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For the past few years, general counsel with stock options have been like party-goers who get to a celebration just as the drinks and food run out. But in 2003, they made it to the party right on time. The 100 top-paid GCs on our 2004 compensation survey capitalized on the market’s rebound last year. They cashed out a total of $95 million in stock options, according to their companies’ proxy statements. That’s double the amount from 2002. More of our survey subjects were invited to the party, too. Last year, 39 of the top 100 GCs exercised options — reaping an average gain of $2.4 million — compared to just 32 cash-outs the year before. The average payout was 60 percent higher than in 2002. After years of underwater options, many GCs finally found their options “in the money” after share prices recovered. And the higher the share price climbed, the more likely that the chief legal officer cashed out. At companies whose GCs cashed out last year, the stock price was up by an average of 49 percent, according to Yahoo Finance stock data compiled by Corporate Counsel. At companies whose GCs didn’t cash out, share prices rose only 16 percent. But observers say that the cash-out frenzy might have just been a last binge, because investors and regulators are looking to spoil the fun. Corporations are listening to shareholders who want executives to hold on to their company stock. And the Financial Accounting Standards Board has proposed a rule that would force businesses to put stock options on the expense side of the corporate ledger. “The big cash-out increases [of 2003] are misleading,” says Michael Frank, an attorney specializing in executive compensation at Gray Cary Ware & Freidenrich’s East Palo Alto, Calif., office. “I don’t expect this to continue.” Fleeting or not, 2003 will go down as a vintage year for options paydays. Leading the way was Boston Scientific Corp. GC Paul Sandman, who cashed out a whopping $19.6 million. Not only was his cash-out the biggest on the survey this year, it was the largest cash-out by a GC on our survey in the last four years — since International Business Machines Corp.’s Lawrence Ricciardi cashed out $20.4 million in options in 1999. Sandman’s windfall was a reward for delayed gratification. The Natick, Mass.-based medical devices maker says it gave the GC nearly 1 million shares in options in 1999 and 2000. But with Boston Scientific share prices in the dumps, Sandman sat on almost worthless options for a few years. That all changed in 2003. Just as Sandman’s options vested, Boston Scientific’s share price rebounded, the result of taking a successful surgical stent to market. Sandman helped by successfully battling a host of patent challenges by competitors, says a company spokesman. Last autumn, Sandman found himself on the lucky side of buying shares at a strike price of between $6 and $8.50 and selling them on the open market for about $35. GCs at other other health care companies also had a good year. UnitedHealth Group Inc.’s David Lubben ($6 million) and Caremark Rx Inc.’s Edward Hardin Jr. ($4.2 million) both made the top 10 cash-out list. Technology sector GCs partied, too: Nine tech GCs cashed out, led by Intel Corp.’s F. Thomas Dunlap, Jr. ($8.3 million) and Lexmark International Inc.’s Vincent Cole ($3.5 million). For some GCs, healthy share prices coincided with a need for cash. Vincent Maffeo, GC of ITT Industries Inc., says that at age 50, he realized he wasn’t young anymore — and his kids were almost ready to leave for college. “I was reaching a point in my life where I started to think about how I was going to plan for getting older,” Maffeo says. After the engineering and manufacturing company’s stock surged 22 percent last year, Maffeo cashed out more options in 2003 — $1.8 million worth — than in the three prior years. Maffeo is still sitting on $3.3 million worth of exercisable options. Other GCs took the money because they wanted to diversify their portfolios. “I try to keep 50 percent of my assets in bonds and 50 percent in stock,” says Occidental Petroleum Corp.’s GC Donald de Brier, 54. He exercised his options four times last year, and realized a total cash-out of $5.1 million, the fourth-highest among GC cash-outs on our 2004 survey. De Brier bought bonds with much of the proceeds. “I just follow the conservative advice I get from my financial planner,” he says. De Brier’s still hoarding $10.4 million in exercisable options. Not everyone who was able to cash out did so. Charles Wall, GC of Altria Group Inc., is sitting on $20.7 million worth of exercisable options (the fourth-highest options pile), despite a stock price that rose 45 percent last year. “I just don’t [cash out as soon as I'm vested]. It’s my policy. I don’t exercise [my options] until the moment they are about to expire. I don’t want any disputes, debates, controversy or anything like that. Part of it is due to company loyalty; but look, I think the company is going to do well, and so I see no reason to jump into the fray,” he says. He’s got time to change his mind; Wall says his options won’t expire for a few years. Wall is the exception. Some experts say that company executives, unable to cash out during the downturn because of underwater options, jumped to cash out once share prices rose. “What we’re seeing is a lot of pent-up demand,” says Alan Johnson, managing director of Johnson Associates, a New York-based compensation consulting firm. “We’re getting three years of [cash-outs] all at once.” Take the case of Intel’s Dunlap. Like many Silicon Valley executives, he received huge options grants in the late 1990s. But when Intel’s share price dipped in late 2000, many of his options were barely above his strike price. Fortunately for him, Intel’s sales rose last year as the tech sector revived, and its share price doubled, from $15 to $30. Last October, Dunlap says, he exercised options on nearly 400,000 shares that were about to expire, reaping an $8.3 million bonanza. But outside shareholders weren’t so happy about Intel’s option grants to top execs. They forced non-binding proxy votes on a few option reform resolutions. As a result of the adverse publicity, Intel agreed to make changes to the way it allocates options to its employees. First, Intel shareholders will participate in a binding vote each year on whether the company’s allocation plan is fair. Also, Intel agreed not to give more than 5 percent of its total employee options grants to its top five officers. Other stock compensation changes are afoot in corporate America. According to a study by Towers Perrin, the New York-based compensation consulting firm, at least 30 large corporations, including Campbell Soup Co. and Bristol-Myers Squibb Co., have adopted stock retention programs that require executives to hold on to a fixed percentage of their shares, even if the options have vested and the executive has acquired the shares. But the biggest change may come from FASB, which could require companies to expense options as soon as later this year. According to compensation experts, many companies are loath to commit to such an approach — which would depress their bottom line and raise their tax burden — and have been lobbying FASB against it. In anticipation of these changes, companies are pulling back on options and, in some cases, substituting restricted stock grants. So is the era of stock options really over? It looks like it, but Jan Koors, a compensation consultant at New York-based Pearl Meyer & Partners, says few GCs will rue their demise. “If someone says to them, ‘I can give you $10 of restricted stock that you don’t have to pay for, or $20 of stock options that you are going to have to pay for and may or may not be worth something depending on the market,’ there’s no question which compensation that executive would choose.”

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