Page 586 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

572 The Complete Guide to Executive Compensation

When Is the Information to Be Given?
The information should be given to executives after the plan has been approved. It should also
be given periodically (e.g., following each financial quarter) and in response to a request. It
should also be available on a secured, personal website. Additionally, the company should send
a report to the executive annually on the current compensation package, such as illustrated in
Table 9-24. This annual report should include at least the following year’s range of total pay
possibilities such as reported in Tables 9-25 and 9-26. Additionally, whenever there is a plan
change, the payout possibilities should be illustrated and compared to that of previous plans.
The differences should be clearly explained. For example, a company deciding to move from
stock options only to a combination stock option and performance-share plan should provide
a side-by-side comparison and explain why the change was made. In Table 9-28, Brucell
determined by present-value methodology that three of its options were equivalent to one
outright share of stock. It therefore moved from an all-option program to half option and half
performance share. The rationale was to take some of the uncertainties of the stock market
out of the long-term incentive plan. The old plan called for 60,000 stock options; the new plan
stipulates 30,000 options and a targeted performance-share award of 10,000 shares. Note that
with a 50 percent stock-price increase, the two plans pay out the same. Above that, the stock
option plan is more attractive; below that, the combination plan is better.

Old New

Stock Price Stock Options Stock Performance New
Total
Change Only Options Shares Versus Old
100% $6,000 $3,000 2,000 $5,000 ($1,000)

50% 3,000 1,500 1,500 3,000 —
25% 1,500 750 1,250 2,000 500

0% 0 0 1,000 1,000 1,000
25% 0 0 750 750 750

50% 0 0 500 500 500
Table 9-28. Comparison of old and new stock plans (in thousands)

To avoid issues with disgruntled executives, it is often prudent to find out how they view
proposed changes before revising the plan. Table 9-29 shows a questionnaire that Brucell used
before making the plan change. Note that the first question distinguishes between stock options
and stock awards. Question 2A distinguishes between a simple stock award and a performance-
share award. Question 2B distinguishes between a “plain vanilla” stock option and a perform-
ance-based stock option. Question 3 permits the responder to weight the answers to 2A and 2B.

How and Where Is the Information Provided?
General information about the plan can be provided in hardcopy handouts along with the
plan documents. The information might also be posted on a website along with answers to