A Popular Reward: Restricted Stock

Job Performance Link Is Debatable

As stock options become costlier and more controversial for companies, another form of executive compensation is gaining favor -- and drawing criticism.

It's known as restricted stock, a grant of stock that generally passes to an executive over a period of time.

The rise of restricted stock reflects the continuing effort to align pay with performance -- or, according to some corporate governance analysts, the continuing effort to avoid aligning them.

In a sense, restricted stock puts the executive in the same boat as ordinary shareholders because its value rises or falls with the share price.

But unlike stock options, which allow the recipient to purchase shares at a fixed price, restricted stock costs the executive nothing. And unlike options, which pay off only if the share price rises, restricted stock rewards the executive regardless.

"It's been generally derided as things such as 'pay for pulse' or 'remuneration for respiration,' " said Patrick McGurn, executive vice president of Institutional Shareholder Services. "In essence, it requires you to only, as one consultant I know says, fog a mirror in order to receive value after some extended period of time."

"Restricted stock is performance-based pay," responded Randall S. Thomas, a professor at Vanderbilt University Law School. "If the stock price goes down, the stock is worth less."

Last year, 43.4 percent of chief executives at big companies received some form of restricted stock, up 5.5 percentage points from 2003, according to Equilar Inc., which researches executive compensation.

The median value of those awards rose 17.5 percent to more than $2.3 million, Equilar's Tim Ranzetta said.

The study, which looked at 403 chief executives at companies in the Standard and Poor's 500-stock index who had been in their jobs at least three years, was designed to exclude large awards to newly appointed chief executives.

At a sample of smaller companies in the S&P 1,500, the median restricted stock award to chief executives rose 14 percent to $421,513, Ranzetta said.

Meanwhile, the median value of chief executive stock option awards fell 4.8 percent to $2.95 million at S&P 500 companies, and fell 23.1 percent to $329,609 in the sample of smaller companies, Equilar found.