Redmeat re email to BoD on structuring compensation in a different manner.
I did make that suggestion to IDCC's directors in an email on May 24 as follows:
To all IDCC directors:
I would like to make a suggestion for the Board’s consideration as a follow-up to my previous email. I previously stated that I had reservations about IDCC’s new compensation plan because of the continued use of dilutive stock-based instruments as compensation, with RSUs just replacing stock options.
RSUs represent free stock to the recipient, involving no cost outflows to the recipients, unlike options and warrants. The values of the granted RSUs are amortized as compensation expense, and they are dilutive by adding to the total outstanding shares, as the RSUs vest. Therefore RSUs have a double-negative impact on earnings per share by decreasing Net Income (expensing affect), and increasing outstanding shares (dilutive affect).
I think IDCC’s stated reason for the continued use of stock-based compensation is to get shares of stock into the hands of the insiders and managers, and thus “align your interests with those of the outside shareholders”. However in my opinion, you are going about this in the wrong way. An excerpt from my previous letter as follows:
I don’t think free restricted stock is the best way to accomplish the stated goal of promoting ownership in the Company among managers and executives, because the insider owner has none of their own money at risk in the company stock. If the goal is to encourage employees and directors to take an ownership stake in the company, then there are better ways to accomplish this than restricted stock units. The only way to totally align “insider ownership” with “outside ownership” is to have employee and director owners invest at the prevailing market prices or a reasonable discount thereto, and put their own capital at risk in the investment, just like outside owners have to do. Then they will really be aligned with the outside owners. Management will never think like a true owner thinks, until one’s own money is at risk.
Now allow me suggest to you what I think is a better way for IDCC to compensate its directors and officers. All compensation to directors, officers, and managers should be paid in CASH, and eliminate the use of dilutive stock instruments. Of course cash compensation will be an expense, just like the value of stock-based instruments will be an expense. However there is absolutely no dilution affect by using strictly cash compensation.
Then to encourage director, officer, and management ownership of IDCC stock, IDCC could make either a requirement or a strong expectation that each recipient use a certain percent of the extra cash compensation to actually buy IDCC stock on the open market. If an individual does not use the extra cash to buy the expected amount of IDCC stock, then future extra compensation to that individual could be reduced or eliminated. This would trigger insider buying, which is looked upon very favorably by the investment community. Director compensation and officer additional compensation could even be staggered so that some insider is continually compensated and purchasing IDCC stock.
By purchasing stock at the full market price with a part of their additional cash compensation, then directors, officers, and managers have their own money at risk in IDCC, just like outside shareholders do. You will then be more truly aligned with the outside shareholder, and more inclined to always strive to enhance shareholder value. Sometimes stock options and RSUs might even be viewed has having a possible conflict of interest with always being motivated to drive the share price higher. Recipients of stock options and RSUs would naturally prefer to receive these instruments when the stock price is as low as possible at the date of grant due to taxability and other reasons.
IDCC's new compensation plan calls for $7m of extra compensation in 2004, with $3m in cash and $4m in RSUs. Just pay out the total $7m in cash, and make a requirement or strong expectation that the recipients use the extra $4m of cash to buy IDCC stock on the open market. Same compensation amount but much greater benefits by using strictly cash compensation, accompanied by stock purchases on the open market, recapped as follows:
There is no additional dilution cost to the outside shareholders with cash-only compensation, thus there is no double-negative impact upon earnings per share.
The investment community will view insider stock purchases on the open market very favorably. Even if there are subsequent insider sales, any possible negative impact will be mitigated by the ongoing insider purchases.
IDCC personnel become true owners of IDCC stock in that your own money is now invested at the going market price, exactly like the outside shareholders.
Your interests are now perfectly aligned with the outside shareholders in that your only incentive is to enhance shareholder value by always striving to drive the share price higher.
Thanks in advance for your consideration of these issues.
Sincerely,
Ronny Marchman, CPA
AI
