Some Firms Find New Ways to Link Pay to Performance

A small band of California companies is attempting to find innovative ways to link pay to performance. Among them:

* Diversified insurer Transamerica Corp., owner of the landmark pyramid high-rise in San Francisco. Its plan, approved last year, wins kudos from compensation experts for being high-risk/high-reward. When the company’s stock was at $50, executives received jumbo option grants at $60, $82 and $100, with strict time limits. The options have no value until the closing price of the corporation’s stock equals or exceeds the exercise price. And the return to the executive would be only the increment above the exercise price. If the so-called strike prices are not reached on schedule, the executives will forfeit the options.

Since the plan went into effect, the share price has already grown by more than 50%, closing Friday at $82.125.

“We firmly believe this more aligns us with shareholders,” said Chairman and Chief Executive Frank C. Herringer, invoking the favorite vernacular of pay-for-performance proponents. “We do very well if we do well. If we don’t do well, we get zilch. As the shareholders get more interested in how managers are compensated, more companies will move in the direction we have.”

In fact, one Bay Area neighbor has already gone that way: AirTouch Communications Inc. And it’s no coincidence that Sam Ginn, the cellular company’s chief executive, is on Transamerica’s compensation committee.

* SunAmerica Inc., a successful marketer of investment annuities, primarily to baby boomers anxiously planning for retirement. For Chief Executive Eli Broad, 62, SunAmerica grants long-term stock incentives only if the company outperforms stocks in the Standard & Poor’s 500 index. The size of the annual grant also depends on the stock’s performance against the S&P; 500.

“That’s innovative, and that’s good,” said George B. Paulin, Los Angeles-based president of Frederic W. Cook & Co., an executive compensation consulting firm.

However, there’s more to the story that might not be so pleasing to shareholders.

SunAmerica breaks down the grants to Broad (whose name rhymes with load) into two components: restricted stock, which cannot be sold until a specified time but carries full-share value, and stock options, which give an executive the right to buy shares at a specified time and price. Options are usually riskier for executives because gains are realized only if the share price rises above the so-called exercise price.

“The restricted stock is weak from a pay-for-performance standpoint,” Paulin said. “It’s a less risky form of compensation because those shares are always going to be worth something, whereas stock options might not be.”

Restricted shares are routinely used as a handsome incentive to keep executives on board. But, Paulin wondered, “what is the retention objective for somebody who is the majority owner of the company and is anticipating retirement?”

A significant part of Broad’s compensation package is in restricted stock, though he won’t get much of it until he retires. Of course, that also serves to postpone his tax liability. And, after all, he did get a hefty $2.1-million cash package in 1995.