This is a puzzle. But before the puzzle, some general background on executive compensation, at public companies (I am, of course, admittedly quite-guilty of greatly oversimplifying, below):
On the one hand, stock-options are thought to motivate CEOs to drive the stock price up -- and more options should motivate them more -- perhaps a good thing for Schering-Plough's shareholders [except in cases where the amount is so large that it creates a temptation to "shade the truth", in order to increase the stock price]. It is also true that if the stock price does not rise, these options do expire worthless -- another good thing, from the shareholders' perspective, because then the-below described expenses are reversed back out, and returned to the Company's coffers, flowing through as earnings per share, in some single future period.
On the other hand, the fair value of these stock options must, under the applicable accounting rules [as adopted by Schering-Plough -- Schering-Plough adopted SFAS 123R effective January 1, 2006 (see page 75 of that link)], be expensed by Schering-Plough (as a non-cash reduction of 2008 reported GAAP earnings), so significantly larger numbers of stock-options are generally a bad thing, from the perspective of a short-term shareholder in Schering-Plough -- because they take away from current-period earnings power (especially where the numbers are so large as to not provide any meaningful additional motivation). Hmmmmm. . . . "are we there yet?"
It is in the name of advancing science, after all. . . .
Now, the puzzle -- a puzzle you should probably decipher, and decide about, for yourself. But allow me to help you -- just a little bit, here:
Question: Is this grant appropriate?
First, Mr. Hassan already owned 828,000 shares of Schering-Plough Common Stock, outright, as of April 29, 2008 (or $15.7 million, of value, as of yesterday's NYSE close). So, if this one grant is fully-exercised upon vesting, won't it, alone, essentially double his shareholdings? Yep -- it will. [And yet, he has bunches of other grants-in-waiting, here. See below.]
Is that appropriate, given that only 20 percent of the options are subject to 2008 performance conditions? Said another way, should 80 percent of them, or 668,800 additional shares be available to him, at $18.85 per share, so long as he doesn't get fired? [As calculated below, that 80 percent has an unvested fair value today of $7,768,112. Wow.]
Note these May 2008 stock options are in addition to the 1,165,580 shares that have not yet vested, disclosed on page 40 of the Schering Plough proxy. Another about ~1 million shares are presently in the process of vesting, in staggered one-third-per-year increments, in favor of Mr. Hassan, as also disclosed on that page of the proxy. This "in process" vesting schedule amounts to a present fair value
of $31,051,051. And that amount is separate from, and in addition to, the $30.32 million of cash he made last year, on page 37 of the proxy [or, click the honey-bear, at right, for details]. Is that appropriate?If, for very rough-estimation purposes, we were to similarly value his most-recent May 2008 option grant of 836,000 shares, in the way the 2007 proxy has valued some of his earlier, as yet unvested, stock option grants, we would learn that this latest grant has an unvested fair value (at date of grant) of a total of something like $9,129,621. Of that amount, $1,391,510 is the value that is subject to 2008 performance goals -- it may be lost, if he doesn't perform. The balance, or about $7,768,112, is not subject to any performance based measures, at all -- all he has to do is keep his seat for three years [he actually gets one third of the total, on each of the anniversary dates, May 1 of each of the next three years -- so it is actually even sooner, for a good chunk of these amounts].
This grant, like all those to Schering executives in the recent past, is also not set at an exercise price above today's market price. Thus, Mr. Hassan gets the full-benefit of this (supposedly) "artificially-low" price if -- IF the price is, in fact, artificially-low -- as Mr. Hassan says it is. Now, is THAT appropriate1?
Note that -- importantly -- if a takeover occurs, due in part, to these ENHANCE travails, all of these share-options, performance shares, and long-term share units immediately vest (some $70 million for Mr. Hassan, alone! -- see page 47 of the proxy, as updated for recent grants) -- and Mr. Hassan keeps 'em all? Is that appropriate? Is that fair? You decide.
Finally, consider that similar, proportionately-sized amounts of all these various items have been granted to all of the top six at Schering-Plough -- and that most of these same plans apply to all of the higher officers at Schering. So, is that appropriate, given what we have learned?
[Maybe this isn't such a puzzle, after all. Heh.]
~~~~~~~~~~~~~~~~~~~~~~~~
[Note 1: At many larger public companies,
especially in times of greatly decreasing stock prices, stock options are granted to senior executives only at exercise-prices of 110 percent, or 120 percent, of the then- current stock market price per share. In this way, senior management won't simply, and unduly, benefit if all the bath-water in the tub rises, bringing all the tiny ships floating there, up with it, evenly. No, unless such an executive, through excellent performance, is able to make the stock rise BEYOND the 110- or 120-percent of current market price level, those options would expire, worthless -- just as though the stock had not risen, at all. Now, if Mr. Hassan's rhetoric is to be believed -- that the low stock price is simply the result of "unwarranted confusion" in the press, and marketplace -- why on Earth should he be able to take extreme advantage of that fact -- given that, even if we accept his view, here, it was he who directly caused that "confusion" -- changing endpoints, then un-changing them, etc., in the very first place? Why? Mr. Becherer (Schering-Plough's Compensation Committee Chairman, imaged at right), are you getting this?]
No comments:
Post a Comment