I kinda’ buried the lede on this idea in this prior post, so let take another run at it, now. . . .
Pharmalot, once again(!) is all-over this topic, this morning — and more illuminatingly so — to be certain.
So, based on a renewed back-and-forth between us, now — once again — why, exactly, if the current view of Schering-Plough’s CEO (and Board of Directors) is that $18.85 is an artificially-low price for Schering-Plough common stock1 — why would grants to senior management be made at the very-same “bargain-basement” exercise-price (836,000 options for Mr. Hassan, alone)?
Why? Why wouldn’t the Compensation Committee, under the supposedly-prudent pen of Hans Becherer (above, right), and upon the putatively-restrained counsel of Ira Kay (below, left) — if the above is also reflective of their views on the current stock price — grant the options at, say $22.60, or the “artificially-low $18.85” price, plus 20 percent? That would avoid a largely unearned windfall to the management team. [The 2006 Stock Incentive Plan documents certainly permit it: “. . .[t]he Exercise Price cannot, however, be less than the Fair Market Value of a common share on the date of grant. . . .” and may be in excess of it.] I mean after-all, didn’t the team have a hand in changing end-points, then unchanging them — and thus, in effect, contributing to this fall in price?
What is the responsible, sensible executive compensation philosophy that supports such a “nadir-touching” grant?
On the other hand, my suggested practice — the granting of above-market price options — is not uncommon, when a stock has been unfairly beaten-down. Shoot, such an option grant is positively old-school inside the Fortune 500 (all circa 2002, or earlier, models), actually — and (an added benefit!) it would reduce the SFAS 123R (non-cash) compensation expense otherwise recognized by Schering-Plough in Q2 2008, thus effectively increasing net income by a like amount. That would be a double-double, for the shareholders.
Instead, the shareholders have seen Schering absorb increased compensation expense accruals in Q2, and if the stock is in fact undervalued — as Mr. Hassan has repeatedly insisted — he (and the rest of senior management) were handed a bucket of “gimme” stock options — offering them an undue windfall.
[FOOTNOTE 1: To be clear, I do not share the view that $18.85 is “artificially low“, here. I think we are finally seeing what the price should have been for most of 2007, and part of 2006. And I do think it untoward to reward management with stock options which are rendered all the more potentially-profitable, to them, personally, in return for their own their mismanagement and miscues.]