As executives with Citicorp and Travelers Group iron out the differences between their companies in the coming months, they will have to contend with one issue that motivates employees like few others: stock options.
Both companies have generous programs for their upper-level employees. But Travelers also has a program that grants options for all its employees, making it one of a small but growing number of financial services companies to grant options to the rank and file.
So whose approach will win out?
"It's going to be a major issue for the new company to deal with," said Michael Garelik, chairman of the financial institutions practice at William M. Mercer Inc., a New York-based consultancy. "You'll have a hard time taking away an all-employee plan. So the new company will have to figure out how to make the two organizations come closer together."
So far, the two companies are shying away from providing concrete answers.
"That's one of the myriad issues that will need to be addressed," said John M. Morris, Citicorp's head spokesman.
What is clear is that all current option grants will be honored once the transaction closes because the deal is a merger of equals rather than an acquisition, spokesmen from both companies said.
In the case of a straightforward acquisition-as most mergers have been- many acquired companies have "change of control" agreements that in some cases let all unvested options held by employees of the target company become vested automatically.
But the merger between Citicorp and Travelers Group does not constitute a change of control, according to both companies.
As a result, Citicorp's highest-ranking 60 executives, for example, would continue to benefit from a program announced this year that would give them the right to exercise options once the bank hits $200 a share and stays there for 10 out of 30 trading days.
The only difference would be that the $200 figure would have to be adjusted for the share value of the new Citigroup, which should trade at less than half the price of current Citicorp shares.
In addition to the Citicorp program for those at the top, another 2,000 of the bank's executives benefit from more traditional options contracts.
At Travelers Group, each employee receives an annual options grant worth $4,000, or 10% of their salary, whichever is lower. Under this plan, employees gradually vest in the program over a five-year period.
Over the past week, the respective values of these options plans have jumped; news of the merger sent Travelers stock up 5% by noon Monday, to $64.75, and Citicorp's up 12%, to $160.
But once Citicorp and Travelers merge and their employees find themselves working side by side, the differences in their long-term compensation could lead to some friction.
A program could emerge that copies one of the plans, said Edward Freher, a compensation consultant with KPMG Peat Marwick. "Or it could be a blend of the two."
