Heads, I win, Tails, I win Again
By Keith Kefgen, Jul 14, 2003
It is no secret that the stock market has been unkind to investor and company executives alike. Many of the stock option packages granted to executives over the past five years are still significantly under water (where the option price is higher tha
It is no secret that the stock market has been unkind to investor and company executives alike. Many of the stock option packages granted to executives over the past five years are still significantly under water (where the option price is higher than today’s market price). Sounds fair. As investors felt pain so did company executives. That is what board of directors preached, as they “aligned the interests of management and shareholders”.
But to combat the stock market malaise, many companies are now turning to restricted stock awards as a source of long-term compensation. Why? Restricted stock allows an executive to lock in value from day one, without performance requirements. In addition, executives earn dividend income even before they take ownership of the shares. Typically, the only restriction is the passing of time. Shareholders have long criticized restricted stock as a “free ride” at their expense. It is clear why the sudden rise in restricted stock awards have drawn the attention of shareholder activists. Management wins no matter what happens to the stock price.
With proxy season in full bloom it is clear that more companies are turning to restricted stock as part of executive pay. In fact, more than forty-two percent of all the public hospitality companies offered restricted stock to their CEOs last year, an increase of nearly eight percent. Interestingly, that did not curtail the granting of stock options as well. Stock options were granted at nearly the same rate of forty-six percent.
So how can the playing field be leveled? We recommend that any restricted stock award have dual restrictions, the passing of time and performance. Performance-based restricted stock is defined as “a plan where the shares are contingent on the achievement of either internal or external performance measures or an increase in the company’s stock price”. There could also be a provision that would accelerate the vesting of the grant based on achieving superior performance targets. Another method that can be used is creating stock purchase plan in tandem with restricted stock awards. This type of plan requires executives to “come out of their pocket” and purchase shares in the company just as investors would. Below is a look at how the various stock plans create value to the executive. As an investor which one would you prefer?
Stock Price Increase of 5% Per Year To Take Ownership
**Reprinted with the permission of Hotel Business**