Aftermath of Enron

8/13/2019 Aftermath of Enron

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2

Things Well Discuss

The Environment

Worst Practices

Best Practices

Possible Change Areas


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3

The Environment

Enron/Andersen collapse

Depressed market despite stronger earnings

Continued investor dilution concerns New disclosure for stock plans

Continued concern about stock plan approval

Finalization of EITF 00-23, but IASB is here

Options continue to be underwater

Missed incentive goals


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4

Enron/Andersen Collapse

Heavy scrutiny of stock options

Distrust of financial disclosure

Earnings comparisons less meaningful

Whats in the numbers?

Re-thinking director compensation Are options right?


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5

Continued Investor Concerns

Higher average potential dilution from stockplans

1997 2001 % change

S&P 500 10.0% 13.7% 37.0%

S&P Mid Cap 10.5% 15.6% 48.5%

S&P Small Cap 13.8% 17.0% 23.2%

Total Super 1500 11.6% 14.1% 21.6%

Continued scrutiny from institutional investors

Source: Stock Plan Dilution, 2002: Overhang from Stock Plans at S&P Super 1,500 CompaniesInvestor Responsibility Research Corp


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Continued Investor Concern

35819737 95

32%31%

22%

18%

18%

0

20

40

60

80

100

120

< 10% 10-15% 15-20% 20%-30% > 30%Total Potential Dilution Range

#ofplans

0%

5%

10%

15%

20%

25%

30%

35%

%N

egative

Votes

No. of Companies-2001 % Negative Votes-2001

Source: Stock Plan Dilution, 2002: Overhang from Stock Plans at S&P Super 1,500 CompaniesInvestor Responsibility Research Corp


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Public Perceptions

Executive greed and duplicity contributed toEnron debacle

Mega-options drove management to falsify accountingto keep stock prices high and rising

Executives used inside information to exercise and selloptions while price high

Stock option accounting contributed to the

speculative bubble in stocks by inflating thegrowth rate in EPS

Stock options cause short-term behavior and aremisaligned with long-term interests of

shareholders


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New Financials

EBIT: Earnings Before Irregularities and

Tampering

ROIC: Restated on Instructions of Counsel

CFO: Chief Fraud Officers


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Worst Practices

Enron

Philosophy to reward shareholder valuecreation

Stock options and restricted stock (50/50)

RS vesting accelerated based on TSR performance

4 year reduced to 1 year

Large grants (Lay: 1.3 million in 2000)

Limited partnership interests

Executive loans and repayments


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Worst Practices

Tyco

Loans

Stock sales Actions without compensation committee

knowledge

$20 million to director

Chair of Corporate Governance and NominatingCommittee

Reloads with 10-year terms


11/3011

Worst Practices

E-Trade

CEO loan settlement

Forgiveness $15,000,000

Tax Gross-Up 15,211,481

$30,211,481 For elimination of certain contractual

relocation benefits


12/3012

Worst Practices

K-Mart

Full recourse retention loans

$2.5 - $5.0 million

Made in 20002002

Vest in 2004, i.e., Forgiveness

Tax gross-up


13/3013

Worst Practices

WorldCom

Stock options only

Large grants (Ebbers1.2-1.9 million per year) Loan arrangements

Company guaranteed $195.6 million (B of A)

Company paid at $198.7 million plus $35 million for LC Company direct loan of $165 million

Why: to avoid the need for Mr. Ebbers to sell

large quantities of WorldCom stock


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Worst Practices - Other

GE

3,000,000 stock options and 850,000 RSUs

($48 million) to Welch 1 year vesting

Recognize 20 years of service and developing

and implementing plansConseco

$45 million cash signing bonus to Gary Wendt


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Worst Practices - Other

Dell and Oracle

38 million options from 1996 to 1998 to MichaelDell

Already owned 353 million shares

20 million options to Larry Ellison

Already owned 700 million shares

Dynergy CEO severance 2.99x base and incentive

compensation

But incentive compensationincludes stock options


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Worst Practices

Layoffs with big pay

Pay Layoffs

Disney $72.8 4,000

Cisco Systems $28.7 8,500

WorldCom $10 million 6,000

stay bonus


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Best Practices (?)

