The Advisors' Blog

– Fred Cook, Frederic W. Cook & Co.

Those of you who have concerns about the continued value and effectiveness of stock options as an employee incentive device may be interested in an alternative by reading an article written by a colleague, Kathryn Neel, and me in the May-June issue of WorldatWork’s Workspan. It describes a new equity device, which we call Market Stock Units, or “MSUs” for short. It is a market-leveraged RSU grant that has the following characteristics:

– More market leverage than RSUs; less than options
– Symmetrical market leverage, not asymmetrical like options
– Uses average period market pricing for measurement purposes, unlike single-day pricing with options
– Avoids the alluring but risky feature of options that allows employees to cash in at will after vesting
– Is performance based without requiring goal setting
– Eliminates situation that leads to pressure to reprice options when they go underwater
– Includes dividend equivalents, hence aligning to total shareholder return, unlike options which align to stock price growth only

We want to alert compensation advisors to MSUs in case you are asked about them by clients. And we want to engage those of you with a technical interest so that you can ferret out the accounting 162(m) and 409A implications of MSUs in advance if you wish.

Schumer’s “Shareholder Bill of Rights”: Why, What, When and If

– Broc Romanek, CompensationStandards.com

Yesterday, Senator Charles Schumer – along with Senator Maria Cantwell – finally introduced the “Shareholder Bill of Rights Act of 2009” (this is the final proposed bill). Here is my ten cents on your burning questions:

1. Why? – Typically, it would be expected that this type of legislation would originate in Rep. Barney Frank’s House Financial Services Committee. So why did Senator Schumer begin frontrunning his own bill a few weeks ago. The likely answer is that influential parties wanted governance reform as part of the discussion over Obama’s “First 100 Days” to keep these issues in the spotlight. And Frank was too busy with financial regulatory reform to drum up something as a placeholder.

2. What? – As noted in this blog before, the bill is a virtual “wish list” for investors interested in reform (eg. CII’s press release and Nell Minow’s observations in “The Corporate Library Blog”) as it tackles every hot governance there is today (with the notable exception of CEO succession planning).

3. When? – The big question: “What are the odds of this bill getting passed?” I think the odds are fairly slim that this bill becomes law because it includes too many items that potentially contravene state law and open it up to a Constitutional challenge. However, if another big scandal suddenly surfaces, Congress could push this through unexpectedly (just as WorldCom’s implosion pushed Congress to adopt Sarbanes-Oxley).

The fact that only one other Senator placed her name on this bill is a “tell” that there might not be a lot of momentum for it. My guess is that Sen. Schumer wanted to make a mark within the first 100 days of the Administration – and that he wanted this bill to influence what Rep. Frank produces later in the year as well as influence the financial regulatory reform that is being crafted now. In the end, I think the chances of certain provisions of this bill becoming law by the end of the year is fairly high, including say-on-pay and shareholder access – just not as part of this bill.

4. If? – What if this bill gets passed? Wow…

Looks like the parameters of today’s proxy access proposal have been made available to the mainstream media since this NY Times’ article states: “The proposal would permit large shareholders — typically institutional investors like pension funds or hedge funds — or alliances of shareholders to nominate as many as one-quarter of the directors. For the 700 largest public companies, the proposal would require approval by 1 percent of the shareholders for a dissident slate to be nominated. For smaller companies, it would be either 3 percent or 5 percent, depending on the size of the business.