The Golden Handcuffs

Mrs. Adeline M. de Neufville, of West Hartford, Conn., was startled by the proxy statement from Security Pacific Corp., a West Coast bank holding company in which she and her broker husband own a few hundred shares. The statement seemed to say that over the next ten years company officers proposed to give themselves Security Pacific shares worth nearly $16 million at current prices, and the men who got the shares would not have to pay a cent. After her husband Lawrence assured her that that really was what the proxy statement said, the De Neufvilles began getting in touch with other shareholders in an attempt to defeat the plan at Security Pacific's annual meeting last month. But Chairman Frederick G. Larkin Jr. assured stockholders that the plan would make officers work hard to raise profits and stock prices, and the scheme was approved. Security Pacific thus joined the growing ranks of companies that are adopting the hottest--and most controversial--executive-compensation idea in years.

Known to management consultants as "performance shares," the concept is simple enough. A subcommittee of the board of directors sets long-range goals for executives to be rewarded--usually increased profits or output. If those goals are met, a number of shares are given to the executive or credited to his name. Under many plans, he begins receiving dividends on the shares immediately, although he may not take possession of the shares themselves for years--sometimes not until he retires.

He does not pay anything for them. He pays regular income tax on the value of the shares when he gets them, but 1964 tax-law changes let him spread out the tax payments over a number of years. At many companies, performance shares are forfeited if the executive leaves to join a competitor before he meets his goals. For that reason, Security Pacific officers call their plan "the golden handcuffs."

Performance shares are intended to replace once popular stock-option arrangements, which grant an executive the right to buy shares in his own company at a constant price over a period of years. Stock-price declines often take away the incentive for conscientious work that options offer; in bear markets, many an executive whose own performance had been outstanding found himself holding options that had become worthless, because the price of his company's stock had declined below what he would have had to pay to buy it. Performance shares carry no such drawback; whatever the stock is worth when the executive receives it, it is all clear gain since he pays nothing for it.

Already such corporate giants as General Motors, Gulf Oil, International Nickel, Pepsico and Texaco have adopted variants of the performance-shares idea. At annual meetings this spring, shareholders of such other firms as Aetna Life & Casualty, Continental Telephone Corp., First National City Corp. and R.R. Donnelly & Sons also are being asked to vote their approval to some form of the plan.

The performance-shares idea is strongly opposed by some stockholders as merely a way for company officers to line their own pockets. "If a plan does not have stringent guidelines, then management is simply asking for a blank check made out to themselves," says Lawrence de Neufville. Even some consultants who specialize in drawing up executive-pay plans doubt the value of performance shares. Says Louis J. Brindisi, a partner in the accounting firm of Peat, Marwick, Mitchell & Co.: "They dilute the stockholder's right to the corporation's earnings by increasing the number of shares outstanding. And since people are not yet familiar with performance shares, they make it possible to compensate an executive far more than it appears he is being compensated." The counterargument is voiced by Pepsico President Andrall Pearson: "The employee has to achieve a certain level of performance. If he performs well, the stockholder benefits. Altogether it's a pretty good balance of everybody's interests."

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