Federal-Mogul Co. Stock Decision Unique, But Wise: Observers

The firm’s stock has fallen by nearly 85% during the past year as its expenses from asbestos claims had piled up. The company’s asbestos-related payments totaled $82 million in the second quarter.

The contributions made by Federal-Mogul employees into its common stock fund are now being redirected into a stable value fund. Even though Federal Mogul’s prognosis looks grim, industry insiders say the firm has not made a bad decision.

The Right Thing

“You’ve got an employer facing some difficulty that’s trying to do the right thing,” said Ward Harris, managing director of the Berkeley, California-based McHenry Consulting Group. “If they’re held responsible for trying to do this it’s unfortunate. The key here is that this is a special situation, not all sponsors are in the asbestos industry. Anytime you have an investor investing in a company that deals with materials that have potentially negative effects, you have a risk.”

Diane Lerner, a New York City-based senior consultant in the compensation practice at Watson Wyatt agreed. “Asbestos litigation can be really old, in some cases as much as twenty years old,” she said. “There is a risk involved given that.”

Communication

However, Lerner continued that the real issue is how to communicate with employees.

“I think the fact that this is a stock option plan doesn’t make it any different than any other plan, either way there are employee communication issues to address,” she said.
“The challenge is explaining the rationale [of the decision] to employees so that they don’t go into a panic. And, it’s easier to explain this now given the current economy than it was six months ago because many companies are in the same situation.”

Lerner continued that a sponsor with a situation similar to Federal-Mogul has a range of things to consider, such as whether to terminate the stock options program or to keep emphasizing its current strategy.

She added that deciding to keep a plan that is losing value is particularly tricky since a sponsor has to figure out what to do with a plan that is not working. In either scenario Lerner said a sponsor has to deal with explaining its approach to employees, which can be a challenging task.

– Nicole Halsey          editors@plansponsor.com