韬睿-人力资源管理

SouthernEmployeeBenefitsConferenceBeyondStockOptionsLong-TermIncentivesinaVolatileorProtractedBearMarketCopyright©May7,1998Overview: Stockoptionshavebecomethedominantformoflong-termincentivecompensationtoday.Morecompaniesuseoptionsthananyotherformoflong-termincentive.Thevalueofoptiongrantscontinuestoincrease.Levelsofparticipationhaveexpanded.Long-termincentivesnowmakeupamajorportionoftotalpay.Overview: Stockoptionshavebecomethedominantformoflong-termincentivecompensationtoday.Morecompaniesuseoptionsthananyotherformoflong-termincentive.Thevalueofoptiongrantscontinuestoincrease.Levelsofparticipationhaveexpanded.Long-termincentivesnowmakeupamajorportionoftotalpay.Overview: Stockoptionshavebecomethedominantformoflong-termincentivecompensationtoday.Morecompaniesuseoptionsthananyotherformoflong-termincentive.Thevalueofoptiongrantscontinuestoincrease.Levelsofparticipationhaveexpanded.Long-termincentivesnowmakeupamajorportionoftotalpay.MedianExpectedValueofLong-TermIncentives

($300,000BaseSalary)Overview: Stockoptionshavebecomethedominantformoflong-termincentivecompensationtoday.Morecompaniesuseoptionsthananyotherformoflong-termincentive.Thevalueofoptiongrantscontinuestoincrease.Levelsofparticipationhaveexpanded.Long-termincentivesnowmakeupamajorportionoftotalpay.Overview: Stockoptionshavebecomethedominantformoflong-termincentivecompensationtoday.Morecompaniesuseoptionsthananyotherformoflong-termincentive.Thevalueofoptiongrantscontinuestoincrease.Levelsofparticipationhaveexpanded.Long-termincentivesnowmakeupamajorportionoftotalpay.Overview: Stockoptionshavebecomethedominantformoflong-termincentivecompensationtoday.Impact:Heightenedscrutinybyshareholdergroupsandthepress.HeightenedinterestinLTIalternatives.“[T]heproliferationofstock-optiongrants,combinedwiththeriseofcushyretirementdeals,sign-onbonuses,andironcladseverancepackagesforCEOs,havemadeamockeryoutofmanyattemptstotrulylinkpaytoperformance.“Theupshot:Good,bad,orindifferent,virtuallyanyonewhospenttimeinthecornerofficeofalargepubliccompanyin1997sawhisorhernetworthrisebyatleastseveralmillion.”Source:BusinessWeek,April20,1998.Overview: Theprosandconsofmanagementstockoptions.ProsDirectalignmentofmanagementandshareholderinterests.Atrulylong-termperspective.Betterappreciationandunderstandingofvaluedrivers.ConsNotline-of-sight.Can’tdifferentiatemanagementperformancefromindustryfortune.Lackstimulusduringeconomicdownturns.Perceivedinternallyandexternallyasagameofchance.TheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.ThePrevailingMethodsDesigncash-basedlong-termincentivestoaddressstockoptiondeficiencies.Designbetterstockoptions.TheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.ThePrevailingMethodsDesigncash-basedlong-termincentivestoaddressstockoptiondeficiencies.Improvedmetrics.Almostallmetricsarevariationsonthesametheme...ResidualIncomeTheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.RI=OperatingProfit-OpportunityCostofRunningtheBusinessThereturn(orexpectation)foregonebynotinvestinginacomparablyriskyportfolioofprojects—theweightedcostofdebtandequitycapital.Opp.Cost= CostofCapital

xBeg.CapitalSalesCostofSalesOverheadEBITTaxonOperationsNOPATResidualIncome=NOPAT

-c*xBeg.CapitalAnIntegratedMeasureofPerformance:ResidualIncomeResidualincomecanalsobeexpressedas:RI=(ReturnonCapital-CostofCapital)xBeg.CapitalResidualincomeintroducesfourpowerfulincentives:Improveefficiency,andthusreturns.Grow,butonlyifnewinvestmentscanearnthecostofcapital.Redeploycapitalfromunderperformingoperations.Managerisk,andthereforethecostofcapital.ValueProposition:ResidualIncomeDrivesMVA

PVCF1ValuePVCF3PVCF2PVNOPATCDiscountedFreeCashFlow

CapitalDiscountedResidualIncomePVRI1PVRI2PVRI3PVRICValueMVA

Thediscountedpresentvalueofacompany’sexpectedresidualincomeisitsmarketvaluepremiumordiscounttobookvalue(“MVA”).

