after the storm – high tech pay in a post-expensing world
DESCRIPTION
After the Storm – High Tech Pay in a Post-Expensing World. May 25, 2005. Today’s Speakers. Carl Schmitt Director Human Resources & Investor Solutions 415-617-3914 [email protected] Brett Harsen Senior Consultant Human Resources & Investor Solutions 312-846-3418 [email protected]. - PowerPoint PPT PresentationTRANSCRIPT
After the Storm – High Tech Pay in a Post-Expensing World2
Carl SchmittDirectorHuman Resources & Investor [email protected]
Brett HarsenSenior ConsultantHuman Resources & Investor [email protected]
Today’s Speakers
After the Storm – High Tech Pay in a Post-Expensing World3
Today’s Session
Approximately one-hour presentation
Question and answer period to follow
Questions can be directed via e-mail to [email protected](please note this email now – we encourage questions)
INTRODUCTIONINTRODUCTION
After the Storm – High Tech Pay in a Post-Expensing World4
In today’s discussion, we will cover six topics
Overview of recent accounting developments
The latest on Mellon’s research into vesting acceleration practices
Update on option valuation trends in High Tech
Developments in High Tech equity compensation programs
Expected future directions for High Tech equity compensation
Issues to consider
INTRODUCTIONINTRODUCTION
OneOne
TwoTwo
ThreeThree
FourFour
FiveFive
SixSix
After the Storm – High Tech Pay in a Post-Expensing World5
Section One – Overview of Recent
AccountingDevelopments
After the Storm – High Tech Pay in a Post-Expensing World6
Much has happened since our January 2005 webcast on the final FAS123R rules
April SEC delays
FAS123R IBM starts expensing (retrospectively)
ACCOUNTING DEVELOPMENTSACCOUNTING DEVELOPMENTS
??March SEC issues
SAB107
May Cisco intends to
issue new security to value employee options
Jan - May Number of companies accelerating vesting grows from
approx. 15 to over 100 High Tech companies continue to assess alternative equity
strategies, but have largely stuck to the wait-and-see mindset
Just what is in store for the future is anyone’s guess right now…
February Options bill
reintroduced in Congress
After the Storm – High Tech Pay in a Post-Expensing World7
SAB 107 is meant to expand upon and clarify FAS123R…
Option Option ValuationValuation
Reinforces liberal standard of good faith effort in performing reasonable valuations
Choice in option valuation model A certain emphasis on using implied volatility if market
traded options are available (at-the-money with terms of at least six months, ideally more than one year)
Simple method for determining a “safe harbor” holding term (average of vesting and contractual term)
Change in valuation methodology is NOTNOT a change in a change in accounting principalaccounting principal
Vesting Vesting AccelerationAcceleration
Remains a viable strategy for early footnote recognition of option expenses
Requires timely disclosure
ACCOUNTING DEVELOPMENTSACCOUNTING DEVELOPMENTS
After the Storm – High Tech Pay in a Post-Expensing World8
SAB 107 is meant to expand upon and clarify FAS123R…
Pro-forma Pro-forma EarningsEarnings
Prohibits including complete pro-forma income statements in SEC filings
Companies may be able to disclose a non-GAAP measure such as net income before option expense, however management must meet burden of explaining why such a measure is appropriate
Separate Line Separate Line Item Item Disclosure of Disclosure of Option Option ExpenseExpense
Prohibited in the income statement (will be included in existing lines such as SG&A)
Separate disclosure will be allowed in parenthetical notes to income statement line items, in footnotes and in the management’s discussion and analysis (MD&A)
ACCOUNTING DEVELOPMENTSACCOUNTING DEVELOPMENTS
After the Storm – High Tech Pay in a Post-Expensing World10
A unique window of opportunity exists to shift option costs into footnotes prior to SFAS123(r)
While a modification, no variable accounting is triggered and no fixed charge is recognized if the options are underwater (recent auditor interpretations have also indicate that in-the-money options can be accelerated without incurring substantial costs)
Requires immediate recognition of remaining grant-date fair value in the SFAS123 footnotes
Does not require shareholder approval under the new NYSE and Nasdaq corporate governance rules
Shareholders may view this as a giveaway – especially if the options accelerated are not significantly underwater and/or are held by officers or outside directors
