Looks like Pedro Reinhard, cfo took some of the wind out of the stock by exercizing 280,000 options on feb 1 at that days price. That was about 5% of that days total market activity and as folks became aware or it probably fixed the price for the near future.
A little ham handed looking out for himself. Is this the new management style that will add future value to the stockholders that everyone is patting on the back. Go to insider trading and note the other activity.
<Stock options (especially since they normally have a one to two year restriction on sale and have a longer term exercise period) would tend to be classified as a long-term incentive.>
I guess 1-2 years IS long-term thinking for corp managment these days...It shows in other decisions as well.
Salary and bonuses represent short-term incentives. Stock options (especially since they normally have a one to two year restriction on sale and have a longer term exercise period) would tend to be classified as a long-term incentive. Some people may exercise very early (especially in businesses with cyclical earnings) but that is not normally the case. Looks like we differ on opinion. OK.
It would be interesting to see how long execs sit on in-the-money options in different industries. Maybe at companies in less volatile sectors it may be worth the ride, especially if you had a good inside view of your company and the industry. But that still takes alot of guts.
In any industry, I'd say it may be more related to the value of the spread versus your annual income. If you are pulling $150K and your option spread is several annual salaries, then there is alot of incentive to get it while it is good. Also figure in the typical term of employment in that industry too. There is incredible turnover now. If you leave for another job, you have to wrap things up within six-months.
And just a comment on Belle's option strategy. You have to sell about half your spread to cover taxes, as option exercise generates AMT. So, right at the start the process is very short termed. Then, you are carrying a ton of shares, all in one equity, which is a nightmare from a diversification point of view. Quite a few once rich ipo households now carry some heavy and very red 6251 numbers, due to stock collapse in 2000-2001, following the exercise and hold strategy. Very noble, but very very risky. You might love your company and its mission, but the market is a cruel place.
Anyway, none of this takes away from the simple math about the short-term nature of stock option programs. You get a grant, vest options over a couple years, but you still own nothing. The stock rises, but you still own nothing. Then on the day you exercise, you have to unload half your spread to pay the AMT. (If you don't, and the stock tanks, you are completely hosed, as you still owe the AMT no matter what.) Even if you exercise and pay taxes, then you have a wildly out-of-balance portfolio that is screaming for diversification. Even if you're an upper-level operating team member of a company, carrying beaux coup in-the-money options makes one jittery about even slight drops of 10-15% in the market price. The value of those option simply vanish into thin air.
If you think that stock options provide incentives for corporate executives to make good long term (i.e. 10-15 years) planning for a company, then that is your view. My view is the opposite. I think options drive short term thinking to drive up stock prices to open up the spread on vested options, even if the thinking leads to sour returns down the road. So big deal, we differ. So what.
Let's put it this way 101, do have any references in the financial publications that support your contention? I would love to learn from them.
<<I must admit I don't understand why some mgmt are exercising their options so early once they are vested.>>
More than likely, it's due to chemical cycle nearing a peak - and they can't be blamed for selling some options. That is not to be confused with TNR calling the option program a short-term focus by management - it's not.
I must admit I don't understand why some mgmt are exercising their options so early once they are vested. I am sure there are diversification reasons that are beyond me, and Pedro is not talking to me <g>. However, I would certainly be willing to take any profits that are on the table if I were to see the downturn of the economic cycle was coming. You are right - Dow is not a startup but the stock price dropped approximately 50% from the last peak and it took nearly five years for it to get back to where it was.
<<If you have an exec with $5-10MM in spread on exercisable options, then that is often many times their salary. They have a big incentive to exercise while the paper is still in the money. Your point about the the grant life of 10-years is pretty minor.>>
TNR you really don't understand the benefits of options. If you made $3MM on employee stock options, I'll eat my hat. Your comments are totally off the wall. An executive with a 10 year option period will not grab 8 points of stock rise the first year of grant unless he has some extraordinary need. The future rise in price over a ten year period warrants waiting it out - Dow is not a start up you know.
I think executive option packages are usually generated by company compensation committees that rely on consultants who, based on their surveys of similar sized companies in the market, are supposed to recommend fair and equitable programs. The compensation committee is usually made up of non-company directors and as such, is not supposed to a vested interest in the contracts, although theoretically, they could be controlled by the BOD.
If memory serves (and it often doesn't), I seem to recall back in '99 or '00, upper mgmt had a series of options that only vested if the stock price reached $150 (pre-split) by a certain date. It may have been perhaps one-third or so of their total option package. The details of the $150 mark elude me (did the close have to average out over a couple of days or did it just have to reach the mark) but nevertheless, the stock did not make it (it touched around $145 I think). If there was ever a potential for mgmt abuse of financial reporting to jack up the share price, that would have been it. I don't recall ever reading any other conditions for mgmt options and vesting thereof.
Thanks for the info. I suspected that but, aside from the exercise restrictions (revealed to me by a previous supervisor)I have no first-hand knowledge of the Options program for Dow executives. I just knew different companies can have different programs for "employees."