Thursday, May 8, 2008

One more time, here -- just WHY was the last grant of stock options (May 1, 2008) at $18.85?


I kinda' buried the lede on this idea in this prior post, so let take another run at it, now. . . .

Pharmalot, once again(!) is all-over this topic, this morning -- and more illuminatingly so -- to be certain.

So, based on a renewed back-and-forth between us, now -- once again -- why, exactly, if the current view of Schering-Plough's CEO (and Board of Directors) is that $18.85 is an artificially-low price for Schering-Plough common stock1 -- why would grants to senior management be made at the very-same "bargain-basement" exercise-price (836,000 options for Mr. Hassan, alone)?

Why? Why wouldn't the Compensation Committee, under the supposedly-prudent pen of Hans Becherer (above, right), and upon the putatively-restrained counsel of Ira Kay (below, left) -- if the above is also reflective of their views on the current stock price -- grant the options at, say $22.60, or the "artificially-low $18.85" price, plus 20 percent? That would avoid a largely unearned windfall to the management team. [The 2006 Stock Incentive Plan documents certainly permit it: ". . .[t]he Exercise Price cannot, however, be less than the Fair Market Value of a common share on the date of grant. . . ." and may be in excess of it.] I mean after-all, didn't the team have a hand in changing end-points, then unchanging them -- and thus, in effect, contributing to this fall in price?

What is the responsible, sensible executive compensation philosophy that supports such a "nadir-touching" grant?

On the other hand, my suggested practice -- the granting of above-market price options -- is not uncommon, when a stock has been unfairly beaten-down. Shoot, such an option grant is positively old-school inside the Fortune 500 (all circa 2002, or earlier, models), actually -- and (an added benefit!) it would reduce the SFAS 123R (non-cash) compensation expense otherwise recognized by Schering-Plough in Q2 2008, thus effectively increasing net income by a like amount. That would be a double-double, for the shareholders.

Instead, the shareholders have seen Schering absorb increased compensation expense accruals in Q2, and if the stock is in fact undervalued -- as Mr. Hassan has repeatedly insisted -- he (and the rest of senior management) were handed a bucket of "gimme" stock options -- offering them an undue windfall.

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[FOOTNOTE 1: To be clear, I do not share the view that $18.85 is "artificially low", here. I think we are finally seeing what the price should have been for most of 2007, and part of 2006. And I do think it untoward to reward management with stock options which are rendered all the more potentially-profitable, to them, personally, in return for their own their mismanagement and miscues.]

2 comments:

DeWaarheid said...

Wouldn't it have been more reasonable to make this grant the the price the employees stock options were granted at in mid-January, round about $22.50? It is a slap in the face to the rank and file that will be charged with bringing the share price back to enrich Fast Freddy to the tune of roughly $3M before we have the opportunity to make a plug nickel. Ethics? Where? Freddy Boy, please, where have you hidden the ethics?

condor said...

DING! Ring the bell, we have a winner! -- Exactly correct!

Thanks for the comment Dewaarheid!

Do stop back, from time ot time, and look in on us.