Underwater Options Exchange Should Exclude Executives,
Maintain Value
February 9, 2009 (PLANSPONSOR.com) - A new analysis
from Aon Consulting's Radford Surveys + Consulting found
exclusion of board and named executive officers (NEOs) and a
value-neutral exchange rate were design features of
underwater stock option exchange proposals that figured most
prominently in gaining approval.
Sixty-two percent of programs excluding board
members and NEOs gained approval, compared to only 18%
that included them. According to a press release, Radford
found 60% of the mutual funds in this analysis voted
against any program brought to them that included the
board and NEOs.
Returning an equal or lesser award value to option
holders as a result of the exchange clearly was a
deciding factor to shareholders in the Radford study, as
54% of programs using approximate value-neutral exchange
rates gained approval. Only 2% were approved that used a
ratio (or ratios) that added value to the employee's
holdings as a result of the exchange.
The Radford research also found programs that reset
vesting had an approval rate of 57%, compared to those
that mapped vesting, which saw only an 18% approval
rate.
Starting in 2008, institutional investor advisory
firm RiskMetrics Group added to its voting guidelines
that no options priced under the company's 52-week stock
price high should be eligible for exchange, as they have
reasonable probability of coming back in the money in the
foreseeable future, the press release said.
According to Radford's analysis of historic voting
patterns against the 52-week test, this feature is the
least sensitive predictor of approval rates with 59%
approval when programs comply and 41% approval when they
do not.
Radford warned that more mature organizations that
are largely held by institutional investors must be
careful when using recent underwater option exchanges
filed with the SEC as best practices benchmarks.
Mutual fund voting data for the study was provided
by RiskMetrics Group's Voting Analytics database. Radford
combined these voting results with its proprietary
database of underwater exchange design features gleaned
from SEC tender offer filings.
Rebecca Moore
editors@plansponsor.com