Recently, Greg Millman at the Wall Street Journal quoted me on the pay changes announced at Intel. The article questions the significance of the program changes to Intel’s Outperformance Stock Units (OSUs). I think that the more significant change is in the pay mix. Here are my observations:
Prior to the announcement:
- OSUs pay out based on difference between Intel’s TSR and median TSR of a peer group
- For + TSR difference, formula was 100% + 5 x TSR difference, capped at 200%
- For - TSR difference, formula was 100% + 2.5 x - TSR difference, but not below 50%
- Design is less typical than basing payout on percentile rank
- This award can be bifurcated – it’s effectively the same as providing half RSUs and half relative TSR units with a 0% to 300% payout range
- High maximum impacts grant-date fair value of OSU portion – roughly 2x stock price at grant date (disclosed value approximated with my Monte Carlo valuation)
- Disclosed pay mix compared to the effective pay mix after bifurcating was as follows:
| Vehicle |
Disclosed Mix |
Effective Mix |
| OSUs |
50% |
35% |
| RSUs |
30% |
45% |
| SOs |
20% |
20% |
- If ISS did a similar analysis, only about 9% of the number of shares granted might have been considered performance-based (Note: ISS uses the NUMBER of shares, not value)
After the announcement:
- OSUs will no longer have 50% guarantee
- OSU leverage declines:
- For + TSR difference, formula was 100% + 4 x TSR difference, capped at 200%
- For - TSR difference, formula was 100% + 2 x - TSR difference, but not below 0%
- Grant date fair value declines relative to stock price – I estimate 1.35x with same assumptions
- Pay mix changes to 60% OSUs/40% RSUs
- Number of OSUs could be above 50% (I get 51% based on my Monte Carlo valuation), which would be viewed more favorably by ISS
It is important to note that ISS did issue a negative say-on-pay recommendation for Intel last proxy season – most likely because of large retention awards during the CEO transition. While the changes communicated by Intel might not appear to be all that significant, ISS might view a change from about 9% performance-based grants to 51% as considerably more favorable than last year’s compensation program (again, ISS looks at the NUMBER of shares granted, not value, when making its assessment). If I’m right, then there should be a more favorable say-on-pay recommendation from ISS this year for Intel.
I hope you find this analysis interesting. If you have any questions or comments or would like to discuss anything related to executive compensation, please give me a call.
Talk to you soon.
Andy |
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