June 24, 2009
Fair Value Transfers Increase in 2009
– Michael Reznick, Frederic W. Cook & Co.
To ensure that a company’s long-term incentive program is competitive and cost-effective, we evaluate its fair value transfer (the total pre-tax expense of LTI awards as a percentage of market capitalization at grant). A FVT measurement:
– Quantifies the aggregate pre-tax compensation cost of LTI grants in a given period (the cost of which will likely be spread over multiple years for purposes of determining earnings);
– Normalizes equity compensation values and costs for differences in stock price and resulting market-cap size; and
– Facilitates trade-offs between various LTI vehicles since all types of awards are expressed on an economically equivalent basis.
In this Alert, we recently compared the aggregate fair value transfer data for the first quarter of 2009 to the first quarter of 2008 to provide insight into how companies changed their grant practices to address the sudden market decline. We found that FVT rates increased in 2009 across all industry and size cuts of our 150-company sample. This increase in FVT was not the result of higher absolute equity compensation grant values, but was because companies granted more shares to offset stock price declines. At the median, the dollar-value of equity compensation decreased (-25%), but not as much as the median decline in stock price (-41%).