Walkaways/Wealth Accumulation Analysis

  1. Sample Walkaway/Wealth Accumulation Tables and Charts
  2. What is the Accumulated Gains and Carried Interest Table?
  3. Memos
  4. "Severance Arrangements" Practice Area
  1. Sample Walkaway/Wealth Accumulation Tables and Charts
  2. What is the Accumulated Gains and Carried Interest Table?
  3. As discussed in the September-October 2005 issue of The Corporate Counsel, the third essential tool for every compensation committee is the "Accumulated Gains & Carried Interest Table." As Fred Cook so ably recounted in his speech, stock options were not originally intended to be part of current compensation, but rather an ownership incentive. Over time, executives would accumulate a "carried interest" that would motivate them to increase the value of the company over the long term. Unfortunately, because so many consulting firms included one-time mega grants in their surveys and smoothed them out to look like annual grants, over time the numbers became so inflated that today's average annual grant is higher than what used to be a huge one-time mega grant. (See the chart prepared by one of our Task Force members that dramatically shows that the median annual CEO grant is now 2.2 times larger than a one-time mega grant in 1988.) To quote from Fred's talk, "it is my belief that currently high stock option grant values for executives have gone beyond any rational motivational value and are sustained only by compensation surveys."

    Because so many CEOs now have accumulated so much equity, the motivational value of additional, incremental grants has been lost for those CEOs. Indeed, there is the temptation to cash out and take the money and run (a perverse, reverse incentive). Again to quote from Fred Cook, "What can be the possible purpose served in granting a CEO who already has an equity carried interest of 150-200 times salary, another option whose ‘face value' is 20 times salary? The CEO is likely to be already so motivated by stock price performance that new grants add no incremental motivational value. They only add cost. It is only done because the surveys say that, without the new grant, the CEO's total compensation will not be competitive. No survey, to my knowledge, considers what executives have already received in options."

    An Accumulated Gains & Carried Interest Table enables a compensation committee to see in one place the total value of all the options and other equity delivered to the executive to date. Too often, directors do not have that information in front of them when they consider making new grants (or when reviewing other aspects of the CEO's compensation). As Fred Cook has pointed out, setting as a target a net future gain from equity grants of 6 to 15 times current salary "should be sufficient to optimize a leader's alignment with shareholders and motivation for a share price appreciation." We have posted an example of a table that illustrates how to set forth both the cumulative realized and unrealized gains for top executives at a company, as well as a chart to demonstrate what the values of equity holdings will be as the stock price rises.

    What Can a Responsible Compensation Committee Do Here?

    After a compensation committee has an accumulated gains table in front of it and sees how much wealth has already been delivered, there are two obvious courses that responsible boards and CEOs should take.

    Turn Off the Hose (It Has Flooded the Field and is Damaging Roots). First is to recognize that the purpose of the equity grants has been met. This means that boards must bite the bullet and put on the table that the CEO has received so much already that there is no reason for more. (For this to happen, some responsible CEOs are going to need to speak out—as some CEOs already have—by, e.g., asking their compensation committees to put their grants back in the pool for other employees. See these and other important examples set forth in the new "CEOs That Have Set an Example" section on CompensationStandards.com.)

    This also carries over to retirement and severance arrangements. Boards must recognize that the purpose of their option grants was to provide (a) incentive for the long term and (b) a healthy nest egg should all things work out. At those companies where the amounts from accumulated equity grants have now exceeded what were beyond the wildest dreams just a decade ago, boards must consider what is now already out there for the executive's retirement years and cut back on (and, in some cases, eliminate) the retirement and severance provisions that were intended to provide for the future. Now that some executives have amassed several lifetimes' worth of wealth as a result of past grants, it is time for responsible boards and CEOs to act here to restore (both internally and externally) trust and loyalty in the company's leadership.

  4. Memos
  5. Severance Arrangements Practice Area