Here's Your Stock. Here's the Catch...

Corporate boards are rethinking their approach to executive pay—and to stock options in particular—but not for the reasons that recent headline-grabbing scandals might suggest.

Compensation experts in the Twin Cities and elsewhere say that classic stock-option grants are playing a lesser role in the overall pay picture than they did only a few years ago. Though company shares are still thrown into the executive-compensation pot, they are increasingly likely to come in the form of restricted stock or performance shares.

Unlike options, whose value depends solely on what happens to the company’s share price, restricted stock comes with strings attached. The recipient must hit predetermined performance targets in order for the restricted shares to vest. Vesting is a process where employees accumulate rights to employer contributions.

Post-Enron shareholders are savvier and more interested in what executives are doing for their money.

The “backdating” scandals of 2006—most famously the Minnesota case that prompted William McGuire, chairman and CEO of Minnetonka-based UnitedHealth Group, Inc., to step down from his post in December—have little to do with the sea change underway, experts say, except to draw further negative attention to the issue of excessive executive pay.

In backdating, stock options granted to an employee get a boost in value because they are issued on one day but priced as if they’d been issued earlier, when the stock price was lower. “That’s simply illegal,” says Jim Adam, a senior consultant in the Alexandria office of Financial Concepts, Inc., an employee-benefit advisory firm. “It has nothing to do with the effectiveness of incentive-based compensation.”

But Adam and others say a change is now occurring, and it has everything to do with effectiveness and efficiency in a shifting regulatory climate. One factor working to diminish the appeal of stock options is shareholders’ concern about the amount of their money that option grants can lavish upon executives despite mediocre performance.