long-term incentive for privately held corporations
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Transcript long-term incentive for privately held corporations
Wall Street Compensation
and Benefits Association
How to Compete With a dot.com
Jeffrey M. Kanter
Erin Bass-Goldberg
Frederic W. Cook & Co., Inc.
May 11, 2000
Today’s Objectives
Examine dot.com pay practices
Approaches to make you competitive
Who’s a dot.com?
Line is blurring between old and new economy
companies
Bricks & Mortar
Bricks & Clicks
Chase
Chase.com
DLJ
DLJdirect
BankOne
Wingspanbank.com
dot.com Employee Mentality
Harsh generalization:
Little loyalty; lots of greed
Therefore:
dot.com Employee Mentality (cont’d)
Originally a different culture
Existing pay structures/guidelines were irrelevant
– Moving too fast
– Bureaucracy is a dirty word
Get rich quick
– Vs. career and security
– Don’t care about old “rules of thumb”
High risk: high reward
Typical pay programs may not work
But seeing shift to old economy structures
– Best of both worlds
dot.com Company Mentality
Downplay cash; up play stock
Would like structures
And to create retention
But fighting high turnover rates and lack of available
talent at all levels
With market downturn and continued talent flight,
more cash and more options required
Recruiting Can Be Expensive
In the money option values:
– 18 internet companies
Option Gains ($000,000)
$250
$200
$150
$100
$50
$0
CEO
1999
2000
(est.)
COO
1999
2000
(est.)
Vested
CFO
1999
2000
(est.)
Unvested
Top Sales
1999
2000
(est.)
Different Pay Packages
Joseph Galli example:
From
To
Company
Black & Decker
Amazon
Position
Head of Power Tool
Business
President & COO
Compensation
(Latest year) $1.1M
annual cash + $460K
LTI + 75K options +
rich pension/SERP
$200K salary +
3.9M options with
$20M guarantee +
$5M cash signing
bonus
Generic Job Comparisons
($000)
$2,500
Internet
$2,000
Internet
$1,500
Internet
$1,000
GI
Internet
$500
$0
GI
GI
CEO
CFO
Salary
Top Sales
Bonus
Long-Term
GI
General Counsel
Run Rate Comparisons
Annual Grants as a %
of Outstanding Shares
8.0%
5.0% - 7.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
91% Growth
2.1%
1.1%
0.0%
New Economy
Old Economy
1989
1999
Potential Dilution as a %
of Outstanding Shares
Dilution Comparisons
25.0%
20.0%
20.0% - 25.0%
99% Growth
13.7%
15.0%
10.0%
6.9%
5.0%
0.0%
Old Economy
New Economy
1989
1999
Stock Option Provisions
Relative comparison:
Established
Companies
Emerging Companies
Participation
Exclusive
Inclusive
Grant Timing
Annual grants based
on competitive
guidelines
Front-loaded
hiring/promotion grants;
“refresher” grants for
ongoing unvested shares
Old economy
practices may return
Stock Option Provisions (cont’d)
Relative comparison (cont’d):
Established
Companies
Emerging Companies
Individual
Grants
Uniform by job level
Differentiated for technical and
critical-skills employees
Tech premium
-- 20% tech vs. non-tech
-- 35% tech vs. sales
Vesting
3-4 years annual
installments
Immediate with repurchase
right or over 3 years, monthly
Response of Old Economy Companies
Many old economy companies are developing and
implementing their own internet- and technologybased strategies
– This approach is complementary to their traditional
business
Wal-Mart , Barnes & Noble, Toys R Us, GM, Ford,
Sears
Others are attempting to convert to a “new economy”
focus
– Kodak, AT&T
Response of Old Economy Companies (cont’d)
The critical success factor is human capital and the
ability to attract and retain “hot skills“ employees
The primary objectives include:
1. Compete with greater upside of new economy
Need a “great stock”
2. Address loss in incentive and retention value
associated with share price depreciation
Need to leverage upside and/or decrease perceived
riskiness of current employment situation
Innovative Approaches
Tracking stock
Subsidiary stock (external market)
Subsidiary stock (internal market)
Venture capital funds
Tracking Stock
Tracking stock is a separate class of publicly-traded
parent company stock whose market value relates to
the financial results of a particular business
– Not a direct ownership interest
– No formal separation of assets
– No legal separation of the company
– No separate board of directors
Separate P&L statements are prepared for each
tracking stock business
– But only one annual report and proxy statement
Tracking Stock (cont’d)
Examples:
Parent Company
AT&T
Disney
Donaldson, Lufkin, Jenrette
