- 44 -
their options. Dr. Hakala also intended that the 50-percent
discount account for the restriction on transferability of
employee stock options.
Next, Dr. Hakala calculated a 3-year moving average of the
stock options’ discounted Black-Scholes values, in order to
“smooth out the volatility between varying magnitudes of options
awarded in different years”.43 Dr. Hakala based his decision to
use the moving average on the Financial Accounting Standards
Board’s Statement of Financial Accounting Standards (SFAS) No.
123. According to Dr. Hakala, SFAS No. 123 requires proration of
stock option values over the vesting period and, as a result,
reflects stock option values over a continued period of
performance.
(iv) Dr. Hakala’s Conclusion
In Dr. Hakala’s opinion, Mr. Menard’s compensation was
“dramatically higher” than compensation paid to the CEOs of the
comparison group companies. Although Menards performed
comparatively well with respect to growth and profit margins, in
TYE 1998, Mr. Menard’s compensation was, in Dr. Hakala’s opinion,
approximately seven times higher than the average of Home Depot’s
and Lowe’s CEOs’ compensation and significantly higher than the
43For example, when computing the value of stock options
granted in TYE 1998, Dr. Hakala averaged the discounted Black-
Scholes values for the stock options granted in TYE 1996, TYE
1997, and TYE 1998.
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