NEWSWIRE - April 8, 1999
Topic: Options and Executive Compensation
Source: "Hard to Lose," by Christopher Gay, Wall Street
Journal, Thursday, April 8, 1999, page R6.
Synopsis of Articles:
(This article appeared in a special section of the Journal discussing executive pay.) Stock options are a very important component of the compensation package provided to executives at major public corporations. A "plain-vanilla" stock option allows the executive to purchase shares in his or her own company for a fixed price. This allows the executive to benefit handsomely from superior performance in the marketplace and also provides the potential to reduce agency costs that distinguish the manager's interests from those of other shareholders. However, the traditional vanilla stock options are frequently embellished with features that allow the executive even more flexibility in crafting a compensation package. One of the more popular of these features is the reload option. This style of option allows the executive to exercise his or her right to purchase shares at a fixed price and also to retain, or reload, the option component by resetting the exercise price on the new options to the current market price of the firm's stock.
Proponents of this technique say that it keeps executives focused by encouraging them to increase their personal stake in the firm without giving up the potential to increase it more in the future. Without the reload feature, executives may choose to wait until the options are near expiration before exercising. Opponents of the reload option argue that it allows executives to profit from superior short term performance at the expense of the long term. They also raise concerns regarding dilution of share value after several cycles of exercise and reload. Finally, all reload options are not the same, some have more lucrative features such as a reset of the original time to expiration. Ultimately, this method for compensation requires shareholders and compensation committees to assess the tradeoff between reduction of agency costs and the potential dilution of shares held by non-managers.
Questions:
1. What are the primary components of any executive compensation package? Why are stock options an important part of compensation?
2. What are the basic components in a "plain-vanilla" stock option? How do these components relate to the value of the actual shares of stock? How does a reload option differ?
3. What are the costs and benefits associated with reload options?
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