Eliminates any remaining employee retention value associated with the award Will create spikes in option-related (footnote) expenses that may increase the difficulty of
comparing period-over-period financials
How it Works
Implications
VESTING ACCELERATIONVESTING ACCELERATION
After the Storm – High Tech Pay in a Post-Expensing World11
The simplified mechanics of the strategy are as follow
Assumptions
Options Granted 1,000Stock Price at Grant $30Strike Price $30Per Share Fair Value (B-S) $20Total Award Fair Value (B-S) $20,000Vesting Schedule 4 Years, 25% annuallyCurrent Stock Price $10 (options are underwater)
VESTING ACCELERATIONVESTING ACCELERATION
Without AccelerationTransition to Mandatory Expensing
Year 1 Year 2 Year 3 Year 4 TotalAPB 25 (Income Statement): $0 $0 na na $0
FAS 123 (Footnotes): $5,000 $5,000 na na $10,000FAS 123R (Income Statement): $0 $0 $5,000 $5,000 $10,000
With Vesting AccelerationAcceleration of Vesting Transition to Mandatory Expensing
Year 1 Year 2 Year 3 Year 4 TotalAPB 25 (Income Statement): $0 $0 na na $0
FAS 123 (Footnotes): $5,000 $15,000 na na $20,000FAS 123R (Income Statement): $0 $0 $0 $0 $0
Total cost of award split between footnotes and income statement
Total cost of award shifted into footnotes only
After the Storm – High Tech Pay in a Post-Expensing World12
Forty percent of the 97 companies we studied were from high technology
Tech Data Flextronics Sanmina Solectron Jabil Circuit AMD Micron Technology International Rectifier Monster Worldwide InFocus
Vesting AccelerationIndustry Breakdown
GeneralIndustry
50%
High Technology
40%
LifeSciences
10%
VESTING ACCELERATIONVESTING ACCELERATION
Including some large, well-known tech companies:
n=97
After the Storm – High Tech Pay in a Post-Expensing World13
The number of companies continues to grow – even immediately after the SEC’s delay of mandatory implementation in March
n= 97
Date of Acceleration
2%1% 1% 1%
10% 10%
23%24%
11%
16%
0%
5%
10%
15%
20%
25%
30%
August'04
September '04
October '04
November '04
December '04
January '05
February '05
March '05
April '05
May '05
n=97
(As of 5/09)
VESTING ACCELERATIONVESTING ACCELERATION
After the Storm – High Tech Pay in a Post-Expensing World14
While most only accelerate those underwater, a growing number have accelerated in-the-money options as well
All Companies
General Industry
High Technology Life Sciences
The price on date of acceleration (all underwater options)
46% 37% 53% 75%
Specified price above the closing price on date of acceleration (specified
underwater options only)39% 46% 33% 25%
Specified price below the closing price on date of acceleration (includes some
in-the-money)14% 17% 13% 0%
n= 69 35 30 4
Price Floor For Eligible Options
VESTING ACCELERATIONVESTING ACCELERATION
After the Storm – High Tech Pay in a Post-Expensing World15
Additional program design findings include…
VESTING ACCELERATIONVESTING ACCELERATION
Roughly one-quarter of outstanding options were accelerated
Only 12% excluded board options and 6% excluded officers
Only 13% placed restrictions on the sale of stock acquired through early exercises
After the Storm – High Tech Pay in a Post-Expensing World16
… And from outward appearances, shareholders haven’t reacted negatively toward the stock
VESTING ACCELERATIONVESTING ACCELERATION
All Companies
General Industry
High Technology Life Sciences
Average trade volume for two days following public announcement of
acceleration as a percent of average daily trade volume for 90 days
preceding announcement
105% 97% 114% 113%
n= 97 47 40 10
All Companies
General Industry
High Technology Life Sciences
Average stock price close on day after announcement of acceleration as a percent of stock price close on day
before announcement
100% 100% 101% 99%
n= 97 47 40 10
Change in Stock Price Following Announcement of Acceleration
Change in Trading Volume Following Announcement of Acceleration
After the Storm – High Tech Pay in a Post-Expensing World17
Section Three – Trends in
Option Valuation
After the Storm – High Tech Pay in a Post-Expensing World18
Many High Tech companies are realizing that binomial is no silver bullet
The binomial model can theoretically be more accurate because it can incorporate a greater array of inputs
However, the output of the model is only as good as the quality of the inputs– Yes, the binomial model can accommodate volatility, risk-free rate
and dividend yield assumptions that vary from period to period into the future based on predicted company or market events…
– But, how many companies can reliably predict how future events will impact these variables?
