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(iii) LTI Valuation Methodology
In his analysis of the comparison group’s proxy statements,
Mr. Rowley used a formula for valuing LTI compensation that he
referred to as the “Growth Model”. According to Mr. Rowley, the
Growth Model projects the actual, as opposed to the theoretical,
value of LTI compensation that a CEO will receive.
Pursuant to the Growth Model, first, Mr. Rowley assumed that
the stock prices would appreciate from the original grant price
at a 10-percent annual rate. Mr. Rowley derived the 10-percent
growth rate from an SEC proxy statement instruction, which
requires that companies report the potential realizable value of
stock option grants37 at both 5-percent and 10-percent
appreciation rates. See 17 C.F.R. sec. 229.402(c)(2)(vi)(A)
(2004). Because the comparison group contained only high-
performing companies and the stock market had a 15-percent growth
rate during the period, Mr. Rowley explained, he opted for the
10-percent growth rate. Secondly, Mr. Rowley assumed that the
recipient would hold the stock “for the typical 10 year term”38
and calculated the LTI compensation value. Lastly, Mr. Rowley
discounted the LTI compensation value to its present value using
37On their proxy statements, companies may substitute the
potential realizable value of the stock option grants with the
present value of the grants under any option-pricing model. See
17 C.F.R. sec. 229.402(c)(2)(vi)(B) (2004).
38According to Mr. Rowley, most long-term incentive stock
option grants are for a period of 10 years.
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