Conference 7.286::digital

  I have some questions about the stock options program.
  Can someone explain, in plain language, why the "re-grant" is taking place?
I assume it is related to the recent large drop in Digital stock prices.
         
>   exchange for one new option.  Some 10,000 current employees, excluding 
>   executive officers of the corporation, are eligible to participate in 
>   the program.

  What kinds of current employees are eligible for the stock option program?
10,000 is a much larger number than I would have expected.

    Sometimes, in the old DEC, a manager receiving 1000 share block of 
    options would "share" with his/her direct reports. In this way the
    hard workers could be rewarded above and beyond the salary plan
    guidelines. 10,000 is not so big a number when you consider some of
    these options are only 100 shares.
    
    /Bob

    
>  Can someone explain, in plain language, why the "re-grant" is taking place?
>I assume it is related to the recent large drop in Digital stock prices.

    Lots of people hold options that will allow them to buy Digital stock
    at a set price. Some of these options are 2,3,5 times the price that
    Digital stock is currently selling for. Since even Digital managers
    know that buy high and sell low is not a good deal no one is about
    to exercise those options. And since Digital stock is unlikely to
    rise to those levels soon they are not all that attractive a benefit.

    What this regrant will do is replace these high, probably unreachable
    prices, with options that are in reach. This way people have an
    incentive to help the company do well and the price go up so they
    can make extra money.

    			Alfred

        The following is posted as an anonymous comment.  The author was
        asked to keep his or her options "secret" and thus doesn't wish to
        be associated with the comment.  (I will have the original message
        on file.)                                                    
        
        -- begin --
        
    I have received two stock option awards (50 shares each) in my 14+
    years at Digital (I'm in Digital Consulting).  These were given to me
    as merit awards and as an incentive to keep up the good work. 
    Unfortunately, the incentive has long since disappeared.

    My first 50 shares were about 10 years ago at a purchase price of (I
    think) $65 each.  I was allowed to exercise 10% per year.  Then the
    stock split and I had 80 shares at $32.50 each (still 10%/year).  This
    was pretty nice because each June I could exercise 10 shares at $325
    when the stock was around $60-$70/share.  I would pick up a nice
    $300-$400 bonus.  

    Three or four years after the first award I was given another 50 shares
    at around $65/share.  This was great at the time!  Our stock was over
    $100 and climbed to almost $199/share!!!  Then, it hit the fan and our
    stock fell well below $65/share and has never seen it since.  I still
    have 50 options at $65/share.  

    Great!  Some award.  Stock is now at about 1/3 value of the price I
    have to pay for my second option.  It's about 2/3 value of the last 10
    shares of my first option.  This merit award is no longer an incentive. 
    I see no scenario of our stock rising above $65 in the next 10 years. 
    I can't even sell the remaining $32.50 shares (my last year to exercise
    them), so I will lose them.

    I am excited about this re-grant if it is true.  It will put some
    meaning back into the award I got for busting my butt.  

    [Note:  The share prices are approximate.  I don't have my option
    papers handy (they're at home) to put in actual prices.]

    
    
    
    
    
    
    
    
>        The following is posted as an anonymous comment.  The author was
>        asked to keep his or her options "secret" and thus doesn't wish to

    This is of course standard practice at Digital. People are not to let
    others know that they have been granted options. I've never understood
    this. It seems to me that the company would want people to know a) that
    people were being rewarded and b) what sorts of behavior got rewarded.
    This secrecy has always lead me to wonder if these grants were always
    given out with good justification as rewards. Or are they just another
    way that management rewards itself and those who are particularly good
    as brown nosing? I have no doubt that some, perhaps many or even most,
    grants are well justified. But it's something that I have to accept on
    faith because I don't have any proof. Frankly, faith is something I'm
    a little short on these days.

    			Alfred

    It flows over from the confidentiality surrounding compensation,
    salary reviews, etc. As managers, we were told not to divuldge the
    actual appraisals (levels, ranking etc.) until the actual review date.
    
