Companies Serve Up New Pay Option
(FORTUNE Magazine) – Just when you thought you had finally figured out your stock options--when they vest, when you can exercise them, why they're still underwater (or is that a 40-foot-deep black lagoon?)--everything is about to change. For that you can thank the Financial Accounting Standards Board, which has persevered for ten years in a crusade to get options expensed like cash, making them a lot harder to throw around like candy. FASB will probably get its way in 2005--not a second too soon for shareholders at many big companies who, weary of dilution, are no longer so quick to rubber-stamp one giant batch of options grants after another.
If you've been following this in the papers, you may recall that Microsoft abandoned stock options last summer, switched to restricted stock instead, and set up an innovative program in which its employees could cash in their unexercised options for restricted stock. (That's where the company grants you x number of shares, to vest on a given date. Once vested, you can sell at whatever the stock's market price happens to be on that happy day.) Other huge employers, like IBM, have announced that they'll keep awarding options, but there's a catch: Only managers who meet certain specified performance goals will be able to alchemize that paper into gold. Simply being there is no longer enough to get you vested.
Okay, if you don't work at Microsoft or IBM, why should you care? Ah. Because some version of those pioneering moves away from options is almost certainly coming to your company too. That's not all bad. Notes Bob Gore, a principal at compensation consulting firm Towers Perrin: "Let's face it, stock options are a lottery ticket. They're only worth anything if the stock goes up. Restricted stock, by contrast, is almost certain to have some value when it vests, no matter what the market is doing." Cash is nice too. "We're seeing a real trend toward cash," says Korn/Ferry International's Chuck Wardell, who recruits CEOs, COOs, and CFOs. "The thinking is, 'Hey, since we'll have to expense options as if they were cash anyway, here's an idea: We'll give you a pile of cash instead, and if you like the stock, buy it yourself.'"
Or don't. The choice is increasingly likely to be yours. Consider what Lincoln National Corp., the Philadelphia-based financial services company, is doing. Instead of its old system of long-term incentives made up mostly of options, Lincoln now offers a cafeteria-style variety: options, cash, restricted stock, or a combination of the three. But under this plan, what you actually get depends on whether you meet your performance goals. No matter what you choose, if you make it 80% of the way to your goal, you get 80%--not 100%--of the money. "It changes the game," says George Davis, Lincoln's head of human resources. "It raises the stakes."
Indeed. Let's cut to the chase: What's all this going to mean for most managers? "Compared with what we've seen in the past, compensation packages will be smaller," Gore predicts. But you already guessed that, didn't you?