* For an explanation of the different approaches used by the AFL-CIO and the U.S. Securities and Exchange Commission to calculate total compensation, click here.

‘Super-Sized’ Stock Options Reward Bank Chief Before Pay Caps Kick In

Talk about adding insult to injury. SunTrust Banks Inc., the Atlanta-based banking company that received $4.9 billion from the Troubled Asset Relief Program (TARP) bailout fund, wants shareholders to approve a mega-grant of stock options for James Wells, its chairman and chief executive officer, even as the company has lost billions of dollars.

Wells received a super-sized stock option grant of 852,941 stock options with an exercise price of $9.06 on Feb. 10.[1] The stock options would reward Wells with millions of dollars if the company’s stock price rebounds—as a result of the federal bailout—back to where it was before the financial system caved in.[2] The bank reported eight consecutive quarters of declining profit, including a $347.6 million loss in the fourth quarter resulting from real estate loans.[3]

SunTrust issued the new stock options to Wells just days before President Obama signed into law the American Recovery and Reinvestment Act of 2009 that restricts executive pay for companies bailed out under TARP.[4] Under that law, companies receiving federal help may not pay their senior executives any bonus, retention award or incentive compensation until they pay back the government. They may, however, grant long-term restricted stock of up to one-third of an executive’s total compensation.[5]

Wells’ new options are in addition to those that are now worthless because of the steep decline in SunTrust's stock price—to $9.06 on Feb. 10, 2009—from an all-time high of $90.61 a share on May 22, 2007. The 953,000 stock options that SunTrust previously granted Wells are now “under water.”[6] In addition to the super-sized stock option grant, SunTrust granted Wells 250,000 stock options with an exercise price of $9.06 a share, as well as 50,000 shares of restricted stock under the company’s 2004 stock plan.[7] In an unusual move, SunTrust also granted Wells 25,075 restricted shares and another 25,075 performance-vesting shares from its 2009 stock plan that have not yet been approved by shareholders.[8]

“The upside potential of this is huge,” says Paul Hodgson, senior research associate at The Corporate Library, a Portland, Maine-based research firm. “As long as the bank can hang in there and get through this economic crisis, the share price is probably going to quadruple in value.”[9]

Meanwhile, long-term investors, such as the pension funds of working Americans, which bought when the stock price was high, have been left holding the bag.  SunTrust’s shareholders have lost some $30 billion since the bank’s stock plummeted from its all-time high of $90.61 a share on May 22, 2007. The bank’s market value was less than $4 billion on March 30.[10]

Shareholders will vote on the stock options plan for Wells and other top executives at the April 28 annual meeting.

SunTrust has plenty of company in heaping new grants on senior executives to make up for now worthless options. Nearly 100 companies have allowed executives and, in some cases, other employees as well to exchange worthless stock options for new awards with more generous terms.[11] Corporate governance experts criticize the practice, which they say undermines the notion of pay for performance and unfairly rewards executives for poor performance, while disregarding the pain of stock price declines suffered by shareholders.[12]  “A stock option is supposed to align the interests of employees and shareholders by putting them in the same boat,” said Patrick McGurn, special counsel to the RiskMetrics Group, the influential proxy advisory firm. “Repricing of options breaks that linkage.”

The company is being sued in a class-action securities lawsuit for having misled investors about its financial condition and failing to disclose the true extent of losses from mortgage-backed securities.[13]