Executives Get Bonuses As Firms Reprice Options
Aim Is to Offset Losses As Backdating Is Fixed; Mr.
By Charles Forelle
The Wall Street Journal
Saturday, January 20, 2007
The stock-options backdating scandal has prompted dozens of
companies to fire top executives, take charges totaling
billions of dollars against earnings and tell shareholders
that they misrepresented how options were awarded.
Now, a number of companies are taking one more step: making
special payments to executives or directors who received
backdated options. Companies say the payments will
compensate executives and directors who weren't involved in
options wrongdoing, yet saw their potential profit reduced
when their options were adjusted to reflect the actual dates
they were issued. Several of the companies describe the
payments as bonuses in regulatory filings.
But the practice has given critics more fodder for attacks
on ballooning executive pay levels and special perks.
Federal authorities are scrutinizing the options practices
of nearly 140 companies, and scores more companies are
conducting internal reviews. A stock option typically gives
its holder the right to buy a set amount of stock at some
future time, at its price at the time the option was
granted. The idea is to give recipients an incentive to
help boost the company's share price. But a number of
companies and executives changed the date on their grants to
make them appear they had been granted at a time when the
price was even lower, making them worth more to their
Many companies that have acknowledged options-dating
troubles are adopting the position that misdated options --
particularly those granted to top executives -- should be
fixed without taking more out of shareholders' pockets. For
instance, Sehat Sutardja, chief executive officer of
microchip maker Marvell Technology Group Ltd., recently
reimbursed his employer $5,355,001 for wrongly dated stock
options he already had cashed in. He also agreed to forgo
another $5.4 million from the value of options he still
But some companies are taking another course. At KLA-Tencor
Corp., for instance, Chief Executive Richard Wallace is in
line for an options-related "special cash bonus," according
to a securities filing.
The semiconductor-equipment maker is adjusting some of Mr.
Wallace's options to carry the share prices that correspond
to the dates the options were awarded, rather than the wrong
ones achieved through backdating. The adjustments shaved
$368,618.36 from the value of those grants. According to
the filing, Mr. Wallace will have that amount paid to him in
In effect, Mr. Wallace may come out ahead now that
backdating has been exposed, since he is swapping
unrealized, potential profit -- which could evaporate if
KLA-Tencor shares fall -- for cash. By keeping the repriced
options, he retains the chance to profit from them if shares
In most cases, the companies making the payments say the
executives in question aren't the ones responsible for the
options troubles. KLA-Tencor has said in filings that Mr.
Wallace, a 19-year company veteran who became CEO last year,
had "no involvement" in the improper options granting, which
it says occurred primarily from July 1997 through June 2002,
a period when Mr. Wallace was a lower-level executive.
KLA-Tencor has said it intends to cancel improper options
held by former CEO Kenneth Schroeder, and it will reprice --
without compensatory payment -- improper options held by Ken
Levy, its former chairman. Mr. Schroeder, a longtime
executive who had taken an advisory role, was fired and Mr.
Levy left in the wake of KLA-Tencor backdating revelations
A KLA-Tencor spokeswoman, Kyra Whitten, says the bonuses are
being paid to Mr. Wallace and two other officials because
the company doesn't want employees not involved with the
options trouble to be "adversely impacted." She said the
company hasn't yet decided how it will treat backdated
options held by nonexecutive employees.
With readjusted prices, most of Mr. Wallace's options are
still "in the money" -- meaning their price is below the
current market price. But a portion aren't -- meaning they
wouldn't be profitable if cashed out. KLA-Tencor will pay
Mr. Wallace $84,332.69 for that portion, according to the
company's securities filings, meaning Mr. Wallace will be
making money from so-called underwater options that
otherwise wouldn't yield profit for him at all. The payment
is due in January 2008.
The bonuses don't sit well with shareholder activists. "To
do this in the context of the outrage over the practice [of
backdating] is just shocking," says Ann Yerger, the
executive director of the Council of Institutional
Investors, who said she was stunned when informed of the
payments. "It is a sign that something remains rotten in
corporate America with regard to executive pay."
Brian Foley, a compensation consultant in White Plains,
N.Y., says, "it seems to me that it [reimbursement] would
really stick in one's craw if it goes to the CEO, CFO,
general counsel, or anyone who was in the know or should
have been in the know."
