deduction and its relation to executive compensation policies

Congress has been complaining about is the excessive risk that people took and the rewards for that but they didn’t suffer the consequence. Congress has some blame on that particular issue in executive compensation policies because when they rolled in 162(m) several years ago, basically you can’t exceed $1 million in performance in the – $1 million in compensation without tying it to performance standards on the front end and, you know, having those documented and all that. That particular provision did not apply to stock options. So you could give as many stock options as you wanted. It didn’t count against your million dollar cap. However, restricted stock did unless it was performance based and outlined on the front end.
Congress through their own policies encouraged people to use options versus restricted stock in executive compensation policies. And now, we have other reasons to look at that obviously.

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

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