Capital One Financial Corp. is taking steps to link executive compensation to stock performance, following the lead of other top financial services firms.
The Falls Church, Va.-based issuer has $8.9 billion in credit card outstandings, making it a top-10 card bank. Since the spinoff from Signet Banking Corp. this year, it has been a strong stock performer among its peers.
"It's always good to see management (compensation) tied to the stock price," noted Thomas P. Facciola, an analyst with Salomon Brothers Inc. However, he and others did not find the plan unique.
Under the board-approved executive compensation plan, Capital One chairman Richard D. Fairbank and president Nigel W. Morris will forgo cash bonuses, annual stock option grants, and supplemental retirement plan benefits for five years.
In exchange, Mr. Fairbank will receive options to purchase 1.5 million shares, and Mr. Morris one million shares, of Capital One common stock. However, the options will vest only if the stock reaches certain price levels.
A plan approved by the board last week calls for the company's two top executives to give up the most compensation for stock options. Other senior managers have been given the option to give up compensation to a lesser degree in exchange for stock options.
"What we have here is a very entrepreneurial-type company," said Stanley I. Westreich, chairman of the board's compensation committee. "We're trying to tie the fortunes of the two most senior executives in our company into a plan where they will get significant revenue if in fact the shareholders get rewarded."
Under the tiered plan for Mr. Fairbank and Mr. Morris, the stock options will vest only if the price of the company's stock equals or exceeds $37.50 per share. An additional 25% will vest only if the share price equals or exceeds $43.75; and the remaining 25% will vest only if the share price equals or exceeds $50.
The purchase price is $29.19 per share, which was the average market price of Capital One's common stock on Sept. 15, the day these options were granted.
Capital One said these one-time grants are subject to shareholder approval of an increase of at least two million in the number of shares reserved for issuance. Shareholders will be asked to vote on the increase in April 1996.
Under the second part of the plan, Capital One's top 51 executives can elect to forgo up to 25% of their current base compensation for each of the next three years in exchange for stock options.
The company said these options will vest over three years in one-third increments. Executives can make their elections until Sept. 29. The purchase price for the shares subject to the options is $29.19 per share. They can buy up to 381,826 shares.
"If there was ever a way to tie in shareholder value to employee value, this is it," said Mr. Westreich, president of Westfield Realty in Arlington, Va.
Emanuel Monogenis, a managing partner with Heidrick & Struggles, a New York-based executive search firm, noted that other companies, including Etna and Travelers, have implemented similar plans.
He speculated the company might have made this move to ward off bigger competitors who have watched Capital One build share through marketing and technology. Or the top executives may have approached the board because they felt they were undercompensated.
If their compensation is below market, Mr. Monogenis said, "this will not be successful as an incentive plan."