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Review of Analytical Alternatives



Review the range of analytical methodologies used by both investor and corporate decision-makers concerning options and other equity-based compensation,  to determine what supporting information should be included in a communally controlled "Compensation Facts" database.

For initiation of project, see item #4 of Forum Report: December 6, 2006 Open Meeting


Workshop Briefing Material


The agenda, discussion outline and list of literature (each item of which is accessible from the listing links) below were prepared by James F. Reda & Associates for participants in a workshop meeting hosted in their offices on February 23, 2007.




1500 Broadway

New York, New York 10036

(646) 367-4460

Fax: (212) 898-1148




Workshop Agenda


February 23, 2007



1.      Validation of marketplace acceptance:  For any principles to be credibly presented as marketplace determinations of fair play, it was agreed that there should be an actual vote of acceptance by representative groups of both investor and management decision-makers.  Discussions included suggestions of membership organizations that would have the operational ability to poll members and an interest in supporting marketplace alternatives to regulatory processes.  Meeting participants supported Forum efforts to develop appropriate validation procedures that could be applied efficiently to both the sample questions and the model for advisory voting, above, as well as to other marketplace standards.

2.     Review of analytical alternatives:  Several meeting participants argued the advantages of alternative analytical standards or methodologies in evaluations of options and other equity-based compensation practices, as well as other aspects of executive compensation.  Note was made, for example, of certain mutual fund reporting requirements that could be adapted to the reporting of operating company executive compensation.  While only some of the meeting participants were familiar with the issues being debated by compensation analysts, there was consensus support for encouraging rigorous professional examination and definition of analytical alternatives as a foundation for healthy marketplace competition.  The Forum will therefore organize a special workshop for qualified professionals to prepare a report on analytical alternatives and associated information reporting requirements.




Points of Discussion - February 23, 2007 Workshop


1.                   The current measures of stock awards

a.       Burn rate

b.       Stock overhang


2.                   The pitfalls of the current measures

a.       Stock overhang is not taken into account in almost any analysis of corporate value

b.       The stock overhang does not really take into account the impact of the stock awards

c.       Companies do not report incentive pool numbers or success sharing rations

                                                               i.      Cash (annual incentive, profit sharing and sales commissions)

                                                             ii.      Stock (un-levered companies would perform much better)

d.       ISS is in a central location in this process, but there information is both flawed and not available


3.                   What Can Investors, Analysts, Consultants and Boards Do?

a.       Investors: Buy and sell stock based on financial outlook. They are very interested in this sharing ration or load placed on the stock by management (and all employees). What should be the proper ratio?

b.      Analysts:  Need to take the success sharing ration in their corporate analysis.

                                                              i.      For example, if a stock rises to $50 and it triggers a large payout, this should be taken into account when valuing a stock.

                                                            ii.      CD&A rules require that prior stock awards be taken into account when making future awards.

c.       Consultants:  They need to take this into account stock overhang, burn rate and incentive ratios into account in their advice to management and the board. A greater awareness of corporate valuation is needed.

d.      Boards: Need to make sure that investors are getting the information that they need and that the consultants and management are providing adequate information so that they can an informed decision.


4.                   What can be done?

a.      Incentive compensation decisions need to be tied to a unified approach.

b.      Stock overhang needs to be taken into account when making incentive decisions

c.       More compensation needs to be tied to financial goals that are tied to the financial success of the company

d.      A ratio needs to be created for each company that will indicate how much is allocated to management and shareholders (similar to a mutual fund)

e.       A clearinghouse of information needs to be created that will encourage this effort.

                                                              i.      This can be accomplished in many ways, but the easiest way is for major providers of information to estimate the effect of incentive plans on stock price.







Reading Materials



1.                  Gordon, Jeffrey N., Executive Compensation: If There’s a Problem, What’s the Remedy? The Case for “Compensation Discussion and Analysis”


2.                   Gabaix, Augustin & Landier, Augustin, Why Has CEO Pay Increased so Much?


3.                   Frederick W. Cook & Co., Inc., 2006 Cost of Management Ratios


4.                   Memo on Cost of Management Ratios


5.                   Hall, Brian and Murphy, Kevin, The Trouble with Stock Options






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