New Research Looks at Optimal Option Exercises

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A new research report, Executive Decisions, Making the Most of Compensation Plans To Build and Protect Personal Wealth,  from AllianceBernstein addresses equity compensation from the executive’s perspective.

One of the more interesting things detailed in the report is the finding that the optimal exercise time for stock options is when their time value is in the range of 10%-30% of total value. This could result in option exercises that occur well before the end of the option term. Many advisors had previously advised that executives should hold onto options until they are just about to expire in order to maximize the potential return from the stock options.

Additionally, the report compiles AllianceBernstein’s key findings, which include:

  • How to evaluate and compare different types of stock-based compensation
  • How to integrate stock-based compensation into lifetime wealth planning, using a “core and excess capital” framework
  • A method for determining how much single-stock risk is appropriate in your portfolio, and, if you need to diversify, a framework for choosing which holdings to divest and which to keep
  • Strategies for integrating single stock with estate and charitable planning
  • Determining when and how to use non-qualified deferred compensation plans
  • Best uses of 10b5-1 plans
  • How to make well-informed decisions regarding Net Unrealized Appreciation (NUA) elections and 83-b elections

The report can be downloaded from:

ISS Publishes Preliminary 2011 Postseason Report

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On August 1, 2011, ISS published its preliminary report of the 2011 proxy season.  The report is available for download here (free registration required):

Key findings of the report include:

  • Average support for Say on Pay votes was 91.2%
  • Say on pay votes failed at 37 Russell 3000 companies (1.6% of total companies reporting vote results)
  • The 168 companies that received greater than 30% opposition on their say on pay votes in 2011 will receive greater attention in 2012
  • Shareholder proposals seeking board declassification averaged support of 73.5%, and won majority supports at 22 of 23 large-cap companies
  • A significant decline in shareholder opposition to directors; as of June 30, only 43 directors at Russell 3000 companies failed to win majority support compared to 87 for the same time period in 2010

The FDIC’s Clawback Regulations

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On July 6, 2011, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) adopted final regulations[1] to implement Section 210(s) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which authorizes financial regulatory authorities to recoup compensation when a current or former senior executive or director is “substantially responsible” for the failed condition of a covered financial company.

This summary looks at some of the common questions about these rules:
While these regulations apply only to financial institutions covered by the FDIC regulations, other public companies would do well to keep an eye on these rules. Why? It is my opinion that lawmakers have had an easier time pushing reforms for financial institutions given the current environment. However, once implemented, these new rules have influenced the regulations applicable to public companies more broadly, as was the case with the implementation of the Say on Pay vote requirement which was first introduced at financial institutions that received assistance under TARP. So, it is possible that some of the concepts applicable to clawbacks for financial institutions covered by the FDIC regulation will end up being applied to public companies more broadly.