    As ICs we were told never to tell what our pay or ranking, frequency
    or promotional status was, since it may upset the others... 
    
    Sad but true
    
    /Bob

        I was asked to post the attached as an anonymous comment to a question
        in an earlier note.  It comments, incidentally, on the whole question of
        why we choose to keep some awards "hidden" or "secret":
        
        -- begin anonymous posting --

When I was a first-level manager (supervisor) I had the experience of
being handed a letter, which I was to endorse and pass along to one of
the people in my group. This letter advised the individual contributor
that he was being given an award of x shares of Digital stock in
recognition of his outstanding contribution to the company's success.

He deserved an award of some type, because he consistently produced far
in excess of what we got from others in his field, and far in excess of
his job description. However, I was surprised by the award, and
embarrassed at having played no part in the award, other than as
messenger. (He had been in my group for about three years.) I had no
knowledge that we could do this, had no knowledge that he had been
nominated, and don't know whether anyone else was given similar awards. 

A verbal request came with the award, to the effect that neither the
recipient nor I should make the award public.

If we don't publicize awards, how will the workforce know what kind of
behavior we reinforce? Doesn't the furtive nature of this send the
message that we're not proud of the award? 

    	All employees should have incentive in the form of options.

>If we don't publicize awards, how will the workforce know what kind of
>behavior we reinforce? Doesn't the furtive nature of this send the
>message that we're not proud of the award? 
    
    They won't.  Awards like this seem to be an implementation of
    the "old Boy Network" rather than any sort of systematic reward 
    process open to all employees.  

    
    	Profit sharing is a wonderful tool. Unless of course it's just
    added on to an already overpaid parachute builder. The trench people
    need incentives too. 
    
    /Bob

>>    They won't.  Awards like this seem to be an implementation of
>>    the "old Boy Network" rather than any sort of systematic reward 
>>    process open to all employees.  

Amen. (for the most part)

Its who you know, not how well you do your job.

How can you explain:

	"Now keep it very quite that <employee> is doing a great job and 
	 they are getting this award"

I've been at Digital 8 years, and "heard rumors" of people being given "awards"
and having to keep it quite.  What a joke.  I have alway felt that if you 
can't announce an award, it should not be given.  Not announcing it kind of
says "I know you're doing a good job, but I can't tell anyone else".

sigh...

bjm

    
    
    In the bygone days I was fortunate enough (right project, right time)
    to visit Acapulco as part of the SWAS Excellence system, as a reward
    for my activities. I do not wish to go into the rights and wrongs of
    how people were selected for this award, but at the same time I was
    given a share option of 100 shares at 72$. I assumed that this was aprt
    of the SWAS Excellence deal. At no time has anyone ever said to me that
    I should keep this discretionary award secret, and indeed I have not
    done so. I believed that having shipped me from U.K. to Mexico in a
    very public fashion then any other awards associated are equally
    public.
    
    Of course if it is meant to be a secret........hope 'der Management' do
    not read this conference.
    
    John M.
    
    P.S. I have not exercised my available options

    I have always had very negative feelings about "awards"... especially
    stock options and so-called "bonuses".  A previous noted mentioned that
    if these things are truly awards for merit, then they should be
    announced... as should a promotion!
    
    I don't have a problem with salaries being "secret"... as they are all
    the "reward" the vast majority of folks will ever get for a "job well
    done".
    
    tony

    When Bob Plamer spoke to the Database Systems folks in ZK last month
    he mentioned that he was trying to convince the BOD to do something
    about the options that were "below water."  It remains to be seen
    what the actual numbers offerred will be.
    
    ed

There may be another reason for this re-grant.  The accounting principals
board (not their official name) have proposed that options be accounted for
at the time they are granted.  Presently, the only accounting entry is made
when the option is exercised.  A lot of start-up firms are opposed to this
change.  I believe this rule is still in the stage of collecting responses,
but most neutral accountants believe the change will be made.

