- The Washington Times - Friday, March 13, 2009

NEW YORK (AP) - Companies should stop touting how they pay their employees and executives based on performance if they’re going to rewrite the rules when times get tough.

Just look at the companies revamping their compensation plans in ways that increase the chance for holders of stock options to make a big windfall should the market turn around.

Almost 100 companies have made changes or are contemplating them, according to the executive compensation research firm Equilar Inc. Some like Google Inc. are repricing options so that they are now more in line with today’s depressed marketplace, while others such as SunTrust Banks Inc. are doling out massive new grants at lower prices.

Even though corporate performance has faltered, these can be potentially sweet deals for workers _ ones that shareholders will never be offered.

“We don’t get to trade in our stock so why should they?” said Richard Ferlauto, director of pension and benefits policy for the American Federation of State, County and Municipal Employees, a Washington-based labor group representing government workers.

Investors like Ferlauto plan to fight companies taking such action during this spring’s proxy season. As he points out, shareholders have to approve such changes, and many investors this year aren’t likely to turn a blind eye to that fact.

That’s because trillions of dollars in shareholder wealth has evaporated in the last 17 months. Major stock indexes are now worth about half their October 2007 record highs, and shares trade at levels not seen in a decade.

Employees, too, have taken the market’s decline on the chin because stock compensation is a large component of pay at many companies. By giving workers equity, companies argue that serves as a good incentive to perform because the only way to gain is if share prices rise.

Each option is given an “exercise” price when granted, which reflects the employee’s cost for cashing in the option. That price is usually reflects the company’s stock price on the day the option was granted.

The problem today is many options granted in recent years are “underwater” because the exercise price tops the current share price. Some 72 percent of Fortune 500 companies have outstanding options with average exercise prices that are underwater, according to new research from Equilar.

As a result, companies say they have to do something to boost employee morale and retain workers _ something that skeptics like Ferlauto don’t think are as widespread as companies allege given the state of the labor market.

Google announced Tuesday that it had repriced 7.64 million stock options belonging to 15,642 workers outside of the executive ranks. The replacement options were all priced at $308.57, which was Google’s closing stock price at the end of trading March 6. That was well below the original exercise price of $500 a share and higher for more than 6 million options eligible for the exchange program.

Workers who exchanged their shares have seen some upside since Google’s stock now trades around $320 a share. But for shareholders, that’s still a far cry from its peak of $747 a share in November 2007.

Compensation expert Bruce Ellig says shareholders should watch out for plan changes like Google’s, which for the most part just repriced the options at a lower level. A better route, in Ellig’s view, would have been for employees to be given fewer options at the lower price, because of the greater likelihood that they could profit on the newly priced options.

Ellig also says shareholders should be on the lookout for companies doling out huge option grants, which give executives a new batch of options at lower prices while letting them also keep their underwater options. Should prices eventually rebound, they could win twice.

At SunTrust, CEO James Wells had 953,000 outstanding, underwater stock options at the end of 2008. The highest exercise prices on those options ranged from $50.50 a share to as high as $85.06 _ well above the $13 a share where its stock has been trading lately.

On Feb. 10, the company granted Wells 250,000 stock options at an exercise price of $9.06 a share as well as 50,000 shares of restricted stock, which are shares that typically aren’t transferable until certain conditions are met.

Then on March 6 when it released its proxy statement, the Atlanta-based company disclosed that under a new 2009 stock plan, it had granted Wells an additional 852,941 options also at an exercise price of $9.06 a share, as well as 25,075 shares of restricted stock and 25,075 shares of performance-based stock awards. The 2009 stock plan requires shareholder approval.

Such grants are much larger than the range of option grants that the company has made in the past, which have been typically between 40,000 and 250,000, according to Paul Hodgson, senior research associate at The Corporate Library, an independent corporate governance research firm.

SunTrust has raised about $4.85 billion from the U.S. Treasury under the government’s Capital Purchase Program aimed at helping the troubled banking industry.

SunTrust spokesman Barry Koling defended the new stock plan, saying it’s “consistent with our pay for performance philosophy.” He said the methodology used in determining the size of the grant given to Wells was in line with what the company has done in the past and the exercise price was based on the current market trading last month.

But Hodgson said it is hard to overlook the fact that the new option grants more than offset the number of options currently underwater. The upside potential, he said, is “huge” if the stock can gain in the coming years.

SunTrust’s existing shareholders certainly aren’t getting an equal chance at that kind of luck.

___

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

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