In some cases, given the nature of binomial calculations, increased accuracy may even mean increased cost
Finally, it is still unclear exactly how auditors will respond to the more complex inputs required by robust binomial models as the large accounting firms are still developing their own internal guidance
OPTION VALUATIONOPTION VALUATION
After the Storm – High Tech Pay in a Post-Expensing World19
Binomial complexity can easily get out of control
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$99.60$69.60
$81.55$53.01
$66.77 $66.77$39.62 $36.77
$54.66 $54.66$28.84 $26.13
$44.76 $44.76 $44.76$20.45 $17.61 $14.76
$36.64 $36.64 $36.64$14.16 $11.46 $8.11
$30.00 $30.00 $30.00 $30.00$9.60 $7.28 $4.45 $0.00
$24.56 $24.56 $24.56$4.53 $2.45 $0.00
$20.11 $20.11 $20.11$1.34 $0.00 $0.00
$16.46 $16.46$0.00 $0.00
$13.48 $13.48$0.00 $0.00
$11.03$0.00
$9.04$0.00
Above the Line: Stock PriceBelow the Line: Option Fair Value
Vol: X%Spinoff
Vol: Y%Product Launch
Vol: Z%
RF Rate: A%
RF Rate: B%
Exercises forced by expected
layoff
(i% prob.)
Baby Boomers’
Retirement(ii% prob.)
George’s Daughter is Accepted to
Harvard(iii% prob.)
Death or Disability (a% prob.)
Our auditors give us a hard enough time on the six basic Black-Scholes inputs!
OPTION VALUATIONOPTION VALUATION
After the Storm – High Tech Pay in a Post-Expensing World20
FIRST – Scrutinize your volatility assumption(s) within the context of the new guidance (lower volatility = lower cost)
Before investing in expensive binomial technology or outsourcing, three low effort/high-impact steps should be explored
OPTION VALUATIONOPTION VALUATION
Company
12 mo. Historic
Vol
24 mo. Historic
Vol
36 mo. Historic
Vol
48 mo. Historic
Vol
Focus Company 24.8% 32.7% 68.1% 61.6% 57.9% 56.5%
PeersPeer 1 23.0% 25.5% 26.3% 28.8% 32.1% 33.5%Peer 2 17.3% 26.2% 26.9% 27.6% 27.6% 27.6%Peer 3 37.9% 44.2% 56.1% 66.7% 66.9% 65.9%Peer 4 28.2% 35.0% 32.6% 33.6% 33.3% 32.6%Peer 5 28.2% 35.0% 32.6% 33.6% 33.3% 32.6%Peer 6 29.8% 35.7% 42.4% 41.7% 42.9% 42.8%Peer 7 27.9% 40.8% 39.3% 47.0% 49.8% 49.2%Peer 8 35.8% 40.7% 41.3% 40.3% 39.4% 39.4%
Median Peer Volatility: 28.2% 35.3% 36.0% 36.9% 36.4% 36.5%
Excluding 4/1/01-6/1/01 - Announcement of SpinoffFocus Company 24.8% 32.7% 31.0% 32.2% 34.0% 37.1%
Greater flexibility now exists for building cases to excluded historic periods of extraordinary volatility…
PriceTerm (yrs)
Last Sale (or bid if sale is
na) Assumed IRAssumed
Div Implied Vol$10.00 0.8 $10.50 3.31% 0.00% 45.87%$17.50 0.8 $3.80 3.31% 0.00% 28.69%$20.00 0.8 $2.60 3.31% 0.00% 32.82%$22.50 0.8 $0.85 3.31% 0.00% 21.68%$25.00 0.8 $0.60 3.31% 0.00% 26.74%$30.00 0.8 $0.15 3.31% 0.00% 27.56%
PriceTerm (yrs)
Last Sale (or bid if sale is
na) Assumed IRAssumed
Div Implied Vol$15.00 1.7 $6.50 3.62% 0.00% 25.24%$20.00 1.7 $3.80 3.62% 0.00% 29.82%$25.00 1.7 $1.60 3.62% 0.00% 25.85%$30.00 1.7 $0.70 3.62% 0.00% 25.76%
If your company has market traded options that can be referenced, SAB 107 tells us implied volatility is a strong benchmark…
Use multiple approaches to support your case for what you expect the company’s volatility to be in the future – but be prepared for increased disclosure
After the Storm – High Tech Pay in a Post-Expensing World21
