Authored by Graef Crystal, “the perfect stock option plan” will aid CalSTRS in future executive compensation proxy votes and discussions with companies regarding corporate governance best practices. “Investors are reeling from the bombardment of tales of such executive compensation abuses as lavish stock options and protected pension plans,” said Jack Ehnes, CalSTRS chief executive officer in a news release. “This report details clear standards for stock option plans and gives valuable insights into addressing the current investment crisis around this issue.”
Divided into two parts, Crystal offers opinions about the current system, including what went wrong and what needs to be fixed. Among the areas Crystal sees as culprits of the current system:
- the emergence of the option mega-grant
- timing of option grants
- option repricings
- the use of at-the-market options
- liberal vesting restrictions
- continuing grants right up to retirement
- adopting liberal post-retirement option terms
- the pernicious effects of stock volatility
- the dividend distortion
- relaxing US Securities and Exchange Commission (SEC) rules
- the use of non-independent compensation consultants.
Crystal contends the inherent problems in current option plans would be substantially mitigated if a board of directors adopted such recommendations as:
- timing option grants on a regular, periodic basis on the same schedule each year
- making option repricing economically equivalent
- timing grants and vesting restrictions to ensure stock options serve as long-term incentives
- hiring an independent compensation consultant to report directly to the board compensation committee
- amending earnings to reflect the cost of option grants
- ceasing grants three years before executives reach retirement age
- indexing option strike prices
- adding dividend equivalents.
A complete copy of Crystal’s report can be found at http://www.calstrs.ca.gov/news/PerfectStockOptionPlan.pdf .