The Corporate Library Blog

Apples to Apples: Stock Options to Stock Options

You may have noticed something a little wonky going on in summary compensation tables this month. The end of February marked a switch in the SEC reporting of stock option and restricted stock awards from a company recognized expense figure to the grant date fair value of equity grants. The change designed to enhance clarity, has also been implemented for the reporting of equity in prior years, making possible an apples to apples comparison of the grant date value of equity grants over a multiple year period. For example, at The Hershey Company, 2008 stock awards for President and CEO D.J. West are noticeably different than the amounts disclosed in the 2009 proxy.

2009 proxy

2010 Proxy

That’s because in the 2010 proxy, the stock and option awards for 2008 have been adjusted and now reflect the aggregate grant date fair value of awards. While $679,071 and $918,335 represent the dollar amount recognized in 2008 for stock and option awards granted, the latest proxy shows us the actual grant date value of those awards was $2,502,599 and $1,500,028, respectively.

Our analysts have entered just over 450 proxies under these new disclosure rules with 135 S&P 500 companies included in the data set. So far, the average grant date values for stock option awards across our coverage universe is $916,741 and the average stock awards are $1,388,898. In the S&P 500, these values climb to $1,973,602 and $2,705,065, respectively. These figures reflect the clear shift to the granting of restricted stock, with its more certain value, over the previously traditional stock options, which can often go underwater when suppressed under a sagging stock price.

Notable option awards so far this season include Tim Armstrong of AOL Inc. who received about $19.1 million worth of option awards in 2009 to go along with $5.6 million in stock awards. James M. Cracchiolo of American Financial, Inc. was granted more than a million stock options in 2009 with a grant date value of $9.1 million. Noteworthy stock awards include John Stumpf of Wells Fargo & Company, who received more than $13 million in restricted stock grants in 2009, independent of the $5.6 million in company stock designated as salary. James E. Rohr of The PNC Financial Services Group, Inc. received slightly more than $8 million in 2009 restricted stock awards.

Prominent CEO’s with no grant date values to report include Kenneth D. Lewis, formerly of Bank of America Corporation, Vikram S. Pandit of Citigroup Inc., John W. Allison of Home BancShares, Inc., and Warren E. Buffett of Berkshire Hathaway Inc.

Greg Ruel - Research Associate

Who wants a stock option when they're underwater?

I know we’ve been hammering mega-grants of stock options at low, low prices – because, really, it is just cheating – but substituting time-restricted stock is not an option (if you’ll forgive the pun).

However, that’s what seems to have been happening.

A new report out today shows that profits from stock options have gone from around 12 percent of total realized compensation in 2006 to zip in 2008, at the median.

We’ve even got a pretty graph to prove it.

What this chart also shows is that even though cash bonuses fell as a proportion of total realized compensation, they didn’t do so by very much. So much for the reactivity of short-term incentives to the worst recession since, well, the last worst recession.

Paul Hodgson - Senior Research Associate

How Governance Could Have Saved $100 Billion

$100 billion? That’s a lot of money.

And could corporate governance have saved it?

You bet.

Read my latest report, which assesses the governance ratings of AOL and of Time Warner prior to the merger, and learn how.

The claims I make are that if governance had been taken into account no one would have agreed to the merger in the first place, thus saving everyone $100 billion (the loss in market capitalization from the time of the merger to the time of the demerger).

The fact is AOL’s governance was rated very high risk. Time Warner’s governance was rated very high risk. And governance is not like mathematics: two negatives don’t make a positive. And two wrongs don’t make a right.

One of the biggest indicators of governance risk? The bucketloads of stock options that were due to vest immediately.

And talking of bucketloads of stock options, I daren’t even THINK how many stock options Larry Ellison (Oracle) is exercising as we speak, or Jonathan Schwartz (Sun Microsystems) for that matter. Or executives at Ticketmaster and Live Nation…. The list goes on.

Everyone’s all worried about monopolies? Forget monopolies, let’s talk governance disasters.

Contact us right now for a governance assessment of the next merger on your horizon. It might make the $100 billion difference.

Paul Hodgson - Senior Research Associate

It's Good to be the CEO at CapitalSource

Below is an excerpt from The Corporate Library's governance risk profile for CapitalSource, Inc. (CSE).

In lieu of annual cash bonuses and as part of his 2006 employment agreement, CapitalSource, Inc.’s CEO John K. Delaney received two options to purchase an aggregate of 7,000,000 company shares. However, as a result of his options being “so far out of the money as to cease to serve as a viable compensatory tool,” Mr. Delaney forfeited his options in March of 2009. Fortunately for Mr. Delaney, he had just received in December of 2008 a whopping grant of 2,000,000 units of restricted stock worth just over $9.2 million for his role “in leading the Company through the unprecedented challenges of the past year and a half.” Disaster averted; we should all be so lucky.

To learn more about this type of investment research, request a free product trial.

Return of the CEO Mega-grant

The latest research from The Corporate Library, entitled “Return of Mega-grant”, marks a rebirth of oversized stock option grants for CEOs. Mega-grants, meaning equity grants that exceed a half a million stock options, are often used by companies to entice a new CEO, or retain one whose outstanding stock options are below current exercise prices. These mega-grants often lead to millions of dollars in profit over the ensuing years, and can provide handsome compensation for minimal increases in stock price; especially if granted when stock is being traded at its lowest point in years.  In this report, author Paul Hodgson focuses on 12 companies who have awarded mega-stock and stock option awards since October 2008. Purchase the report now for US$25.