SECOND – Use existing data from your option administration software or outsourcer to scrutinize historic exercise periods (shorter holding period = shorter cost)
Before investing in expensive binomial technology or outsourcing, three low effort/high-impact steps should be explored (continued)
OPTION VALUATIONOPTION VALUATION
Don’t rely on solely standard reports from your option software or outside administrator to provide accurate employee holding period data (some systems use subjective calculations, most systems will aggregate holding periods on grants with different vest schedules)
Look for different exercise patterns among employee groupings, but only use these differences if the patterns are sustainable and do not make valuation overly-complicated
Calculate the period of time employees hold options after they become exercisable so that data on grants with different vest schedules can be properly compared
After the Storm – High Tech Pay in a Post-Expensing World22
Assumptions– Stock options are granted with a four-year total vest period, vesting
in tranches of 25% per year
– From historic experience, employees are shown to exercise 12 months after vest
This single grant is broken into 4 tranches based on vesting…
OPTION VALUATIONOPTION VALUATION
THIRD – Value each tranche of a ratably vested award as a different grant to recognize early exercisability
Before investing in expensive binomial technology or outsourcing, three low effort/high-impact steps should be explored (continued)
After the Storm – High Tech Pay in a Post-Expensing World23
… this tranche-based approach virtually eliminates the differences between Black-Scholes and binomial (assuming all other assumptions remain equal)
OPTION VALUATIONOPTION VALUATION
THIRD – Value each tranche of a ratably vested award as a different grant to recognize early exercisability (continued)
Before investing in expensive binomial technology or outsourcing, three low effort/high-impact steps should be explored (continued)
1,000$30.00$30.00
Tranche
Months from Grant
Vested Percent
Expected Holding
Term (Months)
Expected Volatility
over Expected Holding Term (%)
Risk-Free Rate Over Expected holding
Term (%)
Expected Dividend Yield over Expected Holding Term (%)
Per-Share Value
Shares Per
TrancheCost Per Tranche
Per-Share Value
Shares Per
TrancheCost Per Tranche
1 12.0 25.00% 24.0 50.00% 2.00% 0.00% $8.73 250.0 $2,181.50 $8.73 250.0 $2,182.442 24.0 25.00% 36.0 45.00% 2.50% 0.00% $9.89 250.0 $2,471.50 $9.89 250.0 $2,473.293 36.0 25.00% 48.0 40.00% 3.00% 0.00% $10.58 250.0 $2,644.50 $10.59 250.0 $2,647.414 48.0 25.00% 60.0 35.00% 3.50% 0.00% $10.99 250.0 $2,747.50 $11.01 250.0 $2,751.95
Total Fair Value: $10,045.00 $10,055.09Total Face Value: $30,000.00 $30,000.00
Fair Value as a Percent of Face: 33.5% 33.5%
Black-Scholes BinomialTranche Vesting Practice
Number of SharesStrike PriceStock Price
Substantially SimilarSubstantially Similar
After the Storm – High Tech Pay in a Post-Expensing World24
In summary, when binomial is used to increase option valuation complexity…
OPTION VALUATIONOPTION VALUATION
Some things are certain…
Complexity Administrative Burden
Audit Scrutiny/Burden
Transparency
But some things are NOT…
Complexity ?