I have not seen the rule in detail and I do not know what the accounting 
entries would be at the time of granting the option.  But, it seems obvious
that the grant price would and the number of shares would be major factors.

If DEC suddenly had to record thousands of shares of grants at high per-share
prices, the hit would appear to be much larger than if they were recorded
at low prices.  Suppose the rule goes into effect.  Without the re-grant,
a large hit, and then corrections the other way as options lapse, but since
no one will exercise the options there is no real effect on the company.
With the re-grant, the initial accounting hit would be smaller, but some of
the options might end up being exercised, and that does have an effect.
Once again, the appearance in the accounting records and the economic reality
are exactly opposite each other.  It is rather like the accumulated vacation
change.

Perhaps an accountant could tell us the details of the proposed rule.
I do not even know if it is a balance sheet only transaction, or if it
also affects the income and expense accounts.

Finally, I have no idea if the proposed rule change influenced the decision
in any way, and I'm not claiming the decision is good or bad.  This is just
some more information that might be relevant.

    About nine years ago, in an organization far far away, I was given
    a stock bonus of 100 shares, at $73 per share, to be exercised in
    10% increments over 10 years. I was one of four people who received
    the stock bonuses. The manager explained that it worked like this 
    (and I heard similar stories from other friends who received bonuses
    in their organizations):
    
    1. Our group VP got X shares of bonus stock
    2. After keeping some, he dispersed the remaining shares to his
        direct reports, my manager among them
    3. She kept some, and divided the remainder to her direct reports
    
    I asked if it this was common practice and was told that many
    managers chose to keep the stock for themselves, it is an individual
    manager's decision whether or not to share the booty. I have no
    way of verifying if this is true or not, it's only what I was told.
    
    I was asked not to discuss my stock bonus only because it could
    cause problems for the 'other managers' who chose not to share
    their bonuses with the people who helped them earn it in the first
    place. Again, I do not know if this is true or not, it's only
    what I was told at the time.
    
    When I got the option, stock was selling for $125 or so. At the
    time I could exercise 10%, the stock had dropped below the $73
    purchase price. The stock has gone down steadily since, and I have
    not excercised even one share. For me, this new plan sounds good!
    
    griz

    
    So for the most part, this is for the higher ups so as they don't have
    to take a hit on bonuses received at a higher # value since the stock
    is so low now.  Is this correct?
    
    
    Mike

    re .17:  The regrant program is for the benefit *everyone* who got 
    shares at rates higher than $22 or so.  This will benefit a number
    of individual contributors, but apparently the great majority of
    the benefit will fall on senior managers.
    
    Is this a disproportionate benefit to the senior managers?  That's
    a hard judgement call, since there is NO official information on the
    amount of stock granted, other than cases (such as Palmer) where the 
    law requires disclosure.  So nobody can know if the program is really
    being used to reward (and KEEP) the best performers, who are essential
    to Digital's continued success, or whether grants are golden parachutes.
    
    I can attest from my own knowledge that stock grants are indeed
    sometimes used as rewards to people who are considered essential, as
    incentives for them to stay at Digital.  The stock grants to Palmer
    fall in that category, too, I believe, whatever one may think about
    his salary increase.  I just wish that some summary information were
    available -- e.g. how many get grants at each level, and how much
    is granted at each level -- so that people can see whether this
    is primarily a benefit for senior management or is a benefit that
    is being shared (in different degrees) at all levels.  There would
    be nothing illegal or improper about releasing summary information --
    it's only information about individuals that should be protected.
    
    Now, why am I talking about this here instead of advocating it
    directly to upper management?  Because I've tried that route. 
    I worked extensively with the Ethics Office (at their invitation)
    proposing improvements and advocating (among other things) release
    of summary information on ethics enforcement, so that we can know
    that things are really happening (or not).  Nothing noticable came
    of it.  I'm still trying to think of a more effective way to
    advocate for change in this company.
    
