Stock grants make CEOs' day
Triangle Business Journal - by Matthew Burns
RALEIGH -- Taking advantage of what many view as an overvalued stock market, chief executives at some publicly held Triangle companies are cashing out stock options earned several years ago and are looking to a more secure way to earn money in the future.
Top executives at local firms increasingly turned to restricted stock awards in 1998, rather than taking boatloads of stock options, as they had in the past. The most notable example: Carolina Power & Light Co. CEO Bill Cavanaugh, who pulled in an eye-popping $4.2 million in restricted stock last year.
A review of 30 annual proxy statements of Triangle companies shows that only half granted options to their CEOs last year, down from about two-thirds in 1997.
Options now carry the baggage of a volatile stock market, which continues to tremble over the possibility of renewed inflation and higher interest rates. Half of the grants are currently worthless since stock in the various companies trades for less than the price set to exercise the options.
Because of this, some boards of directors are turning to restricted stock awards to pay their top management. The stock handed out through such means usually can't be traded for a few years, but it is virtually risk-free for an executive since he doesn't have to plunk down any cash to get it if he waits around long enough.
Marc Buchsbaum of compensation consulting firm Sibson & Co. said restricted stock offers boards a chance to diversify the compensation package, especially in times of stock market jitters.
"There is some uncertainty over where the market is headed, which makes restricted stock a safer bet for executives," said Buchsbaum, who works in Cary. He added that options also are riskier for companies because they are awarded in larger amounts and tend to dilute earnings more than restricted shares.
A growing use of stock awards reflects the fact that more corporate boards fear losing executives in a tight job market and are trying to tie a CEO to a company, he said.
"We used to talk about executive pay, but now boards are more concerned about the executives themselves," he said. "How much would you pay to keep (IBM Corp. CEO) Lou Gerstner or (General Electric Co. CEO) Jack Welch on your team?"
That was the thinking behind Cavanaugh's $4.2 million stock award. CP&L spokesman Mike Hughes said the board adopted a policy in 1997 to award restricted stock to executives solely to retain them. The rest of Cavanaugh's package, by comparison, is based on personal and corporate performance standards.
The 100,000 shares start vesting after three years and become fully vested by the time Cavanaugh, 59, reaches retirement age in six years, Hughes said. CP&L's board could add to the award in the future, he said.
Many utility executives are receiving higher pay because of perceived greater risk facing their companies. Duke Energy Co. Chief Executive Rick Priory received a 75 percent pay raise and a one-time grant of shares valued at $2.6 million as of Dec. 31.
Konover Property Trust Inc. CEO Camm Morton has received restricted stock instead of a bonus and part of his salary since joining the shopping center developer three years ago.
His restricted shares, which usually vest within three years, now total more than $1.9 million, including the $726,133 he was awarded in 1998.
Konover Senior Vice President of Finance Linda Swearingen said the annual awards are part of Morton's employment agreement. She couldn't say why the company's board chose to use restricted stock instead of options, which Konover rarely offers.
Six local CEOs, twice as many as in 1997, decided to reap the benefits of the long bull market last year, cashing in stock options.
Steve Zelnak of Martin Marietta Materials Inc. led the way, exercising 104,333 options for a net gain of almost $2.8 million. Martin Marietta shareholders also have benefited from Zelnak's leadership, as the stock price has almost tripled in the past three years.
Bob Ferguson of Midway Airlines Corp. and Mike Patterson of Triangle Bancorp Inc. also exercised options. Ferguson netted $458,081, while Patterson took in an extra $277,938.
"With the long run-up in the market, options that were granted in the early '90s are in most cases very valuable," Buchsbaum said. "I would expect to see large option exercises in the next year or two as people cash in before (the options) expire."
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