=
Accuracy
=
=
=
Complexity ? Expense =
After the Storm – High Tech Pay in a Post-Expensing World25
Section Four – Developments in
Equity CompensationPrograms
After the Storm – High Tech Pay in a Post-Expensing World26
Option accounting is not the only issue driving equity compensation decisions
Major DriversMajor Drivers
Equity Compensation
Option ExpensingFAS123R
NYSE/NASDAQ(Approval Requirements)
SEC(Disclosure
Requirements)
Taxation &Deferred Compensation
(AJCA)
ShareholderPressure
Secondary DriversSecondary Drivers
Congress(Pending Legislation)
HIGH-TECH TRENDSHIGH-TECH TRENDS
After the Storm – High Tech Pay in a Post-Expensing World27
High Tech companies have been (slowly) modifying their equity compensation programs in anticipation of option expensing
The primary changes have been evolutionary…
Stock options are still the dominant form of equity compensation– However, a notable portion of companies have introduced alternative
equity vehicles, primarily restricted stock (units) and performance shares
Reduce overall share usage (burn rate)
Reduce participation
and/or eliminate eligibility
Reduce individual grant
levels
Implement/refine international differentials
HIGH-TECH TRENDSHIGH-TECH TRENDS
After the Storm – High Tech Pay in a Post-Expensing World28
Overall share usage has been the primary focus
Reducing the burn rate for equity addresses both expensing and investor dilution concerns
High Tech companies are targeting 3.0% gross burn rate for 2005– Lower burn rate of 2.0% for largest tech companies
– Small and rapidly growing companies will struggle to get below 4.0%
These target burn rates represent a significant decline in share usage over the past few years– Burn rates have been declining 20%-30% year over year for most
companies
HIGH-TECH TRENDSHIGH-TECH TRENDS
After the Storm – High Tech Pay in a Post-Expensing World29
To reduce usage, companies have been making tough decisions around eligibility and participation
Our Summer 2004 flash survey found that companies expected to reduce participation primarily for lower level employees– To date, this prediction has proven to be true
HIGH-TECH TRENDSHIGH-TECH TRENDS
* May not sum to 100% due to rounding
Pe
rce
nt
of
Co
mp
an
ies
100%
80%
60%
40%
20%
0%
Pe
rce
nt
of
Co
mp
an
ies
100%
80%
60%
40%
20%
0%
17%
Top 5Executives
Changes to Annual Participation in Response to Mandatory Expensing
83%
0% 0% 0%
24%
76% 69%
30%
1% 1%
OtherExecutives
Directors/Managers
ExemptIndividual
Contributors
Non-Exempts
54%46%
LowerSameHigher
57%
42%
N=107
After the Storm – High Tech Pay in a Post-Expensing World30
High Tech companies still believe in broad equity grants, but are raising the bar on performance
Grants to new hires are still nearly universal– The majority of companies still grant options to nearly all (~100%)
new hires
Ongoing grant programs have seen the biggest cutbacks in participation– Below the director level, universal participation is becoming rare
– Companies generally set a target portion (15%-75%) of employees expected to receive a grant in any year
– “Annual” grants are now “performance” grants
International grant levels and participation are receiving greater scrutiny– “One size fits all” is an unaffordable luxury
HIGH-TECH TRENDSHIGH-TECH TRENDS
After the Storm – High Tech Pay in a Post-Expensing World31
High Tech companies are increasing usage of stock option alternatives
Stock options are still the dominant form of equity compensation!– And will be for the foreseeable future
Among the alternatives, full-value grant programs (restricted stock, performance shares) are getting the most attention
– Other option alternatives like stock-based SARs (Stock Appreciation Rights) are becoming more common
– Some potential successors to options have lost favor because of tax, accounting, or investor issues
A number of High Tech companies have implemented full value grant programs in the past year despite APB25 expense
– Expect the trend to increase as companies get closer to FAS123R implementation
Companies have taken widely divergent approaches with full value grants– Carve-out vs. wholesale replacement of options
– Executives only vs. all employees vs. only lower levels
HIGH-TECH TRENDSHIGH-TECH TRENDS