Lucent Technologies
Perkin-Elmer
Staples
Tracker
Liberty Media (cable)/AT&T Wireless
Group (wireless)
Go.com (internet entertainment)
DLJdirect (internet brokerage)
PBX Systimax (proposed)
PE Biosystems (bio-tech)
Staples.com (internet retail; proposed)
Tracking Stock (cont’d)
Tracking stock objectives include:
1. Creation of a “pure play”
Allows investors to focus on specific business
segments
Provides “currency” for acquisitions
2. Enhance overall market valuation (i.e., eliminate
“conglomerate discount”)
Encourages more specific analyst review
3. Provide real equity incentives for business unit
employees
Employees in each business receive equity incentives
on real shares of their individual businesses
Tracking Stock (cont’d)
Advantages
– Provides a direct “line of sight incentive”
– Can be used in all the same ways as parent company
stock
– Taxation and accounting treatment are identical to
parent company stock
– Does not result in loss of control by parent company
(like a spin-off would)
Tracking Stock (cont’d)
Disadvantages
– Presents challenging corporate governance issues
Potentially creates “self dealing” opportunities among
senior management and Board members
» Can be offset by establishing a proper balance of
incentives and ownership among different equity
classes
Creates divergence of interests among each distinct
group of stockholders
Raises the possibility of lawsuits
Tracking Stock (cont’d)
Disadvantages (cont’d)
– Requires complete recapitalization of company
Is expensive and time consuming to establish
Would be difficult to unwind
– Unlikely to completely capture “full” market valuation
No “take-over” premium
Subsidiary Stock (External Market)
A public market for a free-standing subsidiary is created
by selling a small portion (e.g., 15%) through an IPO
– Objectives are similar to those of a tracking stock
structure, except requires real separation of assets and full
disclosure
Advantages
– Same as tracking stock
Disadvantages
– Same as tracking stock, except:
Reduced corporate governance issues
More difficult to unwind
Subsidiary Stock (Internal Market)
This approach solely supports compensation
objectives
Similar to phantom stock, but uses real shares of a
freestanding business unit
– Shares are valued by third-party appraisal and are
traded within an internal market
– Employees may be given a “put option” back to
Company to provide liquidity
– The employer has a “right of first refusal” or “call
option” to prevent loss of control over stock
Subsidiary Stock (cont’d)
Advantages
– Provides a direct “line of sight” incentive
– Can be used in all the same ways as parent company
stock
– Insulates employees from the vagaries of the financial
markets
– Can obtain favorable fixed plan accounting under
APB Opinion 25 if:
Stock price based on fair market value
Employees hold shares for a minimum of 6 months
before sale to the company
– Does not result in loss of control by parent company
Subsidiary Stock (cont’d)
Disadvantages
– Requires independent appraisal or complex valuation
formula
– Administration is complex
– Six month holding requirement requires employee
capital outlay and increased risk
Capital outlay could be addressed with companysponsored loan or special dividend
No effective solution for stock price risk
Venture Capital Funds
Opportunity to “coinvest” in a company-sponsored
venture capital fund
– Or, could be just a “carried-interest” program
– Fund set up as a wholly-owned management
company
– Investments are generally targeted to those with
strategic value to company; could simply be outside
investments
– Realized returns are split between company and
executives
Venture Capital Funds (cont’d)
Advantages
– Provides attractive investment diversification
opportunity not available to executives on their own
– Can help recreate the partnership and entrepreneurial
culture of private ownership
Disadvantages
– Can be administratively complex
– May be viewed by shareholders as inappropriate use
of corporate assets
Company Profile
Frederic W. Cook & Co., Inc. provides management compensation consulting services to business clients.
Formed in 1973, our firm has served over 1,000 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
35th floor
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
Web site address:
www.fredericwcook.com
Los Angeles
2029 Century Park East
Suite 1130
Los Angeles, California 90067
310-277-5070 phone
310-277-5068 fax