Radford Research Shows Equity Award Exchange Patterns

New data from Aon Consulting's Radford Surveys + Consulting shows that 48% of 103 companies that have conducted options exchanges since 2005 have used options for options exchanges, 36% options for stock (usually a form of restricted shares), 13% a options for cash, and 3% a combination. About 56% of the companies make CEOs eligible; somewhat more make other named executives eligible, but only 31% make board members eligible. Not surprisingly, companies that do not need shareholder approval for their options exchanges are more likely to include executives than those that do need an OK from shareholders.

Almost all the companies limit the options that can be exchanged to those with an exercise price above a multiple of the stock's fair market value at the time of the exchange. The median multiple is 1.4 times and the 75th percentile at 2 times. Half of the companies exchange one option for one new option; of those that do not, the median exchange ratio is 2 to 1. Where options are exchanged for stock, the median is 5 to 1. Just over half of the companies fully reset vesting, regardless of whether they're exchanging options for options or for stock; 28% of options for options companies and 14% of options for stock companies map existing vesting to the new awards; and the rest do partial mapping.

Radford also looked at how four plan design characteristics affected an exchange program's chances for favorable votes from mutual funds holding company shares:

• Exclusion of board and members and named officers
• Price floor above the 52-week high
• Value neutral exchange rates (the present value of the new awards does not exceed what the existing awards were worth)
• Reset vesting

Seventy-nine percent of exchange programs that combined all four features received "for" votes from their mutual fund stockholders.

Radford has a detailed portal on its Web site providing SEC filings for exchanges, articles on ideas for doing exchanges, and research on these practices.