    		Larry

    Re: .19 - Information about upper mgt grants.
    
    The stock options granted to some ammount of the upper managemenr,
    including Palmer, is available in the annual meeting publication.  It
    is also (I beliuave0 available in ome of the 10 series (perhaps K)
    federal forms.
    

    I have always thought the stock "option" plan was very poorly
    implemented.  The key here is with the word OPTION.  It was the 
    option of the lead dog in the group that you were in to keep 
    or distribute.  Hence, the problem..   Good intentions don't 
    always equal deeds. I am familiar with managers that did push
    some down and some that didn't.  For those that received them \
    below the lead dog, then this is good. THe lead dog has lead 
    us to where we are now and has the options.  Let's just say 
    with 20K in options in the early 80's, only 4K would be sent 
    down.  This is before the stock hit 199.  This could be a 
    very costly process, one that takes care of the lead dod. 
    Does he see something coming?
    
    Just speculating

    Did I misread the offer?  It sounds like Digital will offer one option
    at $22 for every three options at $78.  Or is it the other way around
    (which would make more sense to me)?

re .22:

No, you didn't misread it.  $78 options are worthless, and barring a miracle,
will remain so for the foreseeable future.  $22 options have a chance of
having some value.

    
        RE  .22, .23
    
        Got the official package on the regrant options this weekend. 
        For both $78 and $73 options, the number of shares were down-
        sized by a factor of seven (7), not three (3)!!!  That made the 
        downsizing of value (shares * option price) a factor of 21.4 !!
    
        The offical letter mentions that the stock options are to 
        "motivate key employees".  Also, that "It is our intent to give 
        you, and other individuals who hold options, an incentive to 
        contribute to the company's achieving profitable and sustainable 
        growth."
    
        The accompanying Question and Answer sheet says that "On average, 
        about three Existing Options will be offered in exchange for one 
        Regrant Option".   That must mean there are a lot of options 
        downsized by a smaller factor to make up for those at a factor 
        of seven, or a very loose interpretation of "about three".
    
        I'll withhold emotional comments of the effect on motivation for 
        now.  But can someone knowledgeable explain what the effect on 
        the company's books will be of: reducing the number of stock 
        option shares, and/or the value (shares * option price) will be.
    
    
        Thanks,
        Peter

    Well, if the stock price were to rise to 30 or 40, the potential
    gain would be far greater with the regranted option than with the
    existing option...  In fact it would have to rise well into the 80's
    for the existing (73 and 78$) options to even be meaningful.
    
    ed

It seems we may have had the cart ahead of the horse a little bit.  I got info
on the option trade plan this weekend.   Some highlights ...

WHO'S ELIGIBLE ... over 10,000 employess ... all current employees who have
outstanding stock options, EXCLUDING FIFTEEN EXECUTIVE OFFICERS.

WHO'S NOT ELIGIBLE ....  ex-employees, outside directors, retirees, 
        and 15 execs ....
	Palmer
	Brebach
	Cabinety
	Christ
	Farrahar
	Hindle
	Jacobs
	McDonouugh
	Mullarkey
	Pesatori
	Rando
	Siekman
	Stradecker
	Steul
	Strecker

EXCHANGE PRICE ... $22.875 per option

EXCHANGE RATE ... (for me) 5 for 4 ... e.g., I trade in 5 old options and I get
4 of the newer lower priced options.  I have no idea if everyone got the same
exchange deal.                                                


Take care,
Greg



    

I didn't receive anything, yet, and expect that, because I recently
changed jobs, it might get lost. Is there a number to call for info,
and, if so, could somebody please post it? Thanks very much.

    DTN 223-8811 or 1-800-257-5947
    
    (But all I get is a recording saying their hours begin at 8:15 am (!).
    
