International Herald Tribune 

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International Herald Tribune



1. to meet the enhanced growth targets добиться показателей,

превышающих плановые

2. a new corporate mind-set новое корпоративное мышление

3. to have a tangible stake in corporate profits иметь реальную, ощутимую долю

в прибылях компании

4. bonus program программа поощрений, программа

выплаты премиальных

5. to align the interest of workforce with увязывать интересы работников

the interests of shareholders компании с интересами акционеров

6. fringe benefits (perks) дополнительные льготы

7. rank-and-file employees рядовые служащие

8. publicly held company (public company) публичная компания

9. to grant (to offer) stock options предлагать опционы на

приобретение акций компании

10. to devise a stock-option plan (program) разработать программу поощрений

работников опционами на приобретение акций компании

11. to implement a stock-option plan (program) реализовывать программу


12. to clear hurdles преодолевать препятствия

13. to maximize shareholder profit максимизировать прибыль


14. restricted stock ограниченно обращающиеся акции


I. Do the mind-mapping of the text in accordance with the guide-lines suggested in the previous Unit.

II. Read the article below; translate and learn the words and word-combinations in bold

Type; Answer the questions; using your answers as guide-posts write the summary of the

Text in Russian.

Exchanges consider new rules on option plans

Dilution and overhang

By Johanna Schlegel

Employees, companies and investors all have valid reasons to focus on the number of shares allocated to employee stock option plans. The motivation is to achieve the right balance. On one hand, companies must have enough shares to attract, retain and motivate employees. Their contribution can maximize the value of the business, which thereby improves the company’s share price. On the other hand, companies must also limit the number of new shares going into the market, which may decrease the share price.

Dilutionis caused by an increase in the number of shares a company has; overhang is a measure of the dilution that an employee stock plan may cause in the future.

Dilution decreases how much ownership a share represents.

Dilution is the decrease in ownership (affecting share price and earnings per share) that current ownersexperience when new shares are issued. Stock option plans have a direct impact on dilution because when employees exercise their stock options, it is as if more shares have been issued. The existing shareholders are therefore diluted.

In other words , the ownership of the company is spread over more shares – each of the previous owners now owns a little less of the company. This sometimes results in a decrease in the value of each share.

Another potential source of shareholder dilution is new shares that are not in an employee plan. These shares may have been previously approved but not issued; or may be approved just for a specific purpose. (Keep in mind the approval comes from the existing shareholders).

They might be issued to raise cash in a financing round, to buy another business, or to make special grants to partners or employees. Any of these would dilute the current employees’ and investors’ ownership percentages. However, there is less dilution if the shares going out are being traded for money or other assets. If the number of shares is large, it could make a material difference to existing shareholders. Dilution means each share represents less of the total company because there are more shares that must make up the total pool.

An example illustrates. A company is worth $200 million and has 20 million shares outstandingplus 5 million that have been approved but not issued. Currently, the share price is $10.

If the company issues the additional 5 million shares (e.g., to secure a new management team), but still has a value of $200 million, the shares are now worth just $8 a piece – a 20 percent dilution for the previous shareholders.

If, however, the same 5 million additional shares are issued to purchase an asset (a business) worth $50 million, the original company would then be worth $250 million and would have 25 million shares outstanding, each worth $10. In this scenario, each shareholder would own 20 percent less of the company, but the company would be worth 25 percent more. In this case the shareholders would have experienced a dilution in ownership, but not a dilution in value.

Overhang is a measure of potential dilution

Overhang is a term used to quantify potential dilutioncaused by employee stock plans. Overhang is calculated as the number of stock options that have been issued to employees, plus the number that could still be issued, divided by the total number of shares outstanding. These plans are a common way in which a shareholder’s ownership can significantly be diluted.

Investors recognize that companies often use stock options as an incentive to attract and motivate employees. A well designed stock plan extends option grants in reasonable numbers – considered to be the percentage required to create an incentive for employees to behave like owners. From an investor’s perspective, though, overhang puts downward pressure on share prices. Because of the potential dilution, the larger the overhang, the less attractive the investment might be.

According to a 2001 study conducted by Watson Wyatt Worldwide, the typical average overhang is 13 percent, but the figure varies by industry from as low as 9 percent in energy and 23 percent in technology businesses. The firm concluded that the use of employee stock programs has had a positive effect on company performance, the US economy, and the US stock market, and that there is an overhang “sweet spot” in which companies tend to have the best shareholder returns.

What shareholders don’t know could hurt them

Currently, loopholes make it possible for companies to create employee stock plans without getting shareholder approval to issue those new shares. In effect, companies can dilute ownership without asking for approval from, nor disclosing it to, existing investors.

Proposed regulations under consideration by the major stock exchanges and by the Security and Exchange Commission are an effort to strike a better balance between the company's need for flexibility in designing programs to attract and retain key talent, and the investor’s need or right to know the true financial impact of dilution.


1. What is to be understood by the stock option program?

2. Why is the problem of stock option plans viewed as very important by employees,

companies and investors?

3. What are the main sources of shareholder’s dilution?

4. How can companies avoid dilution in share value despite the dilution in ownership?

5. What is overhang, why and how is it calculated?

6. At what average value of overhang does the stock option program have a positive effect on

company performance?

7. What are the regulations considered by the SEC at present aimed at?



Chapter IX

Business Ethics

Unit 19


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