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The Environment
Enron/Andersen collapse Depressed market despite stronger earnings Continued investor dilution concerns New disclosure for stock plans
Enron/Andersen Collapse
Heavy scrutiny of stock options Distrust of financial disclosure Earnings comparisons less meaningful
Whats in the numbers?
# of plans
80 60
No. of Companies-2001
Source: Stock Plan Dilution, 2002: Overhang from Stock Plans at S&P Super 1,500 CompaniesInvestor Responsibility Research Corp
% Negative Votes
30%
Public Perceptions
Executive greed and duplicity contributed to Enron debacle
Mega-options drove management to falsify accounting to keep stock prices high and rising Executives used inside information to exercise and sell options while price high
Stock option accounting contributed to the speculative bubble in stocks by inflating the growth rate in EPS
Stock options cause short-term behavior and are misaligned with long-term interests of shareholders
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New Financials
EBIT: Earnings Before Irregularities and Tampering
ROIC:
CFO:
Worst Practices
Enron Philosophy to reward shareholder value creation Stock options and restricted stock (50/50)
RS vesting accelerated based on TSR performance 4 year reduced to 1 year
Large grants (Lay: 1.3 million in 2000) Limited partnership interests Executive loans and repayments
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Worst Practices
Tyco Loans Stock sales Actions without compensation committee knowledge $20 million to director
Chair of Corporate Governance and Nominating Committee
Worst Practices
E-Trade CEO loan settlement Forgiveness Tax Gross-Up $15,000,000 15,211,481 $30,211,481 For elimination of certain contractual relocation benefits
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Worst Practices
K-Mart Full recourse retention loans $2.5 - $5.0 million Made in 2000 2002 Vest in 2004, i.e.,
Forgiveness
Tax gross-up
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Worst Practices
WorldCom
Stock options only Large grants (Ebbers 1.2-1.9 million per year) Loan arrangements
Company guaranteed $195.6 million (B of A)
Company paid at $198.7 million plus $35 million for LC Company direct loan of $165 million
Why: to avoid the need for Mr. Ebbers to sell large quantities of WorldCom stock
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Dynergy CEO severance 2.99x base and incentive compensation But incentive compensation includes stock options
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Worst Practices
Layoffs with big pay Pay Disney Cisco Systems WorldCom $72.8 $28.7 $10 million stay bonus Layoffs 4,000 8,500 6,000
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Best Practices
Pepsi Enrico reduced salary to $1 Money went for scholarships for children of front-line employees
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Best Practices
Krispy Kreme Since 1937; public since early 2000 Development rights agreements while private Also had franchise equity pool for management All pools and rights agreements terminated
Return of original investment
Best Practices
Ownership Guidelines 13% of Top 250
Not a lot, but more considering
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Best Practices
Ownership Guidelines Other examples
Citigroup 75% of shares granted Pitney-Bowes $350k owned in order to sell stock PNC Bank must use of retainer to purchase stock Tribune 5x most recent stock grant
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Best Practices
Director Performance Options Computer Associates # based on ROE ADC Telecom grant only if 10% ROE SYSCO options granted only if 10% growth in EPS UP & CapOne options vest on stock price
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x x
x x x x
x x x x x x x x
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x
x x x x
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3. Stock Options
x
x
x x x x
x x x
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4. Ownership Standards Code of Conduct Timely Sale Disclosure Retention Ratio Cashless Exercises Proxy Disclosure of Option Sales Recapture of Gains in Bankruptcy Hedging Rule 10b5-1(c) Sell Programs Loans, Margin, Collateral x x x x x x
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x x x x x x
5. Deferred Compensation
SERP Accrual Disclosure Lump Sum Settlements Recapture for Bankruptcy Stock Account Switching x x x x x x
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6. Directors Compensation Stock Options Restricted Stock Committee Chair Fees Ownership Standards x x x x
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firm has served over 1,200 corporations in a wide variety of industries from our offices in New York, Chicago, and Los Angeles. Our primary focus is on performance-based compensation programs which help companies attract and retain key employees, motivate and reward them for improved performance, and align their interests with shareholders. Our range of consulting services encompasses the following areas:
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