Above the Surface: Charter Compensates for Underwater Options

Charter [CHTR] is shifting long-term compensation gears for top execs from options that vest with time to restricted shares that will vest based on a combination of time served and financial performance. Details are contained in the MSO’s current company-wide exchange offer for underwater options. "It’s a more realistic way to compensate an executive," says analyst Robert Routh of Natexis Bleichroeder. Routh says the message to all levels of managers is clear: "don’t manage the stock price, manage the business." The move reflects a decision by Charter’s board "to reduce the significance of stock options in our long-term incentive programs," an SEC document says. As of 31 Dec ’03, Charter had issued 47,882.365 options under the two plans; fewer than half of those have strike prices above $10 and are held by eligible participants. The offer expires Fri. Options granted under a ’99 plan and under a ’01 plan are so far underwater they could be props in "20,000 Leagues Under the Sea." Charter closed at $4.98 Tues; some of the outstanding options are as high as $23.90/share. Every Charter employee at the time of the ’99 IPO received options, but not everyone will get restricted shares: those who would wind up with 400 or fewer shares after converting their options will receive cash instead. The change for the top 9 execs at the svp-level or higher applies to options exchanged for restricted shares. For example, pres/CEO Carl Vogel has already said he’ll tender 3.4mln options in exchange for 680K restricted shares. Half will vest automatically during the next 3 years provided he stays with Charter; half will vest during those years based on achieving "specific percentage growths in revenue and unlevered free cash flow." The "rational and coherent scheme" won’t make a material difference, but should help get the message to employees who survived the reorg that sr mgmt is in this for the long haul, Janco Partners sr research analyst Matthew Harrigan says. Charter releases 4Q and ’03 financials tomorrow. — Staci D. Kramer