After the Storm – High Tech Pay in a Post-Expensing World33
Due to the staggered implementation of FAS123R, equity practices will continue to evolve at a measured pace
Winter ’05/’06 Calendar YE companies
begin expensing
Fall ‘05First required Q1
releases under FAS123R (for 6/30/06 FYE)
Spring ‘06Remaining public
companies begin expensing
Option acceleration increases in lead-up to fiscal year ends
Wider use of full-value shares and stock-based SARs in lieu of options
Continued reduction in equity burn rates and grant levels
Revival of exchange programs for underwater options (repricing)
Summer ‘05June 30 FYE
companies begin expensing
Accounting
Equity C
ompensation
FUTURE DIRECTIONSFUTURE DIRECTIONS
After the Storm – High Tech Pay in a Post-Expensing World34
Now: Acceleration of underwater optionsFuture: Exchange of underwater options
We expect the pace of vesting accelerations to increase as companies approach their fiscal year ends– After adoption of FAS123R, acceleration is considered “non
substantive” and has no accounting benefit
– We expect to see increasing acceleration of vesting on in-the-money options
• Under APB25/FIN44, recognition of expense for in-the-money value is contingent upon an event that would have otherwise caused forfeiture
• As year end approaches, potential APB 25 cost of acceleration is minimized
FUTURE DIRECTIONSFUTURE DIRECTIONS
After the Storm – High Tech Pay in a Post-Expensing World35
Now: Acceleration of underwater optionsFuture: Exchange of underwater options
After adoption of FAS123R, we expect option exchanges (repricing) to experience a resurgence– No longer any need for the “6 month and a day” (6+1) maneuver
– Exchanges can occur immediately after close of tender offer
Under FAS123R, the exchange only increases accounting cost if incremental value is delivered– Most exchanges will be done on a value-neutral basis, so there will
be no incremental expense
For most companies, shareholder approval is required for option exchanges– Need for shareholder approval may constrain frequency and
variation in practices
FUTURE DIRECTIONSFUTURE DIRECTIONS
After the Storm – High Tech Pay in a Post-Expensing World36
The “level playing field” will give full value shares closer parity with option programs
Once companies have to recognize an expense for all equity grants, the full-value grants will be a viable alternative– We expect an increasing portion of companies to incorporate full
value grants into their equity programs
– Options will likely remain the most common form of equity
In High Tech companies, the accounting cost of options is starting to become an issue for budgeting and planning purposes– Planning for future grants and impact on earnings guidance
– Internal budgeting for equity costs by department/function
The net result will be increasing downward pressure on equity grant levels– “What gets measured, gets managed”
FUTURE DIRECTIONSFUTURE DIRECTIONS
After the Storm – High Tech Pay in a Post-Expensing World37
The “level playing field” will give full value shares closer parity with option programs
A key issue for the options vs. full value shares is trade-off ratio– As companies reduce their option valuations, the implied trade-ratio
becomes higher in order to remain expense neutral
At higher trade-off ratios, it takes only minimal stock price increases for options to achieve higher gains– The following table illustrates the gain required and years to achieve
under various stock price growth scenarios
Options for Restricted Stock Trade Off RatioOptions for Restricted Stock Trade Off Ratio
1.5 for 1 1.5 for 1 2 for 12 for 1 3 for 13 for 1 4 for 14 for 1 5 for 15 for 1
Implied Option Value(% of Stock Price)
66.7% 50% 33.3% 25% 20%
Stock Price Gain Required for Option Gain to Equal RS
200% 100% 50% 33% 25%
Years Required to Achieve Equal Gain:
– At 5% Growth Rate
– At 15% Growth Rate
– At 25% Growth Rate
40.0
13.3
8.0
20.0
6.7
4.0
10.0
3.3
2.0
6.7
2.2
1.3
5.0
1.7
1.0
FUTURE DIRECTIONSFUTURE DIRECTIONS
After the Storm – High Tech Pay in a Post-Expensing World38
Section Six – Closing:
Issues to Consider
After the Storm – High Tech Pay in a Post-Expensing World39
How much do all your programs cost?Who benefits from each program?
