The stock-options backdating scandal has prompted
dozens of companies to fire top executives, take charges totaling
billions of dollars against earnings and tell shareholders that they
misrepresented how options were awarded.
Now, a number of companies are taking one more step:
making special payments to executives or directors who received
backdated options. Companies say the payments will compensate executives
and directors who weren't involved in options wrongdoing, yet saw their
potential profit reduced when their options were adjusted to reflect the
actual dates they were issued. Several of the companies describe the
payments as bonuses in regulatory filings.
But the practice has given critics more fodder for
attacks on ballooning executive pay levels and special perks.
Federal authorities are scrutinizing the options
practices of nearly 140 companies, and scores more companies are
conducting internal reviews. A stock option typically gives its holder
the right to buy a set amount of stock at some future time, at its price
at the time the option was granted. The idea is to give recipients an
incentive to help boost the company's share price. But a number of
companies and executives changed the date on their grants to make them
appear they had been granted at a time when the price was even lower,
making them worth more to their holders.
Many companies that have acknowledged options-dating
troubles are adopting the position that misdated options -- particularly
those granted to top executives -- should be fixed without taking more
out of shareholders' pockets. For instance, Sehat Sutardja, chief
executive officer of microchip maker Marvell Technology Group
Ltd., recently reimbursed his employer $5,355,001 for wrongly dated
stock options he already had cashed in. He also agreed to forgo another
$5.4 million from the value of options he still holds.
But some companies are taking another course. At
KLA-Tencor Corp., for instance, Chief Executive Richard Wallace is
in line for an options-related "special cash bonus," according to a
securities filing.
The semiconductor-equipment maker is adjusting some of
Mr. Wallace's options to carry the share prices that correspond to the
dates the options were awarded, rather than the wrong ones achieved
through backdating. The adjustments shaved $368,618.36 from the value of
those grants. According to the filing, Mr. Wallace will have that amount
paid to him in cash.
In effect, Mr. Wallace may come out ahead now that
backdating has been exposed, since he is swapping unrealized, potential
profit -- which could evaporate if KLA-Tencor shares fall -- for cash.
By keeping the repriced options, he retains the chance to profit from
them if shares rise higher.
In most cases, the companies making the payments say
the executives in question aren't the ones responsible for the options
troubles. KLA-Tencor has said in filings that Mr. Wallace, a 19-year
company veteran who became CEO last year, had "no involvement" in the
improper options granting, which it says occurred primarily from July
1997 through June 2002, a period when Mr. Wallace was a lower-level
executive.
KLA-Tencor has said it intends to cancel improper
options held by former CEO Kenneth Schroeder, and it will reprice --
without compensatory payment -- improper options held by Ken Levy, its
former chairman. Mr. Schroeder, a longtime executive who had taken an
advisory role, was fired and Mr. Levy left in the wake of KLA-Tencor
backdating revelations last year.
A KLA-Tencor spokeswoman, Kyra Whitten, says the
bonuses are being paid to Mr. Wallace and two other officials because
the company doesn't want employees not involved with the options trouble
to be "adversely impacted." She said the company hasn't yet decided how
it will treat backdated options held by nonexecutive employees.
With readjusted prices, most of Mr. Wallace's options
are still "in the money" -- meaning their price is below the current
market price. But a portion aren't -- meaning they wouldn't be
profitable if cashed out. KLA-Tencor will pay Mr. Wallace $84,332.69 for
that portion, according to the company's securities filings, meaning Mr.
Wallace will be making money from so-called underwater options that
otherwise wouldn't yield profit for him at all. The payment is due in
January 2008.
The bonuses don't sit well with shareholder activists.
"To do this in the context of the outrage over the practice [of
backdating] is just shocking," says Ann Yerger, the executive director
of the Council of Institutional Investors, who said she was stunned when
informed of the payments. "It is a sign that something remains rotten in
corporate America with regard to executive pay."
Brian Foley, a compensation consultant in White Plains,
N.Y., says, "it seems to me that it [reimbursement] would really stick
in one's craw if it goes to the CEO, CFO, general counsel, or anyone who
was in the know or should have been in the know."
