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3rd Quarter 2012
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or some companies, stock options have
been the primary equity compensation
vehicle in long-term incentive plans.
The financial downturn and subsequent
economic recession of 2008 have pummeled
stock prices, and as a result, stock options have
gone significantly underwater, wiping away
much of their value.
This drop in equity compensation value
reduces future expectations and causes major
retention and motivation dilemmas for
executives and senior management. most
companies grant equity compensation either
on a value basis, determined through a
binomial; the black-scholes option valuation
model; or on market value. The lower the
stock price, the more shares it takes to reward
individuals at levels similar to previous years,
thus increasing dilution levels.
as a result, shareholders are pressuring
management to rein in dilution in order to
maximize their returns. further, companies
may also be caught off guard with a shortage
of shares available for grant in their long-term
incentive plans and must ask their shareholders
to approve amendments to increase the number
of shares available for grant.
as the economy begins to recover from the
recession, a long-term equity compensation
strategy is critical in attracting and retaining
talented leaders. Companies must now cope
with the challenge of how to recruit and
retain key talent, and be in a position to drive
innovation and maintain a competitive edge,
while rewarding employees for success in a
more predictable form of income, all while
maximizing shareholder returns.
The challenge is even greater, given the
devaluation of stock options and high levels
of dilution. Companies are now re-examining
their long-term equity compensation strate-
gies, taking into account their specific needs
and characteristics and what approach will best
serve the company, its shareholders, its executives
and senior management. specifically:
For the company.
how to achieve business
and human capital objectives, while minimizing
the economic costs and accounting impact?
For the shareholders.
how to create the right
alignment of their interests and executive inter-
ests, while minimizing dilution and increasing
the net return to shareholders?
For the executives and senior management.
how to provide perceived value that is
Considering
The (Stock) Options
Steven Heumann
Vice President of SEC Reporting and SOX Compliance, ORBCOMM, Inc.
CFO CFO
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