Corporate Governance: Incentive Pay with 'Rolling Option Repricing' Terms: The Role of Advisory Services (ISS, Glass Lewis); Ramtron Case Study

Abstract:     
This brief essay looks at corporate governance issues that may arise when a company’s incentive pay package permits “rolling option repricing”.

In the case of Ramtron International Corporation (RMTR), the company proposed for shareholder vote at its annual meeting a pay package (the “2012 Plan”) authorizing the issuance of options and other equity incentives amounting to 9.9% of the firm’s outstanding shares. Because Ramtron’s 2012 Plan provided that any outstanding award under prior plans that subsequently expired or was forfeited would be rolled back into the 2012 Plan authorization, a vote in favor of the Ramtron 2012 Plan actually became a vote to authorize the potential issuance of equity awards amounting to 26.6% of outstanding shares. Leading advisories Institutional Shareholder Services (ISS) and Glass, Lewis & Co. LLC recommended a vote in favor of Ramtron’s 2012 incentive plan.

Is an incentive pay plan that potentially authorizes option grants to management amounting to 26.6% of currently outstanding shares an unreasonable size (too expensive)? How does enabling the rollover and reissue of expiring/forfeited options at lower prices with extended maturities differ in end result from enabling option repricing (a practice cited by advisories as a cause for disapproval of a plan)? What can be said about the criteria and operation of institutional shareholder advisory services?

Corporate officers and directors, in proposing pay incentive plans, may want to give these issues thought, and, regardless of the recommendations of advisory services, investors may wish to more closely inspect proposed plans that include “rolling option repricing” terms.

Number of Pages in PDF File: 23

Keywords: governance, incentive pay, option, ISS, Glass Lewis, Ramtron, RMTR

JEL Classification: G30, G32, M52

working papers series