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Research Studies–Proposal Requests

Request for Proposal–Experience Analysis on Exercising of Stock Options

1. Background

Until the late ‘80’s, stock options were primarily rewarded to senior management and other key employees of an organization. However, since that time, there has been a sharp increase in the popularity of broad–based stock option plans. Much of this trend can be attributed to the attractiveness of stock options as a flexible means to share ownership with employees, reward them when the company grows, and retain them. In particular, for growth–oriented companies, it provides an opportunity to conserve cash for other purposes. For high–tech companies, stock option plans have become the norm and contributed significantly to their growth, leading to an estimated 10 million employees in the U.S. receiving stock options, according to the National Center for Employee Ownership.

Following the ever–increasing use and popularity of these plans, the Financial Accounting Standards Board issued new accounting and valuation requirements which became effective this year for most companies. One of the key factors in determining the value of employee stock options is the early exercise behavior of each company’s employees. Only limited academic research is currently available on the question of what motivating factors contribute to employee exercise behavior. Consequently, the Society of Actuaries’ (SOA) Pension Section is initiating an experience analysis of the exercise of stock options to explore this question. To oversee this effort, a special task force has been recruited and formed.

2. Purpose

The SOA is issuing this Request for Proposals seeking researchers who can:

• create a database suitable for performing analysis on stock option data;
• compile clear documentation of the database to facilitate both future updates and use of the data;
• work in collaboration with members of the task force to specify an appropriately structured model geared to the prediction of future patterns of employee exercise behavior given a set of grant conditions comparable to those populating the database;
• quantify and document the effect of model–predictions on valuation given implementation of a lattice–type model for the valuation of stock options that reflects the specific stock–price–path, time–based, and other predictor variables specified by the model;
• perform analysis on the data in consultation with the task force overseeing this effort;
• prepare summary exhibits of the analysis and a report intended for public distribution;
• generate any needed reports from the database including special incentive reports for data contributors.

The SOA is working with investment firms and their clients to procure applicable data. Data specifications will be shared with responders to this request for proposals once they become available. At this point, the data is expected to be fairly voluminous, but it is unclear how much data will be available for this effort. Consequently, the task force envisions this effort in two phases:

Phase 1

For phase 1, data is expected to be procured from 1–2 investment firms. The purpose of phase 1 would be to create a database and analyze the data received from these 1–2 investment firms. Phase 1 would then serve primarily as a learning experience for the issues that might be encountered in a larger study. As a result, it would help to determine the feasibility of a more broad–based study and whether or not to invest resources for such a study.

Phase 2

Depending on the results of Phase 1, the primary purpose of Phase 2 would be to use the database and analysis created in Phase 1 as a launching point for a much broader–based study. If the results of Phase 1 indicated the desirability of Phase 2, data would be procured from a significantly higher number of investment firms. In addition, it is anticipated that the level of analysis might be expanded due to the greater volume of data. Expanded analysis would be discussed in consultation with the task force. The task force reserves the right to make a final determination on whether or not to begin Phase 2.

The deliverables for both phases would be consistent with those enumerated in the bullet points at the beginning of this section (under PURPOSE).

Confidentiality

It is imperative that this data be kept confidential for several reasons. Primarily, the data contains personnel information, which must be protected by the employers whose plans are included in the database. The successful proposal team will be asked to sign confidentiality agreements to ensure this is maintained.

3. Research Objective

The following objectives have been identified for both Phase 1 and Phase 2:

1. Design the database structure. The database should be designed to facilitate future updates and be usable on a going forward basis.
2. Reformat contributed data, as necessary, arriving in a variety of formats and media into a standardized format.
3. Verify the reasonableness of each contributed dataset, and contact each data contributor to resolve any discrepancies.
4. Devise a method for encrypting the identity of the contributing organizations. It may be necessary for the researcher(s) to contact original data sources in order to respond to questions that may arise when the SOA reviews the data. However, it is imperative that the original data source for any data element not be identifiable by anyone other than the researcher.
5. Document above steps.
6. Populate the database with the contributed data.
7. Perform analysis and prepare initial report for review by task force.
8. Work with the task force to refine analysis and prepare final report for distribution.
9. Prepare other special reports as needed.

4. Proposal

To facilitate the evaluation of proposals, respondents to this request for proposals should submit the following information:

1. An outline of the procedures that they will follow, emphasizing data security, integrity and documentation.
2. A description of the computer software and hardware that they will use to store and process the data and why these are suitable to efficiently process the large volume of data anticipated.
3. A brief description of analytical capabilities in terms of fitting multi– parameter econometric models to large databases.
4. Resume(s) of the lead researcher(s), demonstrating how their background, education, and experience bear on their qualifications to undertake this research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak for all of the researchers and for the firm or institution on whose behalf the proposal is submitted. Identifying all of the personnel who will work on this project will not be necessary.
5. A timeline for completion of the research including the identification of key tasks and their time for completion. For purposes of the proposal, the timeline should not be date dependent. In other words, tasks should be described in terms of the number of weeks to complete them, rather than dates since it is unknown at this time when data will become available. The tasks should be separated into Phase 1 and Phase 2.
6. Cost estimates, including computer time, salaries, and other expenses. Respondents to this RFP can give such estimates as hourly rates, but in such cases, they must also include time estimates. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. Cost estimates should be given separately for Phase 1 and Phase 2. As mentioned earlier, Phase 2 may be deemed infeasible and for contracting purposes, any agreement will end with Phase 1, if Phase 2 is so deemed. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
7. Any additional information that the respondent feels will assist the task force in assessing the proposal.

5. Selection Process

1. Experience in related projects.
2. Demonstrated understanding of the scope and purpose of the project.
3. Confirmation of the availability of the lead researcher to give adequate support time and direction to junior team members.
4. Prior experience confirming that previous projects have been completed in a timely manner.
5. Prior experience in selecting and calibrating complex, multi–parameter econometric models (e.g. large parametric regression models with time–varying covariates, Tobit regression technique, etc.).
6. Cost.

6. Questions

Any questions regarding this RFP should be directed to:

Steven Siegel, SOA Research Actuary

Society of Actuaries

475 N. Martingale Road, Suite 600

Schaumburg, IL 60173–2226.

ph: 847.706.3578

f: 847.273.8578

7. Notification of Intention to Submit Proposal

If you intend to submit a proposal, please send written notification to:

Jeanne Nallon, SOA Research Actuary

Society of Actuaries

475 N. Martingale Road, Suite 800

Schaumburg, IL 60173–2226.

ph: 847.706.3592

f: 847.273.8592

8. Submission of Proposal

Please e–mail a copy of the proposal to Jeanne Nallon .

Proposals must be received no later than November 30, 2006. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than December 15, 2006.

Note: Proposals are considered confidential and proprietary.

9. Conditions

The SOA reserves the right not to award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available to continue. The SOA also reserves the right to redirect the project as it deems advisable.

The SOA intends to copyright and publish the results of this research. The research will be considered work–for–hire and all rights thereto belong to the SOA. However, the SOA will give appropriate credit to the researchers.