Equilar's custom research services provide fact-based analyses designed to quickly and accurately inform compensation strategy. Clients benefit from Equilar's proprietary research tools, expertise, and access to the most comprehensive and current set of executive and director compensation data available.
Featured Analysis: Defining Excessive Risk
Although there is no shortage of coverage on the need to limit the propensity of executive compensation programs to incentivize excessive risk taking, there has been little public discussion on how this might be achieved. Indeed, one might be hard pressed to even find a definition of excessive risk. With this in mind, our analysts scanned proxy filings to find interesting examples of companies that recently made changes to their compensation programs as result of analyzing the intersection between risk and compensation.
Our review of recent proxies identified several key questions that companies have considered as they examine issues of excessive risk. These questions include:
Are we over using stock options?
Do our incentive plans promote short-term thinking?
Do we have the right mix between short and long-term goals?
Do large maximum bonus opportunities promote risk taking?
Are we using overly aggressive performance goals?
Do our bonus plans focus on too narrow a set of goals?
Do we have the right mix between fixed and variable compensation?
To provide further insight into these issues, the following disclosure examples further embellish some of the questions listed above:
Double-Take Software (DEF 14A filed on 4/3/2009) — "The compensation committee also considered that options alone, particularly when most outstanding options are "out of the money," may potentially provide executives and employees with incentives to take excessive risks for the purpose of increasing stock prices so that options would have value, and that those risks may not in our best long-term interests. For 2009, the compensation committee determined that employees outside of the executive team would only receive restricted stock units, but that our executive team, including our NEOs, would receive a mix of stock options and restricted stock units. The compensation committee determined that providing NEOs with a mix of options and restricted stock awards would provide continued retention benefits and an appropriate balance of interests so that NEOs would continue to remain focused on building stockholder value over the long-term."
Interactive Data Corp (DEF 14A filed on 4/9/2009) — "The compensation committee believes that these four performance measures are consistent with the overall goals and long-term strategic direction that the board of directors has set for our company and are closely related to or reflective of financial performance, operational improvements, growth and return to stockholders. Further, the combination of these performance measures limits the ability of an executive officer to be rewarded for taking excessive risk that may harm our company because performance under all of the measures is required to maximize the payout."
Rotech Healthcare (DEF 14A filed on 4/28/2009) — "Each financial performance measure must be achieved in order for the bonus to be paid with respect to that measure. If the Company does not meet the threshold level for a particular performance measure, no bonus is payable with respect to that performance measure. The performance bonuses have been structured to provide a cap on the maximum award that may be achieved in order to avoid excessive risk taking by our named executive officers that would potentially threaten the economic viability of the Company. The performance criteria are designed to focus on performance metrics that deliver value to our stockholders and that focus on the health of our business. Further, all of our named executive officers own shares of the Company's common stock which aligns their interests with those of our other stockholders while mitigating the chance of excessive risk-taking."
To learn more about how Equilar can supplement your research on excessive risk, contact an analyst or examine the examples and project template shown above.
Thinking about an Option Exchange?
Crafting an effective yet shareholder-friendly option exchange program is an extremely time-intensive task that involves gathering legal, tax, valuation, and compensation advice. With so many issues to consider, it is critical to arrive at the decision-making table ready to take action. To stay on top of this dynamic issue, tap into Equilar's market-leading Option Exchange Tracker database. Featuring weekly updates and over 70 examples from 2008, the exchange tracker is your best source for market data on this complex topic.
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To obtain more information on these topics, write to analysts@equilar.com. All disclosure examples listed above are reformatted to fit this page.
