Citi's New Option Plan for Top Brass Kicks In Only If Stock Price Soars

Citicorp has adopted a new type of stock option designed to commit its most senior managers to achieving a specific stock-price target.

One of the few banks to offer what are called price-vested or performance-contingent options, Citicorp is reinforcing the messages it has been sending both internally and to investors about its commitment to strategic goals.

The target price in this case is $200 a share, about $75 higher than the current level.

Given Citicorp's stature and tendency to lead industry trends, other banks will be watching the results. Mellon Bank Corp. also has gone this route.

The hitch for the 60 high-ranking executives in Citicorp's plan is that the options can be exercised only if the share price reaches $200 and stays there for 10 out of 30 consecutive trading days. It must hit that goal by January 2003. Otherwise the options expire.

Lower-ranking executives will continue to receive stock options that can be exercised after five years with no pre-set price target, said John Morris, spokesman for the New York-based banking company.

The performance-contigent option plan for the top echelon was meant to be "an important signaling device to investors," Citicorp chairman John S. Reed said after directors approved it last month.

Benefits consultants said such programs are popular with shareholders.

Performance-contingent options "encourage top managers to take actions that support the shareholders' interests," said Christopher Young, a principal at Buck Consulting in Pittsburgh. "Managers don't benefit until the shareholders benefit."

This kind of incentive program is rare. A study by William M. Mercer Co. showed that 12% of 350 major corporations made performance-based or premium stock option grants in 1996. Of the 12%, about one-fourth were of the contingent type that Citicorp is introducing.

In December, the top two executives at Capital One Financial Corp. of Falls Church, Va., one of the top 10 credit card companies, gave up cash compensation until 2000 in exchange for options that are exercisable if and when the company's share price reaches $84. Capital One's shares

Price-vested option offers have a downside, said Mr. Young and other consultants.

Traditional "plain vanilla" stock options, which an employee can cash in after a specified amount of time, do not demand that a bank account for its stock appreciation in quarterly financial statements.

Price-vested option plans like those at Citicorp and Capital One require companies to mark-to-market share prices as an expense in the compensation line on quarterly income statements, according to the Financial Accounting Standards Board in Norwalk, Conn.

For most banks with large payrolls, the incremental expense of price- vested stock options is not significant, said analyst Lawrence Cohn of Ryan, Beck & Co., Jersey City.

Another type of performance-based plan, known to benefits consultants as performance-accelerated options, have the same accounting rules as plain vanilla plans and are more popular, consultants said. This type of plan is in effect for top executives at Mellon Bank, which also has the performance-contigent type in effect.

Some observers are skeptical that performance-based option plans deliver. Bank stocks have risen sharply in the last few years along with the broader market, fueled in part by investor enthusiasm, consultants pointed out. A bank's achievement of a price target does not necessarily mean it is performing above average, they argued.

"There is no guarantee that the price the bank fixes for its target means the bank will be a superior performer from a shareholder's perspective," said Yvonne Chen, a principal at the William M. Mercer consulting firm in New York.

Wall Street analysts said Citicorp's option target is not far-fetched.

In October, the $311 billion-asset company announced a sweeping restructuring designed to reduce operating costs and boost revenues, particularly in retail banking. Mr. Reed said during a Jan. 20 conference call with analysts that he thought $200 a share was achievable within four years.

Citicorp's stock would have to grow at 11% a year over five years to satisfy the option requirement before the deadline, said to David Berry, an analyst at Keefe Bruyette & Woods. It has been up an average of 42% a year over the last five years.

"It might have been more inspirational if Citi had put a shorter period of time on the plan," Mr. Berry said.

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