![\"\"](\"http:\/\/openclipart.org\/people\/cybergedeon\/cybergedeon_thinking_forbidden.svg\" "\\"forbidden\\"")
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A pair of recent studies<\/a> show that about a quarter of the compensation earned by CEOs is now paid as restricted stock. <\/span>Furthermore, one of the studies<\/a> notes that an increasing portion of that stock is being granted based on performance rather than automatically vested over time, and that stock price<\/em> is one of the most common performance measures used to determine the number of shares granted. <\/span>In other words, if the stock price goes up (or goes higher than some benchmark), then the executive would benefit from both the larger number of shares granted and the higher price per share. <\/span>If the stock price goes down, the executive will get fewer shares at a lower price, or maybe no shares at all.\u00a0 The governance mavens are praising this trend.<\/p>\n There is a lot to like about ‘performance share’ plans, and stock-based stock grants provide an exceptional level of motivation and accountability for total shareholder returns over a wide spectrum of performance over time.\u00a0 So, I’m wondering:\u00a0 Why is this kind of plan legal? Consider how a \u2018performance share\u2019 plan works.\u00a0 Let\u2019s say that its designed such that: <\/span>if the stock price falls 15 percent over three years, the plan would yield no shares to the executive; if the stock price grows 20 percent over that period, then the plan would provide a \u2018target\u2019 number of 30,000 shares; if the stock price doubles, the plan would provide 60,000 shares; and performance between these points, i.e., negative 15 percent and 100 percent, yields a proportionate number of shares, i.e., between zero and 60,000 shares. <\/span> <\/span>This plan provides a strong pay-for-performance profile.<\/p>\n Now, let\u2019s say that instead of the \u2018performance share\u2019 program described above, we award the executive 100,000 shares, and lend them cash for 85 percent value of those shares, with the stipulation that they repay the loan from the proceeds of the stock at the end of the three-year period.\u00a0 Let’s add that if the value of the shares is less than the loan, the repayment shortfall is forgiven. <\/span>This \u2018leveraged share\u2019 program creates a mathematically identical pay-for-performance result as the \u2018performance shares\u2019 plan. <\/span> Well, there is one difference between these types of plans, and it’s kind of big:\u00a0 While the \u2018performance share\u2019 program is praised by the governance mavens, the \u2018leveraged share\u2019 plan is condemned by them, and is in fact illegal<\/em><\/a>.<\/p>\n OK, let\u2019s forget about the \u2018leveraged share\u2019 program, and instead offer 100,000 stock options granted 15 percent in-the-money<\/em>. <\/span>That is, the options would lose their value only if the stock price falls by 15 percent. <\/span>Otherwise, as the stock price goes up, the executive makes more money. <\/span>This \u2018in-the-money option\u2019 program is also mathematically identical to the \u2018performance share plan,\u2019 with correspondingly identical incentives and cost. <\/span>The difference is that the \u2018performance share\u2019 plan is praised by the governance mavens, while grants of \u2018in-the-money options\u2019 are condemned by them, and essentially illegal<\/em><\/a> (via punitive taxes) due to their disdain.<\/p>\n So, \u2018performance shares\u2019 are surging in use due to the applause of the governance mavens, while identical alternatives have been banished by those same mavens. <\/span>I\u2019m curious if this rule-based distinction between these three equity grant mechanisms strikes anyone else in the governance community as odd. <\/span>Does anyone else see this as evidence of Geert Hofstade’s theory<\/a> that risk-averse cultures have an emotional need for rules, even when they are arbitrary and ineffective?<\/p>\n","protected":false},"excerpt":{"rendered":" A pair of recent studies show that about a quarter of the compensation earned by CEOs is now paid as restricted stock. Furthermore, one of the studies notes that an increasing portion of that stock is being granted based on performance rather than automatically vested over time, and that stock price is one of the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,20],"tags":[],"class_list":["post-3202","post","type-post","status-publish","format-standard","hentry","category-executive-compensation","category-irrationality"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3202","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=3202"}],"version-history":[{"count":7,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3202\/revisions"}],"predecessor-version":[{"id":3205,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3202\/revisions\/3205"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=3202"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=3202"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=3202"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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