Page 432 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

418 The Complete Guide to Executive Compensation

New Hire Promoted

RT 0.67 0.67
NS 10,000 10,000
g
NS 0 8,000
m
NS ? ?
c
FMV $133 $133
f
OP $100 $100
m
OP $110 $110
c
Promotion
0.67 [10,000 (133 100) 8,000 (133 100)] NS ($133 $110)
c
NS 1,923 shares
c
New Hire
0.67 [10,000 (133 100) 0 (133 100)] NS ($133 $110)
c
NS 9,613 shares
c
Table 8-10. Example of stock option catch-up grant
to the stock price—a form of dollar-value averaging. They also permit a form of deferred
compensation similar to the cash award that has to be earned out over five years. By estab-
lishing a one-year waiting period, and then a maximum exercise of 25 percent of the total
option in each of the succeeding four years, the recipient has a layered series of parts of five
different options after five years. Furthermore, the executive will never be able to exercise all
the outstanding options if terminating employment, except as permitted under the plan for
retirement, disability, and death.
Grant Date

There are three variations to the effective grant date: date of the action; backdated to an
earlier date; and moved forward to a future date.

Date of Action. This is by far the most common method. The date the action is taken is
the one used as the effective date of the grant. Some companies time the grants to precede
good news (believing this will increase the stock price). This is called spring-loading, at best
a questionable practice. To avoid any believed impropriety many companies have a pre-
determined fixed schedule for granting options (such as the day of the July board meeting
that follows the quarterly earnings release).
Backdating. This is when the effective date of the grant is moved back in time, typically to
the date of a lower price than the date the action is taken. The result effectively is a discount
stock option and raises a number of issues:

• Does the plan approved by shareholders permit discounted stock options? Most do
not and under such circumstances action may violate shareholder approval, as well as
NYSE and NASDAQ, requirements. Such action may also trigger a shareholder suit.