Written By:  Keith Kefgen & Doug Rosen

In light of recent corporate scandals, several public agencies have championed new regulations in an effort to regain public trust in corporate America.  Recently, the New York Stock Exchange made several proposals to the Securities and Exchange Commission to both modify existing, and add new corporate governance listing standards.  This article will focus on the NYSE’s recommendation that shareholders must be given the opportunity to vote on all equity compensation plans, specifically option re-pricing.

Currently, if a company’s board wishes to re-price existing options, it can do so at its discretion.  The re-pricing of options typically occurs when the strike price of outstanding options falls significantly below what the stock is currently trading at, thereby putting the options “underwater”.   Subjecting the re-pricing of options to a proxy vote will have varying effects on the parties involved. 

Historically, the investment community has always frowned upon option re-pricing. They believe that management should suffer with shareholders when the company under performs. Unfortunately, share price can decline for a multitude of reasons other than poor performance. Shareholders may feel that management does not deserve such a bailout, but denying a re-pricing may increase the loss of top talent or drive the company to grant significantly more new options. Shareholders might then be forced to vote on a new option plan because the old plan has been depleted.

With shareholders voting on a re-pricing, the board is effectively taken out of the decision making process. It might also affect the size and frequency of stock option grants moving forward. Furthermore, compensation committees may be forced to make executive pay more cash laden.  Coupled with another proposal by the NYSE that would require the expensing of stock options, stock incentives may lose their appeal as a compensation incentive tool.

 
Keith Kefgen
President 

Doug Rosen
Vice President

HVS Executive Search
372 Willis Avenue
Mineola, NY  11501
516-248-8828 Ext. 220
516-742-1905
 

 mail this page to an associate