Acompany’sdiscountedresidualincomeplusitslevelofcapitalemployedwillalwaysequalthediscountedpresentvalueofexpectedFreeCashFlow.

Residualincomeistheonlyintegratedmeasureofgrowthandprofitabilitywhichrelatesdirectlytostockvalue.TheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.ThePrevailingMethodsDesigncash-basedlong-termincentivestoaddressstockoptiondeficiencies.Improvedmetrics.Itallboilsdownto...Adoptingametricwhichworkswellwithyour

company.Conceptuallysimple.Difficulttomanipulate.Economicallyrigorous.TheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.ThePrevailingMethodsDesigncash-basedlong-termincentivestoaddressstockoptiondeficiencies.Improvedmetrics.Improvedimplementation.Focusoncontrollable,company-specificvaluedrivers.Line-of-sight.ImprovedImplementation:

Makingperformancemeasures“line-of-sight”RawMaterialsLaborOtherPlant&EquipmentPropertyInventoryReceivablesPayablesGoodWillIntangiblesRevenueTaxOperatingExpensesCostofCapitalCapitalEmployedCapitalChargeNOPATEVALegend:HighImpactMediumImpactLowImpactVolumeCostofGoodsSoldSG&ACostofDebtCostofEquityFixedCapitalWorkingCapitalOtherPriceTheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.ThePrevailingMethodsDesigncash-basedlong-termincentivestoaddressstockoptiondeficiencies.Improvedmetrics.Improvedimplementation.Focusoncontrollable,company-specificvaluedrivers.Line-of-sight.Makecalibrationandtarget-settingtrulylong-term.Understandcorporatecultureand“process.”Helpbuildvalue-creationcoaches.TheChallenge: Makinglong-termincentivesworkinavolatileoraprotracteddownmarket.Designcash-basedlong-termincentivestoaddressstockoptiondeficiencies.Designbetterstockoptions.Whatwouldweliketosee?Realcapitalatrisk.Managementrewardedforitsdistinctivecontributiontosharevalue.Meaningfulincentivesduringdownturns.Astrongaversiontorepricing.ThePrevailingMethodsDesignChallenge1: Measuregoodmanagement,notgoodluck.Contention: Commoditypricemovementsandstockmarketactivityexplainthevastmajorityofmostcompanies’stockpriceperformance.Example:

TheSpecialtyChemicalIndustrySample:GeorgiaGulfCorpLyondellPetrochemicalCoDowChemCoUnionCarbideCorpOlinCorpDesignChallenge1: Measuregoodmanagement,notgoodluck.Contention:

Commoditypricemovementsandstockmarketactivityexplainthevastmajorityofmostcompanies’stockpriceperformance.Contention: Commoditypricemovementsandstockmarketactivityexplainthevastmajorityofmostcompanies’stockpriceperformance.Impact:

Lessthanone-fifthofmostindustries’stockmarketperformancecanbetracedtocontributionsbymanagement.Conclusion:

Duringdownturns,conventionalstockandcash-basedincentivesareviewedaslotterytickets.

Duringgoodtimes,conventionalbonusplansperpetuatetheimpressionthatstockholderreturnsrelatemainlytogoodmanagement.

Overtime,evensub-parperformancewillberewarded.DesignChallenge2: EliminatethePerceptionGapinBearMarkets.Contention:

Conventionalstockoptionslosemuchoftheirpowertomotivateifthestockisunderwater,despiteretainingsignificanteconomicvalue.DesignChallenge2: EliminatethePerceptionGapinBearMarkets.Contention: Conventionalstockoptionslosemuchoftheirpowertomotivateifthestockisunderwater,despiteretainingsignificanteconomicvalue.Implication:

1. Thereisoftenawidegapbetweenmanagement’sperceptionofastockoption’svalueanditseconomicsubstance.Thisisespeciallytrueforcompaniesbesetbyindustrycycles.Reason: Managersfocusonexerciseorconversionvalue,notoptionvalue.

