March 1, 2023
Option Repricings: Glass Lewis Commentary
This one slipped by me! Last week, Glass Lewis published commentary that suggests the proxy advisor will be on the lookout for option repricing practices as part of say-on-pay and other votes this season. Here’s an excerpt:
The spring of 2022 already saw the start of a decline from the market’s 2021 peaks, due to a convergence of macroeconomic shocks and rising inflation and interest rates. However, last year’s shareholder voting results (and voting agenda) were on a lag — due to the retrospective nature of typical “say-on-pay” votes, in most cases shareholders were expressing an opinion on pay for surging 2021 performance.
In 2023, investors will generally be looking back on the first protracted downturn in a decade. In some cases, repricing may be one of the factors they will need to consider – whether voting directly on a repricing proposal, or in considering say on pay votes (or even the re-election of specific directors) where boards with the requisite authority unilaterally repriced or exchanged options in 2022.
On page 65 of its voting policies, Glass Lewis explains why it is generally opposed to option repricings – regardless of how they are accomplished. However, they may be more forgiving when macroeconomic conditions cause dramatic declines in equity value, versus company-specific issues. Glass Lewis may support a repricing or option exchange program if:
• Officers and board members cannot participate in the program; and
• The exchange is value-neutral or value-creative to shareholders using very conservative assumptions.
In its evaluation of the program, the proxy advisor also considers these features:
• The vesting requirements on exchanged or repriced options are extended beyond one year;
• Shares reserved for options that are reacquired in an option exchange will permanently retire (i.e., will not be available for future grants) so as to prevent additional shareholder dilution in the future; and
• Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.
– Liz Dunshee