More lumps of coal…
Yesterday, we poked at several companies for dumping stuff at the SEC late on a Friday before a holiday weekend. Well, as it turns out the SEC was doing a bit of its own dumping by issuing this release that changes the way stock options are counted. Though unlike those late Friday filings, the release didn’t have a time-stamp, it will have a significant impact on the "total compensation" figure listed in the summary compensation chart in the upcoming proxy season.
If this seems like a bit of inside baseball, it’s not. As Floyd Norris reported this morning, Ann Yerger, executive director of the Council of Institutional Investors, described this as "a holiday present to Corporate America". One of the first to catch this change was the eagle-eyed Broc Romanek, whose CorporateCounsel.net Blog is always one of my must-reads. Broc described the release as being issued with a "hint of Festivus" to it. Already, several law firms have issued alerts to their clients (see here for an example via Securities Mosaic) and more associates are probably at work grinding out additional memos as I type.
Perhaps the change shouldn’t be so surprising. After all, the SEC already scrapped the so-called Katie Couric rule back in July. And perhaps investors could have expected this sort of thing from Chris Cox’ SEC. After all, back in 1994 when he was still a Congressman, Cox was one of the leading voices opposed to the proper expensing of stock options. But investors deserve better than this, especially when a significant rule is changed late on a Friday night before a holiday. For a funny take on the SEC’s new logo, be sure to check out Greg Newton’s stylings here.
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December 27th, 2006 at 1:56 pm
The silver lining in this approach is congruence with accrual: under the alternative approach, if a new CEO receives a megagrant in FY 2005 then you might miss the entire unvested value of that grant in the FY 2006 proxy. The prior approach implies lumpy disclosures which means you need to analyze several years of grant data. As a consultant in my prior life, we used to manually amortize the grants (not unlike amortization over the service period) in order to get a more accurate representation of annualized comp value…
My bigger beef with the rule rule is (a) you really can’t total the different comp elements into one summary number. It’s inevitably subjective to determine a single present value, risk adjusted number – you are adding hard (salary) cash to performance-based cash to contingent derivative instruments (options). When i look at the comp package, i want to decompose the elements; and (b, which follows from FAS 123R) these are still essentially fixed expenses (i.e., grant date fair value) for option where the true cost is unlikely to equal the accounting expense. If you are doing a cash flow analysis, these remain current period expenses that are allocations for future expected cash flows…as such, you don’t necessarily want to depend on the expense number any more than you’d depend on depreciation.
All I am saying is, politics aside, the SEC following FAS 123 is consistent with GAAP framework, you’ve got to give them that.