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Stock options pile up, pay off for Susan Bayh

WASHINGTON – Without billing any clients or cashing a paycheck, Susan Bayh collected $248,700 so far this year in income from one corporation.

By exercising stock options she received for sitting on the board of insurance giant WellPoint Inc. and selling the stock when it was near its highest price of the year, Bayh took advantage of one of the parts of compensation given to the directors of many publicly traded companies.

In the past four years, Bayh has exercised stock options eight times. Each time, she bought and sold stocks of three of the companies she helps direct: Indianapolis-based WellPoint; a Cambridge, Mass., pharmaceutical developer, Curis Inc.; and the privately held E-Trade Bank.

Through seven of those transactions, she has collected a pre-tax gain of more than $1.7 million. In addition, she exercised options of E-Trade Bank shares. But because E-Trade is not publicly traded, the details of the transaction are not publicly reported. In a financial disclosure report that her husband, Sen. Evan Bayh, D-Ind., is required to file each year, the value of the E-Trade transaction was listed as between $500,000 and $1 million. But that would not take into account the cost of exercising the options to buy the E-Trade shares.

Companies often give stock options to the directors and top management. Under the system, a recipient gets the right to buy a certain number of shares at a fixed price after a certain period of time.

If the market price of the stock has gone up when that point arrives, the director or employee can exercise the option, sell the stock and make a profit. If the price has dropped, the director does nothing but can hold the option, usually for a period of up to 10 years. If the market price never exceeds the option-exercise price, the director or employee usually allows it to expire.

“Stock options represent a way to tie (directors’) economic fate, if you will, to the company’s fate and therefore assure that they will be committed and motivated to see the company be successful,” said Edward Lawler, a business professor at the University of Southern California and founder and director of the Center for Effective Organizations.

If directors’ compensation was in cash only, Lawler said, “it would basically not reflect how well the company does and the performance of the company and that therefore they would not be as motivated to see the company be successful as they should be.”

But the wisdom of awarding stock options to directors is not universally shared.

A better approach, said Warren Batts, an adjunct professor at the University of Chicago business school and former corporate executive, is for corporations to award stock that directors can take possession of only when they leave the board. That way, he said, there’s a strong incentive for them to work to improve the company – and increase the value of its stock.

Members of boards who receive the option to buy stocks as part of their compensation must report to the Securities and Exchange Commission when they exercise those options.

In the past four years, Susan Bayh told the SEC:

•In January, Bayh exercised the option to buy 3,333 shares of WellPoint stock at a price of $44.18 per share. She sold all of them for $78 per share, a pre-tax gain of $112,722.

•In May, Bayh exercised options that allowed her to buy 3,334 shares of WellPoint for $44.18 apiece. She immediately sold them for $84.95 or $84.98 per share. The stock traded between $84.15 and $85.45 that day, its highest price all year. Bayh’s pre-tax gain was $135,978.

The price slipped a few days later when WellPoint announced it had fired its finance chief for misconduct unrelated to the company’s business. The health insurer’s stock slid further when the company’s second-quarter report didn’t jazz investors despite an 11 percent profit.

On Friday, WellPoint stock closed at $86.16.

•Last year, she had a pre-tax gain of $796,078 when she exercised options allowing her to buy 20,001 WellPoint shares for prices ranging from $35.85 to $44.18 a share. She sold the stock for $77.08 a share.

•In 2004, Bayh’s pre-tax gain of $400,942 was based on 11,666 shares of WellPoint stock she bought for $71.86 or $71.70 and sold in eight blocks of stock for $106.10 to $106.40.

•Over three days in September 2003, Bayh exercised her option to buy Curis stock at $1.09, $1.50 or $3.13 a share. She sold 123,750 shares the same days in prices ranging from $5 to $5.31 a share. Bayh’s pre-tax gain for the transactions was more than $263,662 and as much as $269,874.

The days Bayh sold her Curis shares, the stocks hit $5 or higher for only the second time in the stock’s history. Since then, the value of Curis stock has tumbled. So far this year, it has traded above $2 on only one day. On Friday, Curis stock closed at $1.14.