Opting Out
Stock options help glue top talent to a company, right? But as their value increases, aren’t they just as likely to aid a quick exit?
When Don Gray had the chance to exercise his stock options back in 2006, they weren’t just “above water,” as the term goes. They were above the clouds. Gray didn’t hesitate. The maverick founder, CEO and president of Peyto Energy Trust who had, in a mere eight years, built his natural gas producer from puny to powerhouse, up and quit, aged 41.
“The bottom line,” he says, “is we made a ton of money for our shareholders. We had our share price go up 30,000%.” Before the company went public, Peyto’s board had voted Gray a healthy number of stock options to supplement his salary of about $200,000 a year. (Other Peyto employees got options as well, from the engineers right down to the company’s first receptionist who, says Gray, subsequently became a millionaire.) Multiplied by Gray’s options and share units, that mind-boggling 30,000% worked out to around 100 million bucks. Enough that even somebody used to life’s little comforts need never have to work again. What blue-collar workers who play the lottery call “F.U. money.”
“I don’t crave being in the public arena,” Gray, 43, says now. “I never wanted to be a CEO. I wanted to make financial freedom.” Now he’s enjoying the kind of homey life that he suspects a lot of A-types in the oil biz would go spinny trying to live. “Going from your office tower and your job downtown to [a life] where you’re picking up your son from kindergarten and you’re helping out with the groceries, it’s a different world, and most of those guys couldn’t handle that change in lifestyle. Me, I enjoy it,” says Gray, adding that he still serves as a director of Peyto, does his own investing and occasionally helps others start up oil companies.
Gray’s departure, like some others in the Alberta oil and gas sector, raises a niggling question about the value of stock options as a corporate retention tool. It may not be an issue right now, when stock values are headed due south, but can those golden handcuffs turn into a golden chariot straight to retirement when those options eventually turn into hard cash? Like, say, if we had a cold winter and natural gas prices staged a long-predicted comeback?
Out in the patch, amongst executive compensation experts, board members and C-suiters themselves, the answer seems to be, “Maybe. Not usually. And why worry about it?”
As a board member at a half dozen companies, including chair of biotech firm CV Technologies, where he is a member of the compensation committee, Gord Tallman has plenty of experience trying to cobble together compensation packages. So much so that Tallman, a member of the Institute of Corporate Directors and a mentor at the University of Alberta School of Business, lectured on the subject in 2006 at the Telus Centre for Professional Development. Tallman sees stock options as necessary in Alberta’s continued tight race to reel in and keep the best and brightest. Big salaries and fat bonuses simply don’t cut it here, where risk-and-reward style compensation – meaning options – reflects the wager mentality that prevails in the patch. Bonuses? How boringly predictable. Moreover, they don’t reward people for making long-term contributions to a company. But options that can inflate like a blowfish to preposterous size, now that’s something that motivates people.
“You can give someone an option package that vests over five years, and hopefully you are going to retain them for five years,” opines Tallman. “And if they’ve created sufficient value which enables them to retire, obviously they created loads of value for the other shareholders also.” For the company and its shareholders, that’s a reasonable trade-off. But Tallman can’t recall anyone he knows scoring big on their options and then taking early retirement. (A more common problem is executives and their families raising their standard of living based on options that are in the money now, but may not be by the time they vest.)
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