Mr. Foley adds that the cash payments are "awkward," since
it means people get paid for options they haven't yet -- and
might never -- exercise.
At Affiliated Computer Services Inc., a Dallas outsourcer
that last year ousted two top executives because of
extensive backdating, several of those who remain are in
line for special bonuses to compensate them for the loss of
value on their wrongly dated grants. At the top of the
list: Chairman Darwin Deason, who was head of the company's
compensation committee and CEO for much of time when
backdating occurred. Mr. Deason, who founded ACS and holds
more than $400 million of company stock, will get a payment
of $650,000, according to an ACS securities filing.
Michael Buckley, a spokesman for ACS, said Mr. Deason isn't
being treated differently than any other employee.
Another ACS executive, Thomas Burlin, will get just over
$100,000 thanks to the repricing of a misdated option grant
that is presently out-of-the-money. Mr. Burlin's options
aren't worth anything at ACS's current stock price.
Meanwhile, Fossil Inc. has said seven officers of the
clothing-and-accessories maker could be up for a "cash
bonus" if their options were repriced. And microchip
Broadcom Corp. said a top sales executive may be up for a
"special" payment of $525,870 next January to compensate him
for lost option value.
Top executives of Sonus Networks Inc., a Massachusetts-based
telecommunications-equipment maker, also may have a payday
coming. The company has said it likely will reprice wrongly
dated options, though it hasn't yet done so. Sonus says in
a filing that upon repricing, it intends to pay certain
executives and directors for any lost value.
Sonus's chairman and CEO, Hassan Ahmed, has some four
million options covered by the payout agreement -- including
one grant of 640,000 shares that is deeply under water. It
now carries a grant date of April 3, 2001, with an exercise
price of $13.875.
The stock was near a sharp low on that date, meaning a new
price from a date even couple of days later would shrink Mr.
Ahmed's potential profit. If the option is repriced to
April 5, for example, the exercise price would change to
$17.875 -- and Mr. Ahmed would be in line for a special
payment of $2.6 million for an option that is otherwise very
far from being profitable. (Sonus shares currently trade at
"All this really is is acknowledging a previous commitment"
to grant an option at the originally agreed price, said
Charlie Gray, Sonus's general counsel. He said Sonus hasn't
determined whether the April 2001 grant carried an incorrect
price, and he added that the company might seek to
renegotiate the payment agreement in cases where the grant
is well out of the money. He said Sonus's audit committee
examined the granting practices and concluded that no
current member of management, including Mr. Ahmed, did
The recent disclosures about the repricings come in large
part thanks to a provision of Section 409A of the federal
tax code. Section 409A slaps a 20% excise tax, along with
other penalties, on certain "discount" stock options whose
exercise price is below the level of the stock on the day
the option was granted. Options backdated to a day with a
low price are a type of discount option. By agreeing to
reprice the options, an executive is saved from the big tax
Executives who already have exercised backdated options may
have to pay a penalty tax. But at least one company, j2
Global Communications Inc., a Los Angeles seller of telecom
services, is relieving that burden. In a filing, the
company says it "anticipates resolving the matter directly
with the Internal Revenue Service on behalf of all such
holders, including making any payments that are required."
In addition to paying its executives' taxes, j2 Global also
is offering a "compensating payment" to several because of
repriced options. The company says in its filing that it
had used "incorrect measurement dates" for some options but
that "no willful backdating took place."
The bulk of companies that have admitted to options problems
aren't being nearly so generous.
Every director and executive officer of chip maker Actel
Corp. of Mountain View, Calif., for instance, will have
wrongly dated options repriced with no reimbursement.
Stephen Hemsley, who replaced William McGuire as CEO of
UnitedHealth Group Inc. after Dr. McGuire's options-fueled
ouster, is surrendering about $190 million in value, though
the Minnetonka, Minn., insurer said it believes Mr. Hemsley
did nothing wrong. (Dr. McGuire is forfeiting $200
million.) Boston Communications Group Inc. of Bedford,
Mass., said in a filing that 13 current or former executives
or directors are surrendering outright a total of more than
410,000 wrongly dated options, without compensation.
Write to Charles Forelle