Sometimes enough is enough. I had a client go through a surprisingly good experience last week that made me realize the positive context of this cliche. After several years of being beaten up by institutional shareholders about equity compensation burn rates and usage, they are now in a position to ask for, and get approved, more shares than they have used in the past 3 years. Here’s the interesting thing, they won’t be asking for it all... Yes, Virginia, there is a company who shows restraint. In fact, contrary to the majority of articles and political rants we all read, most companies show restraint. In my client’s case they were hit hard by the double whammy of 2-3 years of depressed stock prices immediately after granting some significant company-wide and executive equity awards. This impacted their burn rate for several years, due to the fact that the shares they projected to be exercised just sat there underwater and collecting dust.
The company even went as far as having their shareholders approve a potential stock option exchange, but once again showing restraint, they held off when it looked like their stock might recover. They worked hard to arrange a corporate action to strengthen their position and made an effort to keep their employees in the loop by communicating frequently.
During 2010 their stock price grew by five times. Many of those underwater options came back into the money and employees, rightfully and happily, exercised them. The corporate action was successful and increased the number of shares outstanding, further improving their burn rate and potential dilution numbers.
Even more impressive, their current stock price is almost double their 200-day average price (used to anchor some institutional shareholder value calculations) as of December 31, 2010. This means they can ask for more shares than they have plans to use. With the increase in price since the beginning of 2011, they can also give equity at values far greater than they have in the past.
Most impressively, just like most companies, they do not intend to ask for the maximum shares possible. They also have no plans to grant historically large grants to take advantage of the disconnect between their current price and the price used to anchor calculations for shareholders. What they intend to do is the responsible thing.
They will ask for enough shares to get through the next few years. They will award equity commensurate with the improved performance over the past 12-18 months. But, no one will “win the lottery.” It is very unlikely that anyone’s pay will make the front page of a major media outlet (or even the back page.) This is because, like all except a few rare (but well-publicized) companies, this firm knows when to say when.
Hopefully, their shareholders will remember this if, several years from now, they have a tough year. Maybe their shareholders will be able to trust a company that did the responsible thing when the “rules” said they didn’t have to. Here’s to every company that does things right. And to every company I have never read or heard about in some angry blog, screaming editorial or politician's speech. Thanks for knowing when enough is enough.