Review the case: Restricted Stock versus Stock Options: The Case of Jones Apparel Group, Inc. by R. Loring Carlson and Thomas J. Vogel
Questions on Corporate Governance
Then , response to the following questions:
1. Which of the three components of Mr. Boneparth's compensation package (salary, bonus, and stock-based compensation) is likely to be the most important to Jones' shareholders? Why?
2. The New York limes article claims that Jones awarded Mr. Boneparth $35 million in stock options. How do you think this figure was determined? What has to happen for Mr. Boneparth to receive this level of compensation?
3. Discuss three factors that should be considered by Jones' Compensation Committee when determining the size and content of Mr. Boneparth's pay package. Do you believe the pay package offered to Mr. Boneparth is excessive? Explain.
4. As noted in the case, Mr. Boneparth forfeited his right to receive 1,500,000 options in return for 250,000 shares of restricted stock. How do you think the potential payoffs for the restricted stock will impact Mr. Boneparth's performance as an agent for com-pany shareholders? Which compensation component would you prefer if you were a shareholder of Jones? Why?
5. Discuss the pros/cons to Mr. Boneparth of receiving either of these two potential pay package components (1,500,000 stock options or 250,000 shares of restricted stock). Which compensation component would you rather have if you were Mr. Boneparth? Why?
6. The original provisions of the 1999 Stock Incentive Program included the opportunity for a "cashless exercise." Why were these company loans strictly prohibited by the Sarbanes-Oxley Act? How does this prohibition impact the decision of companies like Jones that are distinguishing between stock options and restricted stock in compensation packages?
7. Why do restricted stock awards often include performance requirements, such as the operating cash flow requirement for Mr. Boneparth, in addition to service requirements? Why are stock options usually awarded without performance requirements? What fac¬tors should the Compensation Committee consider when determining the required levels of operating cash flows necessary for Mr. Boneparth's restricted shares to vest?
8. When announcing second quarter results on July 29, 2003, Jones initiated a quarterly dividend stating that "the Board of Directors has declared our first-ever quarterly cash dividend of $0.08 per share to all common stockholders of record as of August 15, 2003 for payment on August 29, 2003." How might the switch from stock options to restricted stock in the compensation packages of Mr. Boneparth and other employees have impacted the Board's decision to start paying dividends?