Mr. Foley adds that the cash payments are "awkward,"
since it means people get paid for options they haven't yet -- and might
never -- exercise.
At Affiliated Computer Services Inc., a Dallas
outsourcer that last year ousted two top executives because of extensive
backdating, several of those who remain are in line for special bonuses
to compensate them for the loss of value on their wrongly dated grants.
At the top of the list: Chairman Darwin Deason, who was head of the
company's compensation committee and CEO for much of time when
backdating occurred. Mr. Deason, who founded ACS and holds more than
$400 million of company stock, will get a payment of $650,000, according
to an ACS securities filing.
Michael Buckley, a spokesman for ACS, said Mr. Deason
isn't being treated differently than any other employee.
Another ACS executive, Thomas Burlin, will get just
over $100,000 thanks to the repricing of a misdated option grant that is
presently out-of-the-money. Mr. Burlin's options aren't worth anything
at ACS's current stock price.
Meanwhile, Fossil Inc. has said seven officers
of the clothing-and-accessories maker could be up for a "cash bonus" if
their options were repriced. And microchip maker Broadcom Corp.
said a top sales executive may be up for a "special" payment of $525,870
next January to compensate him for lost option value.
Top executives of Sonus Networks Inc., a
Massachusetts-based telecommunications-equipment maker, also may have a
payday coming. The company has said it likely will reprice wrongly dated
options, though it hasn't yet done so. Sonus says in a filing that upon
repricing, it intends to pay certain executives and directors for any
lost value.
Sonus's chairman and CEO, Hassan Ahmed, has some four
million options covered by the payout agreement -- including one grant
of 640,000 shares that is deeply under water. It now carries a grant
date of April 3, 2001, with an exercise price of $13.875.
The stock was near a sharp low on that date, meaning a
new price from a date even couple of days later would shrink Mr. Ahmed's
potential profit. If the option is repriced to April 5, for example, the
exercise price would change to $17.875 -- and Mr. Ahmed would be in line
for a special payment of $2.6 million for an option that is otherwise
very far from being profitable. (Sonus shares currently trade at $7.20.)
"All this really is is acknowledging a previous
commitment" to grant an option at the originally agreed price, said
Charlie Gray, Sonus's general counsel. He said Sonus hasn't determined
whether the April 2001 grant carried an incorrect price, and he added
that the company might seek to renegotiate the payment agreement in
cases where the grant is well out of the money. He said Sonus's audit
committee examined the granting practices and concluded that no current
member of management, including Mr. Ahmed, did anything wrong.
The recent disclosures about the repricings come in
large part thanks to a provision of Section 409A of the federal tax
code. Section 409A slaps a 20% excise tax, along with other penalties,
on certain "discount" stock options whose exercise price is below the
level of the stock on the day the option was granted. Options backdated
to a day with a low price are a type of discount option. By agreeing to
reprice the options, an executive is saved from the big tax bill.
Executives who already have exercised backdated options
may have to pay a penalty tax. But at least one company, j2 Global
Communications Inc., a Los Angeles seller of telecom services, is
relieving that burden. In a filing, the company says it "anticipates
resolving the matter directly with the Internal Revenue Service on
behalf of all such holders, including making any payments that are
required." In addition to paying its executives' taxes, j2 Global also
is offering a "compensating payment" to several because of repriced
options. The company says in its filing that it had used "incorrect
measurement dates" for some options but that "no willful backdating took
place."
The bulk of companies that have admitted to options
problems aren't being nearly so generous.
Every director and executive officer of chip maker
Actel Corp. of Mountain View, Calif., for instance, will have
wrongly dated options repriced with no reimbursement. Stephen Hemsley,
who replaced William McGuire as CEO of UnitedHealth Group Inc.
after Dr. McGuire's options-fueled ouster, is surrendering about $190
million in value, though the Minnetonka, Minn., insurer said it believes
Mr. Hemsley did nothing wrong. (Dr. McGuire is forfeiting $200 million.)
Boston Communications Group Inc. of Bedford, Mass., said in a filing
that 13 current or former executives or directors are surrendering
outright a total of more than 410,000 wrongly dated options, without
compensation.
Write to Charles Forelle at
charles.forelle@wsj.com1
