Options Just Part of Business: ERIC Official

February 15, 2001 (PLANSPONSOR.com) - Institutional investors have to decide whether existing disclosure provisions on stock option packages are sufficient or run the risk that new disclosure and shareholder approval provisions will negatively impact a corporation's ability to compete, according to the president of the ERISA Industry Council (ERIC).

Mark Ugoretz, ERIC president, told PLANSPONSOR.com that options are a “legitimate business function” which allow corporations to compete for and retain talented professionals, as well as for involving employees in business decisions.

Ugoretz stressed that institutional investors have to invest in a company based on its business objectives. Raising the issue of options “puts a company in a straightjacket” in terms of making it competitive since it will have to come to shareholders on an annual basis to obtain a shareholder plebiscite” on options packages. As a result, a company’s competitiveness to attract employees can  suffer, he said.

Ugoretz said the current discussions about options initiated by the New York Stock Exchange  and NASDAQ covers a lot of ground since institutional shareholders are concerned about shareholder dilution, while the exchanges are aimed at a broader base of their listed companies.

He pointed out that there are tax laws in place which call for shareholder approval for any compensation package greater than $1 million.  The dilutive effect of options raised by institutional investors is corrected by disclosure which he said is already in place.

Options Being Scrutinized

Ugoretz’ comments come at a time when options are a hot topic. A new survey, conducted by Pearl Meyer & Partners, a Manhattan-based executive compensation firm, found that  options now account for over 60% of a chief executive’s pay and those annual pay packages can now exceed $10 million, according to a new survey.

The average compensation for CEO’s approached $10.9 million in 2000, which was a 16% increase over 1999.

The survey comes at a time when options compensation plans are coming under increasing scrutiny from some activist pension funds, such as CalPERS, TIAA-CREF, and the British fund Hermes.  The NASDAQ has also issued requests for public comment letters about plans to require more shareholder approval of such executive options plans.

The new survey found that  options now account for 60% of what executive receive in their compensation packages, with the average options package hitting $6.5 million in options alone, up 28% from 1999.  (Options were valued at one-third of their  issue value for the survey.)

While these types of packages have raised the ire of some investors, ERIC’s Ugoretz contended that “options are not an executive compensation issue,” but are usually done to achieve  business objectives.  As a result, shareholders  should not have the right to approve or disapprove each and every options plan,” he said.

“Options are part of the business of running a business,” he added.

The new Pearl Meyer CEO compensation survey found that salaries now account for just  10% of pay packages, while annual bonus comprise 20%, long-term bonuses 10% and stock options 60%.

– Chuck Epstein        editors@plansponsor.com