ESPP$4 MM
Bonuses$60 MM
Options$70 MM
Benefits (no pension)$60 MM
Salaries$300 MM
Company has more than $1.5 B in revenues
Company has more than $200 MM in profits
Bonuses are 30% of profits
Options are 35% of profits
ESPP is 2% of profits
Everything must be taken in context
LONGER-TERM STRATEGIESLONGER-TERM STRATEGIES
After the Storm – High Tech Pay in a Post-Expensing World40
SHAREHOLDERSHAREHOLDERCONCERNSCONCERNS
Manage dilutionManage dilution
SHAREHOLDERSHAREHOLDERCONCERNSCONCERNS
Manage dilutionManage dilution
To support the total rewards philosophy, the design of LTI programs requires balancing several factors
ORGANIZATION STRATEGY
ORGANIZATION STRATEGY
What is our business strategy?
What goals do we need to achieve over the next Year? Two Years? Three years?
What is our business strategy?
What goals do we need to achieve over the next Year? Two Years? Three years?
COMPETITIVE NORMS
COMPETITIVE NORMS
What are competitive opportunities at similar companies? Do we have to match the opportunities?
How deep do these opportunities extend and what forms do they take?
What are competitive opportunities at similar companies? Do we have to match the opportunities?
How deep do these opportunities extend and what forms do they take?
Does our pay philosophy support:
• Pay for performance• Risk/reward tradeoffs
What is the culture we want to reinforce and how far do we have to go to achieve it?
Does our pay philosophy support:
• Pay for performance• Risk/reward tradeoffs
What is the culture we want to reinforce and how far do we have to go to achieve it?
ORGANIZATION SITUATION
ORGANIZATION SITUATION
PLANDESIGNPLAN
DESIGN
LONGER-TERM STRATEGIESLONGER-TERM STRATEGIES
Do you want to be a "first mover“ (“market leader”), "market follower", or in the middle?
After the Storm – High Tech Pay in a Post-Expensing World41
In conclusion…
High Tech is changing its equity practices at an evolutionary rate There are specific accounting related actions that can (and
should) be taken before implementing FAS123R Over time, grant levels will likely continue to decrease and
become more focused on top performers In considering changes to equity programs, look at equity and its
cost in the context of total rewards and the business strategy
… The times, they are changing
LONGER-TERM STRATEGIESLONGER-TERM STRATEGIES
After the Storm – High Tech Pay in a Post-Expensing World42
Thank You
Questions?(email now to: [email protected])
Carl [email protected]
Brett Harsen312-846-3418
After the Storm – High Tech Pay in a Post-Expensing World43
For some companies, full-value grant programs can be a better match for their situation and needs
Stock OptionsStock Options(Appreciation Awards)(Appreciation Awards)
Restricted StockRestricted Stock(Full Value Awards)(Full Value Awards)
Description • A right to purchase stock at a specified price during a specified period
• Full shares of stock that typically vest over time based on continued employment
Advantages • Creates a direct link between employee and shareholder interests
• Provides more leverage than full-value stock arrangements
• Simple to administer and easy to understand
• Promotes shareholder interest by facilitating stock ownership
• Powerful retention vehicle• Requires fewer shares than option awards to
deliver competitive value• Provides downside protection to employee
Disadvantages • Subject to market fluctuations• May not be aligned with business/ rewards
objectives• Requires more shares than full-value stock
arrangements to deliver competitive value
• Less performance oriented than other vehicles because of downside protection
• Employees cannot control timing of tax event (award is generally taxed at vest)
Variants • Other forms of appreciation awards include:
– Stock appreciation rights (SARs)• Stock-based SARs• Cash-based SARs
– Indexed options– Premium-priced options– Phantom stock units
• Other forms of full-value awards include:– Performance shares– Restricted stock units (RSUs)– Performance units– Deferred stock units
APPENDIXAPPENDIX