The Corporate Library Blog

How many stock options did Liberty Media give its CEO?

Ten million, eight hundred and fifty-six thousand, to be precise. 10,856,000 stock options for CEO Gregory Maffei valued at just shy of $80 million.

Unbelievable.

Our ratings team, Hoang Nguyen and Damion Rallis, brought it to my attention to see if we needed to manually adjust Liberty Media's governance risk rating.

Actually, it was almost as bad as they come, so we didn't have too much wiggle room.

Of course, my first reaction was to say yes, but wait, I thought, these were options that would cliff vest half at the end of four years and half at the end of five years. Maybe they were going to replace all his options over the next four or five years with these ones, which would be a mere two million or so a year (counting 2010-2014 and well into megagrant territory each year but, still) and maybe they premium-priced them in tranches.

Maybe this was not so bad after all.

So I asked Hoang and Damion to check on the prices.

• $10.27
• $23.28
• $47.70

My heart soared. I was going to be able to say something positive. Whoopee.

Then we looked a little closer. The options were for three different shares – LINTA, LSTZA, LCAPA – and each option was granted at market.

Even more depressing after the initial, but mistaken, elation.

He already has nearly five million outstanding options but those were all underwater, so where’s the fun in that?

Now, these weren’t low point stock prices (those happened when everyone else’s did) but then again they weren’t exactly high point prices too, so he’s made a paper profit of more than $51.5 million already less than two years into the vesting period.

And the compensation committee members?

• Donne Fisher
• Malcolm Gilchrist
• David Rapley
• Andrea Wong

Wong and Gilchrist were up for re-election this year, but, damn, we just missed the annual meeting.

And if you think this is bad, wait until you see how many other megagrants there were this year in our forthcoming report SON OF MEGAGRANT.

Paul Hodgson - Senior Research Associate

Compensation Concerns at Tenet Healthcare Corporation

There is ongoing serious concern related to executive compensation at Tenet Healthcare Corporation. First of all in February 2009 CEO Trevor Fetter received a mega mega-grant of 5.5 million stock options at a historically low exercise price of only $1.14, the relative nadir of Tenet’s share price over the past 25 years. In addition, the other four named executive officers (NEOs) received an aggregate total of 3.6 million options at the same exercise price. At fiscal year end, Tenet’s share price has already nearly quadrupled, representing gains of nearly $39 million for all NEOs. As this illustrates, market priced stock options may provide rewards due to a rising market alone, regardless of individual performance. On top of that, Mr. Fetter’s pension and deferred compensation earnings exceeded his base salary for the second straight year and he continues to receive such excessive perks as personal use of corporate aircraft. While we note favorably that the company has finally disclosed annual incentive performance targets and results, it is difficult to judge these components as there is as of yet no year-to-year comparison available. Regarding long-term incentives, 75% of the award is in the form of stock options (as we previously addressed); the remaining 25% of the award consists of performance awards that are based on only three-year performance periods, use one of the same performance metrics (free cash flow) as the annual plan, and are cash-settled. Lastly, we note that all members of the Compensation Committee received at least 13% director withhold votes at the company’s 2009 annual meeting. Will shareholder discontentment continue? We will find out at Tenet Healthcare’s annual meeting on May 5, 2010.

Damion Rallis - Ratings Analyst

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

Oracle Corporation: CEO Compensation Concerns

The Corporate Library has raised serious concerns about Oracle Corporation's governance practices. To purchase the company's governance rating and risk profile at a steep discount ahead of the annual meeting on October 7, visit our online store. The profile contains:

• Proprietary TCL governance risk ratings and analysis
• Complete CEO compensation review
• Board and individual director profiles and compensation
• Committee structures and independence
• Chronology of key governance events
• Hard-to-find related party transactions
• Current SOX 404 compliance status
• Critical takeover defenses information

Or you can request a free trial of Board Analyst, which will give you access to more than 3,200 U.S. and Canadian public company profiles and ratings.

While fiscal 2009 were not as profitable as fiscal 2008 in terms of take-home pay, Lawrence J. Ellison still raked in more than $130 million in total realized compensation (TRC). Most of this, similar to last year, is comprised of value realized on the exercise of ten million stock options for a profit of more than $124 million. We will refrain from comparing Mr. Ellison’s compensation to that of an island nation this year, but instead compare the amount to something more close to home. Mr. Ellison’s TRC is more than 325 times President Barack Obama’s salary of $400,000 (excluding monthly allowances). Currently, the CEO holds more than 30 million unexercised options (13,150,000 are exercisable), including seven million stock options granted in July 2008 with a grant date value of more than $78 million. As we’ve previously stated last year, the granting of market-priced stock options raises concerns about the link between executive compensation and company performance, since small fluctuations in the market as a whole can lead to large compensation consequences. Moreover, the continued granting of stock options to someone who already owns over one-fifth of the company is questionable.