Amazon.comAMB Property Corp.Bank OneBoeingCoca-ColaDole FoodsFannie MaeFreddie MaciStar FinancialLevel 3 CommunicationsSovereign BancorpWashington Post

Winn-Dixie

Delta Air LinesHeinzTarget Stores

Others:Companies

Expensing OptionsCompanies Considering

Expensing Options


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Best Practices

Krispy Kreme

Since 1937; public since early 2000

Development rights agreements while private

Also had franchise equity pool for

management

All pools and rights agreements terminated

Return of original investment

All sales through 10b5-1 plans


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Best Practices

Ownership Guidelines

13% of Top 250

Not a lot, but more considering

Most use multiple of retainer

5x most common

Comcast & Fordmultiple of retainer/fees


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Best Practices

Ownership Guidelines

Other examples

Citigroup75% of shares granted Pitney-Bowes$350k owned in order to sell

stock

PNC Bankmust use of retainer to purchase

stock

Tribune5x most recent stock grant


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Best Practices

Director Performance Options

Computer Associates# based on ROE

ADC Telecomgrant only if 10% ROE

SYSCOoptions granted only if 10% growth

in EPS

UP & CapOneoptions vest on stock price


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1. Compensation Committee Governance

Committee Charter x x 100% Disinterested (Audit Standard) x x

Compensation Literacy and Experience x

Strong Chair, Periodic Rotation x

Code of Conduct (conflicts of interest; sales) x x

Total Compensation Oversight x

Access to Outside Advisors and Staff Support x x

Legal Representation x x

Executive Sessions x

CEO Pay Determination x


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2. Annual and LTIP Design

Relevant Metrics x

Audit Confirmation of Formula Results x

Negative Discretion x

Strategic and Qualitative Factors x

Recapture for Restatements x x

Operational vs. Market Goals x


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3. Stock Options

SFAS 123 Accounting x x

Managed Run Rate and Overhang x

Nonshareholder Approved Plans x x

Mega Grants x

Performance Vesting x

Ownership Intent x

Inside Information x

Repricings x x


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5. Deferred Compensation

SERP Accrual Disclosure x

Lump Sum Settlements x x

Recapture for Bankruptcy x

Stock Account Switching x x


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6. Directors Compensation

Stock Options x

Restricted Stock x

Committee Chair Fees x

Ownership Standards x


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Freder ic W. Cook & Co., I nc.provides management compensation consulting services to business clients. Formed in 1973, our

firm has served over 1,200 corporations in a wide variety of industries from our offices in New York, Chicago, and Los Angeles. Our

primary focus is on performance-based compensation programs which help companies attract and retain key employees, motivate and

reward them for improved performance, and align their interests with shareholders. Our range of consulting services encompasses the

following areas:

Total Compensation Reviews

Strategic Incentives

Specific Plan Reviews

Restructuring Services

Competitive Comparisons

Incentive Grant Guidelines

Executive Ownership Programs

All-Employee Plans

Directors Compensation

Equity Instruments

Performance Measurement

Globalization

Privatization

Compensation Committee Advisor

Stock Option Enhancements

Our offices are located:

New York

90 Park Avenue

35thFloor

New York, New York 10016

212-986-6330 phone

212-986-3836 fax

Chicago

19 South LaSalle Street

Suite 400

Chicago, Illinois 60603

312-332-0910 phone

312-332-0647 fax

Los Angeles

2029 Century Park East

Suite 1130

Los Angeles, California 90067

310-277-5070 phone

310-277-5068 fax

Website address:

www.fwcook.com

Documents

Aftermath of Enron