Three Companies That Raised the Hurdles in the Stock-Options Chase
By ADAM BRYANT
One common criticism of stock options is that they give executives immediate rewards for stock-price jumps caused more by broad market forces than by their individual efforts.
Some companies appear to have taken these complaints to heart. Rather than hand out options to buy stock at the market price on the date of the grant, these companies have set higher thresholds that executives must clear before they can enjoy any profits on the options.
In return for this higher risk, though, executives typically get larger stock option grants.
Here are three examples of companies that are offering new incentives that are likely to win applause from many shareholders:
TRANSAMERICA CORP. When this San Francisco-based financial services company granted new stock options last year to the company's chairman and chief executive, Frank C. Herringer, Transamerica stock was trading at $93.19 a share.
But rather than grant shares at that market price, the board gave him 645,000 shares that will pay off for him only if the stock rises to more than $150 a share within five years.
Once Herringer clears that hurdle, though, he faces yet another: Transamerica's total shareholder return from the date of the grant must be at least at the median of its industry peer group's. The stock closed on Friday at $118.50.
"This plan is great in two respects," said Graef Crystal, an expert on compensation. "It assures that Frank Herringer isn't going to make money unless he really performs well, in both absolute and relative terms. That's something rarely seen in an option plan."
If all companies had instituted plans like Transamerica's during the last five years -- a period when stock prices have more than doubled, on average -- more than 50 percent of chief executives would have received no payoffs from stock options at all, Crystal added.
MONSANTO CORP. Earlier this year, this St. Louis-based life sciences company disclosed that it had instituted a new stock option plan for Robert B. Shapiro, its chairman, with two unusual features.
The first is that Shapiro will be rewarded only to the extent that Monsanto's stock rises more than 50 percent within five years. Second, he has to buy the options ahead of time at half their present value at the time they were granted. So if the stock does not reach that 50 percent mark, Shapiro stands to actually lose money, a rare concept in the world of executive pay.
BANKAMERICA CORP. Last year, David A. Coulter, chairman and chief executive of the banking company based in San Francisco, received an unusually large grant of 1.94 million shares. But those options were divided into three groups, each progressively more difficult to attain.
The first was set at 33 percent above the market price, the second was 50 percent higher and the third and largest tranche was set at double the average market price of the stock during the 10 trading days preceding the date that the board granted the options.