Keystone Financial Inc. is an unlikely candidate to have one of the industry's most shareholder-friendly executive compensation packages.

Situated in the heart of Pennsylvania, the bank has only $5 billion in assets, its investor base is primarily retail, and there have been no serious financial difficulties that would spur angry demands from disgruntled shareholders.

No matter. Keystone may be the only bank in the country to pay its chief executive partly with so-called premium options - which penalize the officer if the stock performs only modestly.

"Most bonuses are set up so CEOs can't lose," said James Schmidt, a bank fund manager with John Hancock Investment Management. "But Keystone's puts more risk in it."

Unlike run-of-the-mill options, which are given to executives at current market prices, the exercise price for premium options is higher than market value.

Keystone chief executive Carl Campbell received his options in 1994 when the stock was trading at $30 a share. In typical option plans, that would also be the strike price, so any price growth would result in instant profit if he cashed in the options.

But Mr. Campbell's options pay off only if the stock reaches $36 a share, 20% above the issue price.

Thus the executive has financial incentive to significantly boost the stock price. Incremental increases are not rewarded.

Premium options are rare not just in banking but throughout corporate America. Only eight of the companies in Standard & Poor's 500 index use them, according to the Institutional Investor Research Center in Washington.

Where they do exist, the company is often in the midst of a financial restructuring, says Vincent Perro, director of the financial services group at Sibson & Co., a compensation consultant.

Harrisburg, Pa.-based Keystone has other shareholder-friendly items too. Employees in some units get incentive payments. Executives must own a certain amount of Keystone stock. And there are no company cars - Mr. Campbell has a $500 pretax monthly allowance to lease his Buick Park Avenue.

But the premium option sets the bank apart.

"It was a way for us to put our money where our mouths were," Mr. Campbell said. "We felt it was a unique way to show our confidence in the future of the company and link shareholder value with performance."

Other top executives all received premium options in 1994, which expired after a year. Mr. Campbell's are due in 1998. The company is considering an extension of the program.

"Carl truly understands the role of a regional bank," said Emmett Daly, an investment banker at Keefe, Bruyette & Woods, who has advised Keystone in the past. "And if his efforts don't result in a higher stock price he will suffer with his shareholders."

And to a certain extent, he has.

In 1994 he received 100,000 premium options, agreeing to freeze his pay at $330,000 a year for three years. The strike price is still underwater, at the current price of $33.

His total $514,000 salary for 1994 - including annual bonus - trailed the average bank chief executive's compensation in the region by 10%, despite Keystone matching the average for shareholder return, according to SNL Securities Inc.

For Mr. Campbell, the issue is doing right by shareholders, even though there is no apparent effort among investors to force greater management accountability.

"We have had strong, steady performance, so there were no negatives that promoted this," he said. "I didn't expect them to pay off" right away.

Mr. Campbell still expects his options will be in the money by 1998. He has forgone salary increases for three years, and rejected the chance to receive less risky options.

Observers say Mr. Campbell may have misplayed the timing. Keystone had been fairly valued, so as banks listed on the Nasdaq exchange increased in value 36% since mid-1994, Keystone appreciated only 8%.

But Mr. Schmidt, the Hancock investor, said the investment should pay off come 1998 on the strength of Keystone's solid fundamentals.

"If there is justice, the options should pay off," he said. "If not, we may not see them again for a long time."

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