Tough New Rules for Board Stock Options
Lost in recent blowup over U.S. corporations backdating executive stock options (and how massively option awards have paid off in 2006) has been how option pay for board members is trending lately. The Wall Street Journal in December examined how some directors (such as Monster.com) themselves benefited from suspiciously timed option grants. (This might be a subtrend worth exploring – any board willing to wink at date fudging for their CEO’s options is more likely to help itself to the booty). Thus, straight option pay for directors, always a bit controversial, is finding less favor. But what’s taking its place?
§ Equity for directors, yes, but not in straight stock options. Deferred and restricted stock are part of “a definite shirt” says, Beverly Aisenbery, New York managing director with pay pros Frederic W. Cook. ‘The move into deferred stock is a fairly large move, with the stock usually held until the director leaves the board.” As usual, General Electric has been the leader here, paying board members deferred stock units (rather than an actual number of shares) on a pretax basis, but not realizable until the director retires.
§ Companies have grown more creative at prodding their directors to get and hold onto equity, says Dan Moynahan, principal at Compensation Resources (see the item above). Still, most boards shy away from dropping a hammer on members who just don’t meet equity guidelines the board sets for itself. “The response has typically been for the board to pay out more of retainers in equity rather than cash if a director is not getting to the guidelines.”
§ It’s no secret that board pay varies by company size, with Fortune 500 directors doing a lot better for their labors than your local madcap. NASDAQ listed companies also tend to average board pay than NYSE firms, says Aisenbrey, but she finds the real break when it comes to use of equity pay “is technology versus manufacturing companies.” Techs, especially young, fast growers, have an options pay culture, and that view reflects in the boardroom. If your company is an old-line metal bender with a static or strongly cyclical stock price, forcing directors to eat lots of long-payoff equity may sound noble, but won’t prove very inspiring.
§ One result of the backdating scandals – boards are “bringing a much stronger formalization to when and how they grant equity” note Moynahan. Option granting polices, once lax, are now being cast in stone. “If the board says that all equity grants will be made on the third Thursday after their quarterly meeting, they now make sure that’s gonna happen.”