2. Duringdownturns,stockholdersreceiveaseverelydilutedmotivationalreturnonthehighcostofpreviouslygrantedoptions.DesignApproach1: Tinkerwiththeoptionsthemselves...1. Indexagainstindustryperformance.Specifically: Excludevaluegains(orlosses)attributabletotheS&Porindustry.Impact: Createsoptionswherethedifferencebetweenoptionvalueandexercisevalue(andthustheperceptiongap)issmall. Justifiesissuingmoreoptionsasaconsequence.butdon’tconfusethiswithrepricing.Portfolioof5.6at-the-moneyindexedoptionsisworthjustoneout-of-the-moneyoption,but...Thedifferenceinupside(anddownside)potentialisenormous,thusgreatlyamplifyingincentives.OptionValueStockValueHighcovariancewithindexmeansmuchcloserrelationshipbetweenoptionvalueandconversionvalue.Unchangingstrikepriceandlongertermtomaturitymakesconventionaloptionmorevaluablethanindexedoption,despitehigherstartingpoint..DesignApproach1: Tinkerwiththeoptionsthemselves...Indexingoptionsexploitstheperceptiongaptocomparativeadvantage.PerceptionRealityAt-the-moneyoptionconsiderablymorevaluablethanout-of-the-moneyoption.Indexingmeansmorecontroloverdestiny—thusgreateroptionvalue.OptionValueDesignApproach1: Tinkerwiththeoptionsthemselves...1. Indexagainstindustryperformance2. Rewardperformance,notlongevity.

Considerperformanceoptions—optionswhichraisetheexercisepriceovertime.Becauseperformanceoptionsareworthlessthanconventionaloptions,managerscanbeofferedmoresuchoptionswithoutdilutingthevalueofstockholders’investment.DesignApproach2: Tinkerwithcapitalstructure...1. Makecapitalstructureline-of-sight.Createequityinthebusinessunitsthemselves.Partialpublicofferings.Spinoffsandsplit-ups.Letterstock.Restructurebusinessportfoliotoreflectcorecompetencies.DesignApproach2: Tinkerwithcapitalstructure...1. Makecapitalstructureline-of-sight.Createequityinthebusinessunitsthemselves.Partialpublicofferings.Spinoffsandsplit-ups.Letterstock.Restructurebusinessportfoliotoreflectcorecompetencies.DesignApproach2: Tinkerwithcapitalstructure...1. Makecapitalstructureline-of-sight.Createequityinthebusinessunitsthemselves.Partialpublicofferings.Spinoffsandsplit-ups.Letterstock.Restructurebusinessportfoliotoreflectcorecompetencies.DesignApproach2: Tinkerwithcapitalstructure...1. Makecapitalstructureline-of-sight.2. Makethestockamanagementplayratherthananindustryplay.Issueequity-linkeddebt—peggedtothestockpriceofcompetitors.DesignApproach2: Tinkerwithcapitalstructure...Specifics:

DECSorPridesissuedagainstcompetitors. Hybriddebtinstrumentswhoseinterestpaymentsarelinkedtotheperformanceofaparticularstock—inthiscase,amarket-weightedorequally-weightedportfolioofcompetitors.Examples:

Lyondell,Enron,NationsBank,Netscape,Nextel,TelecomArgentina,plussevenothers—eachissuedfortaxreasons,notbusinessreasons.Issuancerelativelylow-costandroutine.1. Makecapitalstructureline-of-sight.2. Makethestockamanagementplayratherthananindustryplay.DesignApproach2: Tinkerwithcapitalstructure...1. Makecapitalstructureline-of-sight.2. Makethestockamanagementplayratherthananindustryplay.Issueequity-linkeddebt—peggedtothestockpriceofcompetitors.Issuecommodity-linkeddebt—peggedtothepriceofrawmaterials.TheCommonTheme: PayforPerformance,NotLuckInexpensivewayforcompany,andthusitssh