Texb re IDCC’s executive compensation plans. From your post in bold:
(1) IDCC now has two separate and substantial executive bonus plans that are tied to goals that DO NOT correlate well, if at all, with stock performance. Management is NOT aligned with shareholder interests through these two bonus plans whose goals are purposefully limited to predictable cash balances and other easily achievable benchmarks.
It certainly appears that you are right about the existence of two separate compensation plans for certain IDCC executives, the old existing bonus plan and the new Long-Term Incentive Plan (LTI). It was certainly unusual to have two different RSU grants already in 2005, one dated 1/1/05 and the other dated 2/28/05. It appeared that the February RSU grant to the insiders was almost 20% of the number of RSUs granted in January. I agree with your opinion that the Jan. RSU grant was probably associated with the new LTI plan, and that the Feb. RSU grant was probably associated with the older existing Bonus plan.
(2) The imposition of costs associated with the LTIP have singlehandedly taken IDCC from potentially exceeding market expectations to "misses" in the last 3 quarters. IMO, IDCC's credibility with the Street and the analyst community is strained nearly to a breaking point largely as a result of the LTIP. Nokia is a convenient scapegoat, but much of IDCC's current depressed stagnation is traceable to IDCC's failure to control costs, especially those of the LTIP.
The real question becomes how much are these long-term incentive and bonus plans really costing? How much did IDCC actually expense in 2004 relating to these compensation plans, and how much of the unvested 2004 RSU grant value carries-over into 2005's expenses. How much do they project expensing in 2005 related to these plans, and how much of the unvested 2005 RSU grant value carries-over to 2006 and 2007 expenses? We will probably get some form of answer as to the 2004 recorded expenses when the 10K comes out, and additional answers as to the total 2004 compensation of insiders when the proxy comes out.
From a discussion with IR on 9/11/04 re some of my specific questions about the new compensation plan as follows:
1. It is clear that this new compensation plan will cost $7 million for 2004, beginning in April 2004, composed of $3 million in cash-based LTI and $4 million in restricted stock units. Does the $7 million cost represent an entire 12 months of cost or only 9 months?
I did not ask Janet this question, because it was clear from the second quarter 10Q that the $7m represented nine months or three quarters. IDCC disclosed that $2.3m of operating expense increase in the second quarter was due to the new employee compensation plan.
2. Does the new compensation plan, which involves approximately $70,000 average additional compensation each for about 100 managers and executives in 2004, replace the existing bonus plan for certain IDCC executives or is it in addition to the existing bonus plan?
Janet said that the old bonus plan for some of the executives has not been officially replaced by the new incentive plan, or that was my understanding of what she said. However she thought that the new incentive plan would tend to somewhat supercede the old bonus plan or at least be taken into consideration, so that from a practical standpoint there shouldn’t be a lot of duplicated incentive compensation for these certain executives.
3. The LTI part of the compensation plan is entirely performance based with the level of potential payout being tied to the achievement of goals associated with the Company's strategic plan. Will IDCC officially publish this Strategic Plan, so that shareholders and analysts will be able to judge whether or not strategic goals are being achieved? What happens if strategic goals are not met, then would there be no LTI compensation or would there be some type of prorated LTI compensation?
IDCC has no plans at this time to publicly disclose the Strategic Plan. If IDCC comes close to achieving a certain goal, without fully achieving it, then there could be some type of prorated incentive compensation allowed. However if they do not achieve a certain “threshold” level on a particular goal, then no incentive compensation will be awarded for that goal.
4. It appears that $4 million restricted stock units for 2004 are taking the place of the stock options as a major component of compensation. RSUs have a double-negative impact on earnings per share by reducing the company’s Net Income (expense affect) and by increasing the outstanding shares (dilution effect). Will IDCC consider using only cash as additional compensation, in conjunction with required or expected IDCC stock purchases by the recipients with a part of the extra cash received, thus eliminating the use of stock-based dilutive instruments as compensation?
At this time they are not modifying the new compensation plan, which includes both cash and RSUs.
5. Some previous restricted stock grants of IDCC also involved a tax gross-up feature, which greatly increased the cost by covering the recipients expected income tax. Will the RSUs or restricted stock used in the new compensation plan have a tax gross-up feature also?
No the tax gross-up feature has been eliminated.
6. The restricted stock units vest over time. How long is the vesting period? Is it one year, two years, three years, five years, ten years, etc? Almost all of IDCC’s existing outstanding restricted stock units vest in one or two years. Will RSUs really help the stated goal of employee retention, if the vesting period is real short?
The latest RSUs granted under the new incentive plan had a two-year vest period. However, some vest only at the end of two years, whereas others partially vest at the end of one year and the remainder would vest at the end of the second year. The RSUs granted to “upper management” vest only at the end of the two-year period. However for accounting purposes, IDCC still has to accrue an expense amount in each quarter for all the granted RSUs, although the calculation is a little different for the RSUs that vest only at the end of the two-year period. BTW the vesting period is determined at each RSU grant date, and can therefore be changed each year.
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