Micron Chiefs Get More Stock Options

10/24/02
By: Julie Howard, The Idaho Statesman

Micron Chairman and CEO Steve Appleton and other top executives at the semiconductor firm received at least 50 percent more stock options for 2002, a year in which the Boise company reported a record $907 million loss.

Appleton was given a 60 percent increase, or 400,000 options, according to the firm´s annual proxy statement mailed to shareholders this week. Using federal guidelines, Micron said the value of Appleton´s options over the next 10 years could be $13.5 million.

The company´s top executive continues to forgo his annual $800,000 salary, a move he made a year ago. Appleton has said he will not draw his salary until the company posts a quarterly profit.

Compensation and stock option specialists said the boost in options was to ensure talented executives aren´t stolen away by rival firms.

“If these are good executives, they are at risk because they´ve experienced a pay cut, and their previous options are underwater,” said Daniel Moynihan, a principal with Compensation Resources in New Jersey. “Another company could come offer the same salary and a new set of fresh options.”

Attempts on Wednesday to reach members of Micron´s compensation committee were unsuccessful. A Micron spokesman declined to comment on the committee´s reasons for increasing options to top executives.

“That´s a private committee decision and not made public,” Micron spokesman Sean Mahoney said.

The company´s proxy statement says the committee issued stock options to executive officers “in order to provide incentive … related to long-term growth in the value of the company´s common stock.”

Salary incentives have been reduced.

In addition to Appleton´s own salary decision, Micron´s top executives operated under a 20 percent pay cut during the past year. And, options granted last year had a strike price of $78.31, meaning they have no value — or are underwater — unless Micron share prices rise above that amount.

Micron shares closed Wednesday at $15.68, up $1.23 for the day.

Current options were given a strike price of $21.11, the price the stock traded at the day the options were granted back on Aug. 22.

“My gut reaction is this was an attempt to offset the salary losses,” Moynihan said. “It was an effort to recognize they not only gave up salary, but also in recognition that all those options from the past year are virtually worthless.”

That opinion is shared by Paul Bahnson, an accounting professor at Boise State University. He said companies have been known to “reload” options that have little hope of providing value to an executive.

“Options with a strike price of $78 when the share prices are much lower is not a powerful incentive,” Bahnson said. “A company can reload the options, or lower the strike price. An alternative is to give a bunch more options this year to make up for those given in the past.”

The financial rewards that can come with stock options can be extreme and can far surpass an executive´s annual salary when the company is doing well and share prices are up.

In fiscal 2000, Appleton had an income of more than $42 million, of which only $657,000 was salary. That year, he received $2.5 million in bonuses and netted more than $39 million by cashing in stock options.

During fiscal 2002, Appleton´s entire income was markedly different. He received $110,777 in salary for the two months before he began declining his annual $800,000 salary. He received no bonus and netted $34,200 from exercising options. He does, however, continue to own or hold the right to acquire 1.1 million shares of Micron stock.

Equilar Inc., a company that tracks compensation trends, released a report Wednesday that says most CEOs surveyed either didn´t receive a bonus or saw their median bonuses decline by more than 43 percent in 2002. CEOs also saw a decline in cash and other compensation for the year, the report said.

In July, a national survey of mostly small and medium sized technology companies showed that base salary was considered a central element of compensation. Grant Thornton, a Chicago firm conducting the study, reported that executives wanted the security of the salary rather than having bonuses or stock options dominate.

For large public companies such as Micron, however, options will continue to be a primary element of compensation, Moynihan said.

“The goal of using equity as a tool is to provide long-term wealth accumulation and retention incentive for executives,” he said.

Tying personal reward to stock price also provides an incentive for a company´s leaders to generate sales and profits that typically drive up share prices.

“They´re making money if the company is successful,” Moynihan said. “It´s all about shareholder return and nothing else. They need to make sure a profit is made.”

The proxy statement used an SEC-approved formula to calculate a potential value for options granted to executives.

Under that formula, the options granted to Appleton in 2002 could be worth a net $13.5 million to him by the time they expire.

Bahnson, however, said such a calculation is unreliable.

“That number could end up being zero or some unbounded huge amount,” he said, because Micron´s share prices fluctuate dramatically from year to year. “There´s a wild range of outcomes, and it´s complete speculation to what the value could be.”

Even though he chose not to accept it, Appleton´s salary is the third largest among CEOs at public companies in Idaho.

According to the last proxy statements filed, Albertsons Chairman and CEO Larry Johnston ranked the highest, with a $980,770 salary, followed by Boise Cascade CEO George Harad, at $975,009.

Christopher Maus of Lifestream Technologies was awarded the most options — 872,000 —in the past fiscal year, followed by Harad (297,000) and Stephen D. Simpson of Extended Systems Inc. (125,000).