Extra Helpings on the Gravy Train

Tracking stocks let some execs double up on their options

Tony L. White, the little-known CEO of Applera Corp., earned a footnote in the history of executive pay last year. In pocketing $61.9 million in 2001, he became one of the highest-paid CEOs by drawing compensation from not one but two different companies.

White is a beneficiary of a recent Wall Street fad: the creation of tracking stocks, a class of shares linked to the performance of a specific business or unit of the parent company. The stocks were meant to "unlock the hidden value" of a company's assets in high-growth sectors by attracting investors who would pay more for those operations. What few realized in the late 1990s, when many tracking stocks were issued, was that the stocks also could result in unusual windfalls for executives who, in effect, doubled up on their options even though their jobs didn't substantially change.

After all, aside from the financial engineering, the senior executives still managed the same assets and employees. Yet in several cases, the issuing of tracking stocks allowed them to hold options on multiple securities. The invention gave the CEOs a chance to win twice--even if the shares of one business completely tanked. Gripes Sarah Teslik, executive director of the Council of Institutional Investors: "It's having your cake and eating it, too."

At some companies, the executive-pay souffle managed to rise quite nicely. In 1999, for instance, White renamed the old Perkin-Elmer Corp. Applera and did a recapitalization that created a pair of separate securities with names befitting the high-tech craze: Applied Biosystems (ABI ), a maker of laboratory instruments, and Celera Genomics (CRA ), a provider of medical information. White, his top execs, and the company's board of directors all got stock options in both shares. Last year, White realized $27.2 million in stock-option gains on Biosystems and $8.9 million on Genomics. He also got a total of $24.1 million of restricted shares in both businesses, landing him at No. 11 on BusinessWeek's best-paid CEO list, with a total of $61.9 million.

Of course, investors also benefited when shares of Biosystems and Genomics soared. And many argue that granting multiple securities to executives ensures that they pay equal attention to the operations represented by those different shares. "It's essentially a necessity," argues William B. Sawch, general counsel of Applera. "If senior managers are only compensated from one part of the company, they would be biased toward that side." Sawch maintains that it's hardly an example of double-dipping. "It's as if you had a dollar bill and you tore it into two pieces," he says. "It's meant to reflect the whole enterprise going forward."

Trouble is, execs rarely cut their options in the parent company in half when tracking stocks are issued. Instead, the total number of options and restricted shares that companies hand over on both stocks are often so large that the managers' overall equity grants are far bigger than what they would be otherwise. In 1998, Sprint Corp., for instance, issued a pair of tracking stocks to reflect its mainstream long-distance telephone business, Sprint FON Group (FON ), and its wireless operations, Sprint PCS Group (PCS ). The maneuver was initially a big success, more than doubling the total market value of Sprint, to $105.8 billion within a year. The combined stocks are valued at just $25.2 billion now. Even so, in the three years since the Sprint recap, seven of the company's top executives have realized gains of $185 million on PCS stock options alone. CEO William T. Esrey had gains of $46.8 million, while President Ronald T. LeMay had $91.1 million. At the end of 2001, Esrey was also still holding options on 10.1 million shares of FON, while LeMay had 5.7 million. A spokesman defends the idea of option awards on both securities. "Sprint is defined by two tracking stocks, both equally important," says Mark Bonavia, Sprint's director of corporate communications.

Maybe. But not all companies that issued trackers put their executives on multiple-option gravy trains. Through all the years that General Motors Corp. (GM ) had trackers for both Hughes Electronics Corp. and Electronic Data Systems Corp. (EDS ), CEO John F. Smith Jr. was never given an option on those shares. That's one way to keep tracking stocks from becoming just another executive-pay boondoggle.

By John A. Byrne in New York

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