Adobe Limits Insider Stock Sales

March 18, 2003 (PLANSPONSOR.com) - Adobe Systems Inc's Board of Directors has adopted guidelines that would prevent its top executives from immediately selling some of the shares they receive from the software company.

The software company took the action after a shareholder activist, The American Federation of State, County and Municipal Employees (AFSCME), urged Adobe to institute a holding period on insider sales.   However, the new restrictions do not go as far as AFSCME had proposed, according to a Dow Jones report.

The new stock-ownership guidelines require executives to hold onto 25% of the net shares acquired from the company for two years. Net shares are those sold to cover the option exercise price and taxes are deducted from the total. The rule applies to directors, senior vice presidents, executive vice presidents, the chief financial officer and chief executive.

However, provisions in the guidelines allow the restrictions to be waived if executives meet certain ownership thresholds.

AFSCME’s initial proposal wanted San Jose, California-based Adobe to require senior executives to hold onto at least 75% of the shares they receive from exercising options.   The activist organization, whose pension fund owns 2,747 Adobe shares, said unchecked stock-option programs fail to align management and shareholder interests.

Adobe countered, saying executives can only profit from option grants after they have vested and if the stock price has risen from the date of grant. However, the board adopted the new rules at a February meeting as part of a year-long effort to review and improve its corporate governance and compensation practices.

Stocking Up

This is the second look the maker ofphoto-editing and document-sharing softwarehas taken at its stock option plan lately.   In February, Adobe announced that proposed stock option expensing would have cut 97% from the company’s fiscal 2002 profit.   The profit reduction was r evealed in a footnote in its annual report, noting 2002 net income would have shrunk to $6.6 million from its reported earnings of $191.4 million if it had used the fair-value method to figure the cost for employee stock options (See  Adobe Takes Snapshot of Life With Option Expensing ).

Like many other technology firms, Adobe relies heavily on stock options as a form of compensation, using the intrinsic value method to account for the value of the options.  Under this method, options are accounted for by taking the difference between the market price of the stock and the exercise price at which the employee may buy that stock.

Current US guidelines allow companies to choose between subtracting the expense of stock options from their income statements or disclosing their theoretical value in the footnotes of their financial statements.  With the exception of a handful of early volunteers and the approximately 130 recent coverts, most companies have opted to record the expenses in their footnotes (See  Fewer Companies Volunteer Stock Option Expenses ).

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