***OT Aligning Management Interest with Shareholders OT****
The chip equipment industry has a lot to lean from Maple Foods if we, as shareholders, will only exercise our voting rights.
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Maple Leaf gives lesson in Options 101
By BARRY CRITCHLEY
The Financial Post
ÿAny company that wants to bring common sense to what has become a great ripoff -- management share option arrangements -- should have a chat with Michael McCain, president of Maple Leaf Foods Inc.
ÿ"He is the principal architect, the flag carrier on the stock option program," said Maple Leaf chief financial officer Tom Muir. The company recently added a third leg to its program, which was endorsed by shareholders at its recent annual meeting. Like the other two, it's performance based, meaning the stock price, or return on net assets, has to reach certain levels before the options can be exercised.
ÿHere are its main elements:
Options were granted to 57 senior employees instead of cash payment entitlements under Maple Leaf's bonus plan.
The 57 could waive all or part of the share options and collect the amount they were entitled to under the plan. Of the five most senior officers, two took cash, two (McCain and Muir) took options and one took a combination.
Those who participated received one seven-year option for each $5.14 of cash bonus, exercisable at $15.49. The $5.14 was calculated by using the Black-Scholes option pricing model, less 20%. "Participating executives have the incentive to increase share prices by more than just a modest amount, as they will benefit only if the share price at the time of exercise exceeds $20.63 [$15.49 plus $5.14 in cash bonus forgone] plus the investment income the executive would have earned on the cash bonus."
ÿThe first leg in the option plan was introduced in 1995, when the stock was $7. About 2.5 million options were granted at that time to 18 senior executives. A mere 26% of the options granted (5.2% a year) vest automatically over the period. The other 74% vest provided the stock price reaches certain levels. "The better the price, the more options can be exercised," Muir said.
ÿThe stock price had to double to $14 over a five-year period -- a 15% compound annual rate of return -- before any of the 74% of options could be exercised. For each $1 increase over the $14, a further 1/11 of the vested options become exercisable.
ÿIf the stock reaches $24 on or before the five years, the remaining 74% could be exercised. "It's not a straight line correlation but rather an exponential correlation with shareholder returns," said Muir, explaining that for each additional $1 increase in the stock price, management does better than it did on the previous $1 increase.
ÿThe third leg was introduced seven months after the second leg -- options for 86 senior managers and executives to buy 560,000 shares. Those options vest over a period from 1998 to 2002, based on the company's performance for fiscal years 1997 to 2001.
ÿReturn on net assets is the performance criterion.
ÿ"If RONA hasn't achieved certain targets, you don't get full vesting," said Muir, referring to the annual option plan. To vest, actual RONA has to be at least equal to budgeted RONA for each year. "To the extent actual RONA is below budgeted RONA in one or more years, the number of options that can be exercised is reduced."
ÿMaple Leaf shares (MFI/TSE) closed up 75› at $20.25 yesterday.
ÿOn changes to the option arrangements, Muir expressed no support for tying the exercise to Maple Leaf outperforming its peer group. He said the company competes for capital against all companies, not just food producers. So why not extend the benchmark to the Toronto Stock Exchange 300 index? Muir said such a plan hadn't been considered
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