Winpak Ltd. has an unusual strategy on stock options - it doesn't give out any.
At most publicly trade companies, options are a big part of executive compensation, favored as a way to bind the financial interests of executives with shareholders. But the practice is compensana non-grata at the Winnipeg, Manitoba-based packager.
``It's a fallacy to say you need to give stock options to attract and retain people,'' said J. Robert Lavery, president and chief executive officer of the firm. ``There are hundreds and hundreds of people who work for private companies who don't get stock options. Why do they stay there?
``You can attract and retain good people if you pay a good, competitive compensation and you offer people a good job,'' he said.
The company's path was set in 1985, when its majority shareholder, Finnish conglomerate Wihuri Oy, gave a thumbs down on using stock options.
Winpak was planning to go public and was looking at various compensation plans, including options. Ultimately it decided that options would not align the interests of shareholders and executives, Lavery said.
Most shareholders buy stock for the long-term, but Lavery said he thinks options make managers too oriented toward short-term gains so they can exercise an option quickly and take a profit.
In his opinion, that partly explains recent financial scandals where executives cut corners to boost earnings. Plus, options reward executives when the market rises and lifts all companies, even the ones that are not managed well, Lavery said.
Winpak is not alone. Sealed Air Corp., for example, has a long-standing policy of not awarding stock options in favor of having executives receive grants of stock. Still, most public companies say they find options a good way to link executive pay to shareholder interests.
Supporters of options say the executives cannot make money unless the stock goes up in value, in effect making them ``golden handcuffs.''
While options are controversial today, it's worth remembering that they were the tool of choice for corporate reformers a decade ago when companies were searching for ways to better link manager pay to performance.
Options by themselves are not bad, but they have not worked as intended, said Charles Elson, director of the center for corporate governance at the University of Delaware in Newark.
``The implementation hasn't worked the way we thought,'' he said. ``Companies are much more liberal with giving them out than they should be.''
Elson said he prefers companies to give out stock grants instead of options, since grants mean executives lose value along with shareholders when stocks go down.
While Winpak relies entirely on cash for all but two executives, it does have a program for its two top executives that mirrors a stock grant plan.
The two executives - Lavery and Bruce Berry, president of the firm's Winpak Division - get ``phantom shares,'' which are cash payments based on stock performance. Those shares, which the company calls ``rights,'' pay dividends like stock.
But those shares are given to executives outright, and are not stock options. They function like a stock grant program, a common incentive program that gives executives shares of stock if performance targets are met, Lavery said.
All of the firm's executives used to receive phantom shares, but the company dropped that in 1999 in favor of a program that gives cash bonuses, up to 112.5 percent of base salary, based on each executive meeting specific performance goals.
Lavery also owns 50,000 Winpak shares that he bought with his own money. Lavery had a salary of US$258,000 in 2001, up 15 percent from the year before, and he got a payout of US$279,000 from its long-term compensation program.
As for the bottom line - retaining employees and growing the company - Winpak believes it fares well. The company has lost only one senior executive to another firm. In the past five years its stock has grown an average of 19 percent a year.
Lavery laments that at most companies, executives do not face much of a downside when their firms perform poorly.
``That's what's so annoying about this whole executive compensation thing,'' Lavery said. ``These CEOs get themselves into such high compensation levels. There are so many companies where people had tremendous compensation packages and the shareholders didn't do very well."