    L.

    
    
      Incidently,  last friday's wall street journal has an article
    about some upcoming potential changes to FASB accounting
    standards which would make it very desirable to get such options
    off the books.  (Page A3)
    
    
    						

    
> changed jobs, it might get lost. Is there a number to call for info,
> and, if so, could somebody please post it? Thanks very much.
    
    Good question ...
    
    "Should you have any questions on how to take advantage of this offer,
    please call Investor Services at
    		DTN:  223-8811   or
    		1-800-257-5947"
    
     

    Re: getting it off the books.  I can see how the company would like
    to make a few changes.
    
    How many times have companies "lost money due to a one-time
    acccounting charge."  Everything is rosy till the "generally accepted
    accounting pricipals" change and things change columns with a THUMP.
    
    ed

re .28.30, thanks very much.

    Interesting.  Mine was 5 old options for 1 new.

        Re:                  <<< Note 3098.33 by TNPUBS::JONG "Steve" >>>

        There's a  different formula for every year.  Those that are 7 to
        10 years old  are  all  1 for 7.  Newer ones are at progressively
        lower rations.  Looks  like  the  formula  is  to  reqard  recent
        contributions more than not-so-recent.
        
        Anker

	This is really getting interesting; 


Options at 78 and 73 are going at 7:1

Others are at 5:1 and 5:4 (what option price?)

And my options at 34.5 are also 7:1 (actually 5.3:1 because they round up
to the next multiple of 10 shares)



I looked at the deal offered and decided not to take it. I computed a
break-even price of about $37. If I keep my $34.5 options, I'll win
if the stock passes $37 before my options run out.

100 orig. shares (@34.5) will trade to 18.86 new shares(@22.875)

If the stock stays below $37, the most I'd get would be $250/100 orig. shares
(if I didn't trade), and $266/100 orig. shares (if I did).

If it stays below $34.50, the most I'd get would be $0(if I didn't trade),
and $238/100 orig. shares (if I did). 

If it stays below $22, I get nothing either way.

So, the most I can lose by not trading is $238/100 orig. shares.

Now, if it reaches just $1 more than the break even, I'd get 
$350/100 orig. shares (if I didn't trade) and $285/100 orig. shares (if I did).


Comparing the two options:

         price       trade   don't trade
           <22.875      0        0
            34.5     $238        0
            37.00    $266     $250
            38.00    $285     $350
            39.00    $304     $450

I'll risk the $238 to bet on digital!

    
        Re:  .35     "This is really getting interesting"
    
        It may be even more interesting than you think.  After my 
        previous note, I heard from someone with $78 options in 
        about the same year which he says were downsized by a factor 
        of 2.77:1 instead of 7:1 .  Time to find out what's going on.
    
        BTW, I did the break-even calculation as well, and found that 
        in my case, that came at a stock price of $85.  That would 
        qualify as high risk.  On the other hand, the 7:1 downsizing 
        makes the number of shares at $22.875 so small that there's 
        not much gain for any reasonable stock price increase.  Under 
        those terms neither option looks very good.  
    
    
        Anker:  if you know what formula is being used, or what the 
        criteria are, could you publish that?
    
    
        Peter

    well, ya see... it's like this:
    
    
    ya get this random number generator, y'see... and ya toss in
    everybody's names...
    
    and then  ya.....
    

    I got the 7:1 ratios on $34.50 and $56.00 excercise price options.
    My number wasn't big to begin with, and the regrant number just
    shocked me after the initial notification that the average would be
    3:1.  My "incentive to contribute" as the letter states, has been
    adjusted accordingly 8^)
    
    Mark
    

    So, if I get this correctly......If I have $34.50 options from 8 years
    ago, they get split by a factor of 7.  If I have $34.50 options from
    a year ago, they get split by a factor of less than 7.  Therefore, the
    only rational explanation is that because I have been working for the
    company longer, I need to be less incented to stay, and more incented
    to leave.  Also, my options were granted by the "old" Digital, not the
    "new" Digital.  Ahhh..now I'm getting the picture...out with the old,
    in with the new.  Maybe I'm missing something, but it just doesn't
    seem fair to reward those who helped the company lose money & shrink,
    and punish those who worked hard to help the company make a profit and
    grow.
    
