Option Grants Spiraled 30% as Stocks Sank

The number of corporate stock options granted to workers shot up 29% in the first half of 2009 compared to the same period in 2008, according to a comparison of 68 Israeli companies traded on the Nasdaq exchange in New York conducted by Tamir Fishman investment house. Just 1.2% more options were granted to workers in the first two quarters of 2008 compared to the same period the previous year.

"It's certainly true to say that there has been a large increase in the number options allocated to company employees since the beginning of the crisis compared to the period that preceded it," says Yaniv Shiryon, Tamir Fishman's head of corporate benefit services.

The investment house manages employee stock option plans for numerous companies, including Bezeq, Bank Leumi, Bank Mizrahi, Alvarion, Nice and Intel Israel.

"The most dramatic increase is in the number of options allocated to top executives," says Shiryon. "The increase in the number of options allocated to other employees is not as clear-cut or as substantial, but per person, it has definitely increased."

The calculations are based on the number of options, and do not reflect the value of the allocations, in light of the fluctuating value of the shares. The collapse of stock prices in the current crisis has created an opportunity, and the capacity for big profit in the area of employee stock option plans.

Granting stock options is, in essence, offering corporate employees and management the opportunity to participate in a company's profits and enjoy its success - that's why they are considered an employee incentive. Workers receive options beyond their cash salary, and their contribution to the company should result in an increase in the value of their shares, enabling them to earn more from the options granted to them.

In recent months the situation has been different. Companies granting stock options to employees are allowing them a chance to make a great deal of money simply by benefiting from the expected correction of stock prices and overall recovery of the market, and not necessarily through the company's actions. The losers from these issues are generally shareholders, both private and institutional investors, whose shares are diluted.

No mechanism for punishment

More and more companies have recently distributed options to their top management, including board members and other persons who have a decisive influence on corporate decisions. According to a survey recently conducted by PricewaterhouseCoopers, Israel, on options granted to the chief executives of the companies included in the TA-100 index, almost no allocation of options included a predefined set of targets as a prerequisite for exercising the options, other than the interim time period and continued employment in the company.

The survey also revealed that in about 60% of the cases, the average cost of exercising the option was based on the average price in the month preceding the granting of the options. The median shareholders equity granted to a manager was about 0.1%, ranging between 0.001% and 4%, and the median value granted to each manager was about NIS 600,000, according to the survey.

Some 90% of those queried by PwC agreed that compensation mechanisms in the financial sector are slanted in favor of short-term performance, and offer no "punishment" for disappointing results. In addition, annual incentives granted to chief executives and vice presidents were found to have been based on the board's discretion in 70% of the instances reviewed, and not on predetermined measures and targets.

Moreover, Shiryon explains, the increase in the number of share options granted is a result of layoffs in these companies. "Companies have implemented large-scale layoffs, but continued to allocate the same number of options to employees in general as they have in the past. As a result, the number of options granted to specific employees has increased."