O'Reilly executives cash in stocks

In 21 days, 11 O’Reilly Automotive Inc. (NYSE: ORLY) officials sold more than 185,000 shares valued at $32.37 million combined.

The high-volume moves began Oct. 23, according to Securities and Exchange Commission filings, and some have been relatively minor. Independent Director John Murphy sold 1,118 shares on Nov. 3, garnering $196,377. Senior Vice President of Distribution Gregory Johnson generated $264,616 when he cashed in stock options Nov. 4.

In terms of volume, Executive Vice President of Expansion Ted Wise leads, with a 45,000-share sell-off Oct. 23 that netted over $7.5 million. He sold 25,000 additional shares Nov. 6, and five days later cashed in another 25,000 shares. In all, the stock moves represented nearly $16.5 million this past month.

The stock moves stem from exercising a compensation incentive known as nonqualified stock options, in which the sellers pay ordinary income tax on the difference between the grant price and the price at which the option is exercised, according to Investopedia.com.

O’Reilly spokesman Mark Merz said the company has used NSOs as a compensation incentive since the auto-parts distributor and retailer went public in 1993.

“Shareholders believe – and (the board of directors) also very strongly believes – that one of the best ways to align the interests of shareholders with that of company management is to pay a good percentage of the executives’ total compensation in the form of equity,” Merz said. “If a portion of their total compensation is based on how well the stock does, they will make decisions that are in the best interests of the company, and not, potentially, just on the best interests of themselves.”

He said options at O’Reilly can range from seven to 10 years for senior managers and all of the options that were exercised by executives in the past month fell within that range.

“If they didn’t exercise that option within 10 years they’d lose it,” Merz said.

Ten years ago, ORLY shares were selling for roughly $22, compared to over $178 per share by press time. The recent transactions were valued between $165 and $180 per share, according to SEC filings.

Jeff Jones, an assistant professor of finance at Missouri State University, said NSOs are common among public companies to align the goals of executives with those of shareholders.

Whether what’s being offered is a traditional or a nonqualified stock option, public companies don’t realize immediate expenses with the incentives, but managers can hold something of value for their work.

“A stock option, in general, gives you the right, but not the obligation, to purchase shares of stock at a prespecified price,” Jones said.

At O’Reilly, the options were set at guaranteed prices that ranged from under $23 per share to around $35 apiece.

Jones said public board directors tend to prefer issuing NSOs because of inherent tax benefits.

“They can deduct a compensation expense for tax purposes, but they’ve actually paid zero cash to the employee,” Jones said, adding traditional stocks or incentive stock options have no such tax write-off.

NSOs are named as such because they don’t qualify to meet the ISO requirements outlined in the Internal Revenue Code.

There are other ways to skin a cat, Jones said, and restricted stock is another option.

“Instead of creating an option to buy the stock, you are just giving them stock directly and saying you can’t sell this for 10 years or 15 years,” he said. “That forces the managers to hold stock and, therefore, some of their personal wealth is tied up in how the stock does.”

In addition, he said businesses could offer incentives for such performance gates as revenue or net income.

The practice of issuing restricted stock is preferred at Monett-based Jack Henry & Associates Inc. (Nasdaq: JKHY), said Kevin Williams, chief financial officer for the national financial software provider.

“We actually let our nonqualified plan expire,” Williams said via email, noting the company used NSOs in the 1990s, but stopped utilizing them over a decade ago after an accounting rule change. “The new rule issued by the Financial Accounting Standards Board required companies to expense the projected future value of the options immediately when they were granted, so that would have created a significant impact on our financial statements.”

According to Investopedia, restricted stocks became more popular in the mid-2000s because companies don’t have to report them as an employment expense.

For Jack Henry, Williams said restricted stocks are used at the discretion of the board of directors’ compensation committee to balance the executives’ compensation toward equity and put them in the same position as their shareholders.

In September, Mark Forbis, Jack Henry’s vice president and chief technology officer, twice sold restricted stock – nearly 5,500 shares combined – valued at more than $310,000. President David Foss received nearly $54,000 with the sale of 930 shares.

For O’Reilly Automotive executives and members of the founding family, stocks also work as donation vehicles.

Earlier this month, the O’Reilly family contributed a naming-level donation to Missouri State University’s health science center at the corner of Cherry Street and Kimbrough Avenue.

David O’Reilly said by email the stock sales were unrelated to that donation, but the gifts were made in stock.[[In-content Ad]]