A look at BMC Software’s time-based RSUs…

When Houston-based BMC Software, Inc. (BMC) filed its proxy June 17, we made a mental note to praise the company for what we think is a small step in the right direction:   The company said that while it will continue to pay the travel costs for executives' spouses to attend "appropriate company events," it will no longer gross up reimbursements to pay the taxes on that imputed income.

While that move will save the company a little money, a bigger disclosure jumped out at us that will surely cost the shareholders far more.

BMC awards two kinds of Restricted Stock Units ("RSUs"), some that are "time-based," and some that are "performance-based." The proxy states that the performance-based shares given to executives and other key employees vest in full only if BMC reaches pre-established performance targets and the recipient remains employed with the company.  The only executive who got performance-based RSUs in fiscal year 2010 was Hollie Castro, the SVP of Administration. However, those shares were given to Castro pursuant to the terms of her September 23, 2009 Employment Agreement.

BMC's other RSUs are the time-based shares. The company describes those as follows:

"Time-based RSUs directly focus on retention while providing an opportunity for increased rewards as stockholder return increases. Typically, these awards vest over three years, assuming continued employment."

BMC explained that the poor market conditions, when combined with the company's lower share price (which was lower than the strike price on the previous two years' stock options) meant that the prior awards "...had little to no perceived reward or retention value." But rather than replace or exchange the awards, the company used time-based RSUs to "...ensure stability in the leadership team, particularly as our company has performed well during difficult economic conditions." It then explained:

"We view time-based RSUs as a less volatile equity instrument which links an executive's interest to stockholder interests while maintaining a strong retention component. Time-based RSUs also provide a clearer view at the time of grant of future value to be delivered. If the stock price decreases, the value diminishes thus creating a downside to performance. If the stock price increases due to performance delivery, the value increases further motivating executives."

Last year, BMC's board awarded CEO/President Robert Beauchamp $8.94 million in time-based RSUs.  Senior Vice President/CFO Stephen Solcher got almost $2.1 million.  Hollie Castro (and remember, she just joined the company in September, 2009) got nearly $1.8 million.  And four other NEOs (two of whom who have since left the company) got nearly $7.9 million, collectively. The proxy states that the numbers given represent the fair market value of the shares on the date of the grant.

Other than a few little purchases and one sizable acquisition (121,083 shares) by Beauchamp, most of the insiders' recent trades reflect a lot of sales and dispositions of BMC's stock.  Apparently the program helps to retain the executives, but whether or not they retain the company's stock is a different question.