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COMPAQ COMPUTER CORPORATION
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(Name of Registrant as Specified In Its Charter)
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On March 24, 1998, Compaq Computer Corporation distributed to its proxy
solicitors, certain members of its management team, and other employees the
following questions and answers to assist them in responding to inquiries from
stockholders about the 1998 Stock Option Plan being submitted at Compaq's
annual meeting of stockholders on April 23, 1998. Compaq or its
representatives may also use these materials to initiate the solicitation of
certain stockholders.
1998 Stock Option Plan
Questions and Answers
Q1. Why is Compaq requesting additional shares for employee stock options?
A1. Compaq is requesting additional shares to enable the Company to continue
to attract, retain and motivate key employees at many levels. The technology
market is extremely competitive and has a very low unemployment rate. In
order for Compaq to continue to compete effectively within the information
technology sector for high performing and high contributing employees, the
Company must have available competitive forms of compensation, including
equity based compensation.
It is important to note that Compaq, like many high tech companies, uses stock
options broadly beyond the senior management level. In 1997, executive
officers received less than 17% of the stock options granted. Significant
stock option awards are made into the middle and first level manager
population and the higher level individual contributor population in order to
provide performance based total compensation packages consistent with the high
tech marketplace.
Q2. What are the Compaq stock option granting practices in relation to the
high tech industry?
A2. Compaq grants options on an overall basis at or below the average practice
of the high tech industry.
During the past several years, Compaq has granted stock options to employees
at an annual rate of between 1.8% and 2.7% of the outstanding stock plus
options each year. This compares with industry average rates (1) (for >$1b
revenue technology companies) of 2.5% (1996) and 3.5% (1997).
(1) Source: I-Quantic survey of high tech stock option practices
Compaq's total overhang ([stock options outstanding, plus stock options
authorized, plus the current requested shares] divided by [current total
outstanding shares plus the numerator above]) including the 1998 share
authorization request is about 18.7% assuming the Digital acquisition is
approved and concluded. If the Digital acquisition is not approved, the total
overhang is about 18.1%. This compares with industry average rates (1) of about
19.2% in 1997, and specific company practices ranging as high as above 40%.
(1) Source: I-Quantic survey of high tech stock option practices
Q3. How does this authorization for employee stock options compare to others
that Compaq has requested?
A3. Compaq's requests for approval of shares track its grants to employees
(see Q2). Compaq has requested additional shares for employee and director
plans nine times since we went public in 1983. As we've grown larger and more
established, we've generally made relatively large requests less frequently.
This enables us to plan our stock option grant strategy to compete effectively
to attract, retain and motivate key employees. In the 1990s, we have
requested shares for employee plans only twice before--in 1991 (requested at
about the same level as this year) and 1995 (when we requested under 5%). If
you consider the years in which no request was made the average authorization
works out to 2.2% per year before this year's request. We'll be using the
shares requested this year for the next several years.
Q4. Are the options contemplated to be granted under the 1998 stock option
plan indexed or performance based beyond simply increases in the stock price
from the grant date?
A4. The 1998 stock option plan requires options to be granted with an exercise
price at least equal to the market price of the stock on the grant date. This
approach is consistent with the vastly prevalent market practice for the
employees the Company is desirous to attract, retain and motivate. The plan is
flexible in that if the accounting rules and the competitive practices in
relation to stock options change in the future (such as to use options with an
indexed or above market exercise price), the Board will have the authority to
grant such options.
Q5. The request for shareholders to approve a stock option plan representing
almost 10% of the outstanding stock seems quite dilutive. Is it necessary to
allocate this many shares?
A5. Companies take different approaches to stock option share authorizations.
Some companies have adopted an evergreen approach, which adds a certain
percentage of the outstanding shares to the pool each year. Others make
frequent relatively small requests for shares. One tech company has used a
modified evergreen approach that adds shares each year for the next five
years. Compaq has chosen to request an authorization that should permit the
Company to provide competitive stock option awards for several years into the
future. We do not believe an evergreen plan is appropriate, nor is proposing a
share approval to stockholders every year or two. Even though Compaq is
requesting a large authorization, the total overhang (see QA2) after the
requested shares is still below the average of large high tech companies. And,
our annual grant practices are within the industry average.
Q6. What are some other recent share authorization requests from high tech
companies?
A6. In the past few years, several large technology companies have requested
and received approval for share authorizations in excess of 5%. These include
Microsoft (16%), Seagate (6%), Texas Instruments (9.7%), Hewlett Packard
(6.25%) and Dell (4%+ per year for each of the next five years-20%+ total).