    Mark
    

Based on my situation, here is how my values work out, and where I break even:

  Stock Price      Old Option Value      New Option Value       Regrant Impact
  -----------      ----------------      ----------------       --------------

     $20.00             $0                     $0                    n
     $25.00             $0                     $85                  + $85
     $30.0              $0                     $285                 + $285
     $35.00             $100                   $485                 + $385
     $40.00             $1100                  $685                 - $415
     $45.00             $2100                  $885                 - $1215
     $50.00             $3100                  $1085                - $2015
     $55.00             $4100                  $1286                - $2814
     $60.00             $5300                  $1485                - $3815
     $65.00             $6550                  $1686                - $4864
     $70.00             $7800                  $1885                - $5915

Clearly, if the stock price stays under $40 for the next 15 months, I will
make out by taking the regrant program.  If it hits $40 or more within that
same time frame, I will be better off not taking the program.  Interesting 
decision...will the stock double in little over a year?


Mark

One reason the older options have a higher (reverse) split ratio than
new options (at the same strike price) is simply because they have fewer years
left to run.

Newer options have a longer time to run and have a relatively higher
chance of ever having any value.

The older options are more likely to expire worthless and are therefore
"worth less".

In other words, it is not only the "intrinsic value" of the option that
counts, but also its "time value".

-steve-

How about an incentive for non-option employees...
This option program resets the execution price for old options

How about Digital buying back our ESPP stock for what we paid
them for it. I wouldn't even ask for the 15% discount money.
This way those employee who are left can push the reset button and
start where the stock is now.

I think employees would be much more motivated about thrusting this
company forward if we weren't looking at how much our stock was worth
and sighing...

At this stock price rate of excelleration my son's college fund will
only pay for a year of pre-school training.

    	By the way, did anyone read the "employee agreement" statement on
    the regrant form that must be signed and returned to accept the
    regrant? It seemed different than I remember, and I found parts of it a
    little distasteful. I'm just curious if others had the same reaction.
    	And my $78 options from '87 (I think) are in the 7:1 catagory. I
    have some older options at $31.50 which expire this month which aren't
    covered by this regrant plan and which, obviously, are headed for the
    trash I guess.

    "EXPIRE THIS MONTH"  isn't it really "90 days after 10 years"???
    
    Don't toss 'em yet....
    
    GAD I remember buying 30 shares at 9.375 and selling at $192...  :-)
    
    them were the days...
    
    ed

    FYI, I called Investor Services to ask about this stuff, being in the
    7:1 category.  I wanted to know precisely what formula they were using.
    I'm afraid that I didn't understand it completely, but it wend
    something like this:
    
    1)  ASSUME that Digital stock rises in value at a set rate -- I think it
    was something like 25% per year.
    
    2)  Run the current price of Digital stock out to the end of the grant
    period and compute the profit that the employee would make on the
    option.
    
    3)  Figure out how many shares offered at the current price would
    produce the SAME profit as of the date the stock option elapses,
    and offer that many shares.
    
    
    Of course 1) is entirely imaginary -- in my view DEC, excuse me Digital
    stock will either rise a lot more than that or a lot less -- but which?
    Also, I found out that in my case, the result of 3) was a ratio of
    10:1, which Investor Services thought was unreasonable and changed
    to 7:1.  After I learned all this, it didn't take me long to decide
    to accept the offer.
    
    	Enjoy,
    	Larry

    
    Well, just a brief note.
    
    The regrants are actually worth something for the first time this week.
    
    								-mr. bill