The Advisors' Blog

– Paul Hodgson, Senior Research Associate of The Corporate Library

While I was writing a new issue of “Proxy Season Foresight” on TARP and its funding recipients last week, SunTrust Banks, the recipient of $4,850,000,000 of TARP funds, filed its proxy statement. For 2008, the CEO James Wells earned just over $1.25 million with no bonus, no vesting of stock and no option profits. At the beginning of the year he was awarded equity with a grant date value of more than $6.8 million which was worth a little over $560,000 on February 17, with the stock option component of this grant worth nothing at all.

While this is somewhat reflective of the collapse in the company’s stock price, the proxy also discloses that the compensation committee has granted – subject to stockholder approval of the plan – 25,075 shares of restricted stock, 25,075 shares of performance stock based on relative Total Shareholder Return, and 852,941 stock options with an exercise price of $9.06.

This is in addition to the 50,000 shares each of restricted stock and performance stock, and 250,000 stock options already awarded to Mr. Wells on February 10th, again at an exercise price of $9.06. These awards pre-date the ARRA regulations by just a single day and are of even greater concern because typical stock option grants to the CEO in the past ranged between 40,000 and 250,000.

Mr. Wells had 953,000 outstanding, underwater stock options (not so much underwater as drowning) at the end of 2008. The combined 2009 awards would appear to be a repricing in everything but name. Using the company’s own calculations, the “grant date value” of the combined awards is less than half the grant date value of the 2008 awards, but this is not the issue. The issue is that the upside potential of these awards is huge. The highest exercise price for outstanding stock options for Mr. Wells is $85.06. If the stock price were to return to that level, the options would be worth over $89 million, with the restricted stock worth $12.8 million.

While such a rebound may seem unlikely, in a period of 10 years it is not impossible. Even if the stock price were to rise to the lowest exercise price of Mr. Wells’ outstanding options – $50.50 – the options would be worth over $45 million and the restricted stock $7.6 million. While shareholders would clearly benefit from such a return, for most it merely represents restoration of value rather than a gain and such compensation is clearly excessive for a CEO who oversaw the decline in value.

None of the expense associated with any of these awards is deductible under the amended Section 162(m) of the Internal Revenue Code. It is even likely that a Treasury review of these prior payments would find that they are “inconsistent with the purposes of… [ARRA].”