Furthermore, the company’s formulas for the calculation of annual cash bonuses should raise red flags. Named executive officers' bonuses are equal to a percentage of the growth in the company’s non-GAAP pre-tax profits. CEO Ellison’s bonus was equal to .5 % multiplied by the growth of the non-GAAP pre-tax profits. While no bonuses are paid if there is no growth, such a method for calculating annual incentives at this level of management as well as at an established S&P 500 company (rather than one at an early stage of its growth) is inappropriate.

In addition, the amount of the CEO’s “all other compensation” of approximately $1.5 million is very difficult to justify in terms of shareholder benefit. This amount consists of $1,479,072 for security-related costs and expenses for Mr. Ellison’s residence. The amount and nature of this perquisite calls into question the board’s ability to ensure that the executive compensation is sufficiently performance-related.

Finally, the CEO has agreed to reduce his annual base salary to just one dollar from one million a year. While this may be a positive thing in the minds of some shareholders, it realistically changes little. For instance, annual incentives are not based on a percentage of base salary, as mentioned above. Thus bonuses will not be affected here. Long-term incentives, which have been entirely comprised of stock options, are based on subjective evaluations, not based on clearly-defined objectives or a multiple of an executive’s base salary. While this may be a PR effort to demonstrate to shareholders that the CEO is making sacrifices, the adjustment should be regarded with considerable skepticism.

And They Call This "Undercompensation"

Despite a 51% decline in stock price from fiscal year end 2007 to fiscal year end 2008, Superior Energy Services’ Chief Executive Officer Terence E. Hall received more than $15.2 million in total realized compensation, a 14% increase from 2007. While 2007’s total realized compensation resulted mostly from a $9.2 million of value realized on exercised stock options, CEO Hall’s total realized compensation for 2008 is comprised mostly of $10 million of change in pension value. The Compensation Committee has the sole discretion to make discretionary contributions to a participant’s retirement account. After so many years of service, the Committee felt that Mr. Hall needed an additional retirement benefit (although the CEO owns approximately 1.3% of the company’s total outstanding common shares). The board “determined that although the company has prospered under Mr. Hall’s leadership, Mr. Hall has been under-compensated” and “in an effort to address the inadequate retirement benefits available to Mr. Hall,” the Committee credited his retirement account in the amount of $10 million. We are not persuaded that Mr. Hall is undercompensated, considering the high levels of pay he has received in several recent years.  For example, the amount of his total realized compensation for 2007 was $13.3 million; in 2005 it was $14 million (including $13 million of value realized on exercised stock options) and the value of his unexercised in-the-money exercisable options at fiscal year-end 2005 was more than $10.6 million. Moreover, Mr. Hall has an aggregate balance at fiscal year-end of more than $3.4 million under his nonqualified deferred compensation plans. This may not be in the best interests of shareholders and an amount this large, which would seem an unnecessarily large use of resources, should be voted upon by public shareholders.

Moreover, in regards to the company’s annual incentive bonus, the Compensation Committee has the discretion to make additional discretionary cash awards to executives outside of the annual incentive program. This discretion has been used for the last three fiscal years for all named executive officers, including $1,225,219 in discretionary cash awards to Mr. Hall. The discretionary nature of these payments diminishes the credibility of the annual bonus plan, does little to align the interests of management with shareholders, and would seem to undermine the claim that Mr. Hall has been under-compensated, especially during a year when the company’s stock price lost more than half of its value. In regard to long-term incentive compensation, the company awards stock options, restricted stock, and performance share units (PSUs). The disadvantage of market-priced stock option awards is that in a bull market, options provide high rewards that may be unrelated to management actions and in a bear market, options can lose value through no fault of management. In addition, stock options can encourage management to manipulate results to achieve short-term stock price. The disadvantage of restricted stock is that it provides rewards whether the stock price is rising or falling, unless there are performances goals attached. In addition, the vesting period for these awards is only three years, too short of a time to be considered as being effective for retention purposes or to measure long-term performance. Finally, the 2008 payout of 2006 PSUs was in the form of cash ($1,241,467) and in stock ($246,908). Long-term performance compensation paid in cash does little to align the interests and risks of management with that of shareholders.

Hoang Nguyen — Ratings Manager

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.

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