First Niagara Financial Group and Fisher-Price parent Mattel have become two of the latest U.S. companies to speed up the time when executives and other employees can cash in stock options in a bid to reduce their own expenses.
Stock options are rights to buy a specified number of shares at a fixed price during a set period of time, regardless of the current market price. They are only considered "in the money" or "above water" when the market price is higher than the exercise price, because the owners can buy stock for less than it's worth and then sell it at full value.
The options are used as a form of stock compensation, to encourage executives and employees to work harder to increase the value of the company and its shares. But the options are usually granted to "vest" or be exercised in stages over a few years. By speeding up the vesting, the companies are allowing their employees to use the options earlier than originally planned.
El Segundo, Calif.-based Mattel said it accelerated up the vesting of 12.4 million shares to cut $30 million in compensation costs from 2006 to 2008. The options have exercise prices ranging from $16.09 to $22.52, with an average price of $18.34. Mattel stock closed Wednesday at $15.90, which means those options are currently "under water" or worthless because they're more expensive than the shares themselves.
About 14 percent of the options, or 1.7 million, are held by executives, including 500,000 shares owned by Neil Friedman, Mattel Brands president and former president of East Aurora-based Fisher-Price. Shares held by Chief Executive Robert A. Eckert and nonemployee directors, as well as those with lower exercise prices were excluded.
However, the company also mandated that executive officers reporting directly to the CEO, including Friedman, must hold any shares they buy with the options until the options would have normally vested or until they leave the company, whichever comes first.
Similarly, Lockport-based First Niagara announced that it is speeding up the vesting of stock options held by about 200 directors and employees that would otherwise not have vested until sometime next year. That means 779,897 shares, or 35 percent of all unvested options, can now be cashed in.
Most would have vested by August, and more than half would have been exercisable by May. All but 60,016 of the options are "in the money," with "strike" prices ranging from just under $13 to just over $15. The stock closed at $14.56 on Thursday.
The savings bank said the move would reduce costs from $2.5 million to $1.3 million for 2006. Unlike Mattel and many other companies that vested all of their future options, however, First Niagara only advanced the vesting of next year's options, not those that can be used in 2007 through 2009, so it will still record expenses for those options in the future.
The company said it felt that cutting earnings by $1.2 million for options that would vest in a few months anyway seemed disproportionate for what the options are worth to the employee. But officials didn't object to paying such a charge for options that vest in future years.
The savings bank said it expects to continue using stock compensation, but didn't say whether that would be in the form of options or just restricted stock.
"We strongly believe in share-based compensation. We strongly believe that is and will continue to be an important part of our strategy and we fully accept, endorse and agree that there should be a charge," said First Niagara Chief Financial Officer John R. Koelmel.
Stock options have been a popular tool for companies to pay their executives highly without having to record a cost in their income statement. But that's been criticized by shareholder advocates, who say it hides the true compensation cost to a company and the impact to shareholders.
The Securities and Exchange Commission and Financial Accounting Standards Board changed that with a rule taking effect in January that requires companies to subtract the estimated value of stock options from their earnings. The rule was passed over the objections of industry, especially technology firms.
So many companies have opted to speed up the vesting of outstanding options to reduce or eliminate the cost. Already, more than 439 U.S. companies have cut $4 billion from expenses beginning next year, according to a report by Bear Stearns & Co. analyst Chris Senyek, who predicted over 600 companies will ultimately speed up vesting this year, cutting $5 billion in costs.
The bulk of those companies were in the technology sector, followed by health care. Financial companies, including banks and insurers, made up just 11 percent, or about 50 companies.
Most companies had small market values, with a median of $320 million. First Niagara's market capitalization is $1.65 billion, while Mattel is worth $6.4 billion.