Alltrista Corp. Chief Executive Officer Thomas Clark was searching for a way to motivate his top executives to double sales to more than $500 million in five years, but he didn't think the traditional stock options the firm had offered would do the trick.
So the diversified Muncie, Ind.-based maker of packaging and industrial components decided to trash options. Instead, it awards stock grants based on very specific performance goals — with the grants increasing dramatically if an executive dramatically exceeded the targets.
``The point is you are putting something in their hands and they are working hard to retain that as opposed to a stock option, which is a one-sided test,'' Clark said. ``The value of the stock option depends on the performance of the market and the performance of the company.''
Alltrista's plan kicked off this year.
While such nontraditional stock pay plans are increasingly favored by institutional investors, they remain relatively uncommon. ``Plain vanilla'' stock options continue to dominate, according to compensation industry experts.
For example, just 2.7 percent of the largest 1,000 U.S. publicly held companies use one form of the new stock awards, the premium-price stock options, according to figures from Executive Compensation Advisory Services.
Ironically, many of the critics of stock options today were strong supporters of options when they first gained prominence in the wake of the stock market crash of 1987, said Carol Bowie, research director with the Springfield, Va., compensation firm.
Back then, institutional investors were looking for a way to boost share prices and recoup the value of their investments, so companies responded by increasingly linking pay to stock options, she said. Not coincidentally, it worked — and stock prices soared, she said.
The plan implemented by Alltrista takes it a step further, linking stock awards to more-specific performance goals.
The main target: roughly 15 percent growth in an executive's area each year, Clark said.
``If you put an option in the hands of a manager in a business unit, they could hit a home run in managing their business but adverse conditions in other businesses could result in the share price going down,'' Clark said. ``We are making the grant on their performance, not on the market.''
Meeting the target gets the executive 100 percent of the grant indicated, but exceeding that can increase grants by an additional 50 percent, he said. And if those specific goals are met, shareholder return and company value should go up accordingly, Clark said.
``There has been excessive options granting in many companies, in our point of view,'' he said.
Institutional investors are pushing stock plans that require firms to beat the stock market or to beat an industry average to exercise the options. That helps ensure that executives do not get rewarded merely because the market goes up and their stock rises too, said Chris Bohner, spokesman for the AFL-CIO's Executive Paywatch program in Washington.
Stock options and stock grants do carry risk, of course. A market downturn or decline in a firm's performance could lower their value, or render them worthless if the stock price sinks below the option-exercise price, experts said.