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the date of grant. The requisite increased price must be reached and maintained or exceeded for a period of 20 consecutive trading days. As a result of these vesting constraints, 100% of the options granted will not vest until the stock price increases by 60% from the base price level.
Similarly, Bell Canada International Inc.’s 2000 Stock Option Plan provides that options vest on any of the first three anniversary dates of the grant if the company’s share price increases by a compounded annual rate of 25% above the strike price. If the applicable price target is not reached by the third anniversary of the date of grant, the options simply do not vest. Although these vesting provisions are the strictest of those surveyed in this article, it is important to note that the Corporate Governance Committee or the Board may, in its discretion, grant options with alternative vesting provisions. Options have seven-year terms. In 1999, BC Gas Inc.’s LTIP was amended to include a Share Option Plan under which options granted to executives would have a “performance-vesting feature”. Specifically, the eight-year term options vest only when the company’s common share price has reached 125% of the strike price and remains at or exceeds the target price level for 10 out of 15 of the ensuing consecutive trading days. As an extra incentive, executives are eligible to receive additional options if the performance hurdles are reached within four years of the option grant. Non-performance based options are granted to employees other than executives who are eligible to receive option grants. All of this would not be news to executives at Encal Energy Ltd. where option vesting contingent upon stock price has been a feature of executive compensation since 1994. Like the BC Gas plan, the option plan at Encal provides for two distinct vesting regimes. The provisions that apply to executives who receive option grants are as follows: options vest as to one-third if share prices reach a 12% annual compound growth rate over four years; and as to the remaining two-thirds if share prices reach a 15% annual compound growth rate over four years from |
the grant date. The maximum term of options under the plan is five years.
These recent option plan developments will warm the heart of anyone interested in corporate governance issues. Option plan detractors habitually point out that there is at best a weak alignment of an option plan participants’ interests with those of a company’s shareholders. If stock price hurdles line the road to vesting, option exercise profits have an additional quantitative link to increases in shareholder value.
Moving the Goalposts at Inmet
There are few compensation-related issues more thorny than option repricing. When a company requests shareholder approval for a reduction of the exercise price of outstanding stock options, the request is always but one plot twist in a very sad drama. The proxy circular will provide ample evidence of the particular hardship faced by the company’s executives who find what can be a large portion of their compensation not only has no current value, but that an epic scale recovery in the company’s stock price must take place just to allow the options to come above water. The proposal itself is most often gingerly worded so that the tepid bath shareholders are taking is acknowledged while management seeks permission to towel itself off.
One of the sad stories found in proxy voting materials this season was told by Inmet Mining Corporation. During fiscal 1999, the company’s Board cancelled an aggregate of 315,000 options held by certain named executive officers and key employees. Within six months, 225,000 options were granted to the same optionees. Options with strike prices of between $9.50 and $10.00 were essentially transformed into options exercisable for $3.00 per share. At the time of the new grants, the company’s shares were trading at approximately $2.95. The TSE does not allow this sort of thing absent shareholder approval, a requirement that can only be avoided |