As Long As You're Up, Get Me A Restricted Stock Grant

When prices fall, execs find such awards preferable to options

With dot-com mania sending some stocks soaring and others into the basement, compensating CEOs with basketfuls of stock options isn't working the way it used to. At Philip Morris, Gillette, and Owens-Corning, for example, the latest rounds of option grants to the top brass aren't worth a penny.

Meanwhile, high-tech chieftains are cashing in options worth tens and even hundreds of millions of dollars, leaving boards worried that executives will depart for ever-greener pastures. "How do you keep them down on the farm after they've seen the California gold rush?" wonders Nell Minow, editor of, a site specializing in pay and corporate governance.

But where there's a will, beleaguered compensation committees have found a way. Throughout Corporate America, gifts of restricted stock have become the latest cherry atop the fudge sundae of compensation. After losing favor to options, which were seen as better at linking pay to performance, restricted stock grants are staging a comeback.

ENDURING VALUE. Of course, such grants have hardly replaced options. According to Executive Compensation Advisory Services, the number of options in the average grant is up 36% so far this year. But restricted stock is once again in vogue because it guarantees executives some payout. A stock option gives executives the right to buy a stock at a certain price, and only has value if the stock rises above it. By contrast, a restricted-stock grant is a gift of stock, and thus retains value even if the stock falls. Like an option, it must be held for a vesting period and sometimes has performance requirements built in.

According to Executive Compensation Advisory Services, 61 companies out of a group of 180 that have reported pay data so far this year made awards of restricted stock. Companies are also increasing the size of the average grant and the number of people they give this stock to. "There are some huge awards out there," says Carol Bowie, director of publications at Executive Compensation Advisory Services. "The biggest we've seen in years."

The biggest of all restricted-stock grants was the $670 million awarded to Charles B. Wang, CEO of Computer Associates International Inc., in 1998. Unlike option grants, which are not accounted for as an expense, the cost of restricted stock, like cash pay, is charged against corporate earnings. In Wang's case that led to a $675 million charge, and numerous lawsuits.

Such drawbacks haven't put a damper on restricted stock, though. Tyco International CEO L. Dennis Kozlowski received 624,000 shares of restricted stock, worth $41.20 apiece, on Oct. 18, just as Tyco stock dipped from its split-adjusted high of around $54--in the wake of criticism of its accounting policies. Company shares fell to $22.50 before recovering to about $48.50. So while shareholders have lost $9.3 billion in market value since the peak, Kozlowski's grant, which vested in January, is worth $30 million.

Likewise, Bank of America Corp. CEO Hugh L. McColl Jr. was awarded 600,000 shares of restricted stock worth a mind-bending $44.7 million last year. According to BofA's proxy, the gift was a reward for his leadership over the five preceding years. A company spokesman also says the company was trying to bring McColl's compensation in line with that of his peers. The grant was an add-on to his $3.75 million salary and bonus and 1.4 million options granted at $74.50 per share.

BEST ALTERNATIVE. Since the award, BofA stock has dropped to around 52, making McColl's latest round of options worthless and frustrating many shareholders. His restricted-stock award, however, is still worth $31 million. "I think that's shameful," says Minow. "If he had [only] options, he would be worth nothing. Let him do what I do as a shareholder: Reach for his checkbook and buy some stock."

Still, proponents of restricted stock say it's the best alternative for companies whose options aren't paying off. In the war to keep talent, in fact, it has become part of the cost of battle. "The [key to] retention is to minimize [executives'] picking up the phone," says Russell H. Miller, a partner at pay consultant SCA Consulting.

It's also vital to attracting top executives. Hewlett-Packard Co. offered $65.6 million in restricted stock and restricted stock equivalents to help lure Carleton S. Fiorina from Lucent Technologies Inc. In Fiorina's case, the restricted stock was used to make up for some of the millions in exercisable options she left on the table at Lucent--a critical factor in closing the deal. Thanks to the the rise in HP stock, it is now worth $84.8 million. No wonder restricted stock has more appeal than ever. Especially in the corner office.

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