Fleet Financial Group has created a "phantom stock-option plan" to encourage employees to buy into its cost-cutting program.

Fleet told about 20,000 employees that it will set aside money from them if the banking company improves its efficiency ratio to 60% by March 31, 1995. Today, that ratio stands at 66%, which means Fleet spends 66 cents for every $1 of revenue.

To help improve the ratio, Fleet in July unveiled "Fleet Focus 1994" - a seven-month expense review that will ultimately result in staff reductions at the Providence, R.I.-based banking company. Fleet is asking all its employees in the Northeast to improve their units' profitability by 50%.

Fighting Layoff Anxiety

Bank officials hope the phantom stock-option program will lessen anxiety that the cost-cutting effort is likely to produce in Fleet's work force.

"When you go through a study like this, it creates morale problems and uncertainty," said Eugene M. McQuade, Fleet's chief financial officer. "This program is employee-driven from the bottom up, so we wanted to reward them."

The size of the pool is intended to reflect the increase in Fleet's stock price between July 27, 1993, and March 31, 1995.

Fleet will contribute to the pool the equivalent of the proceeds of one million to three million shares of its common stock multiplied by the growth in its stock price from the day Fleet Focus was announced to the average price for March 1995.

Share Price Eases

On July 27, Fleet Focus' launch date, Fleet's stock closed at $33.375. Fleet's shares traded down 12.5 cents near Friday's close, at $30.875.

If the stock price doesn't increase by at least $10 by March 1995, but Fleet does achieve an efficiency ratio of 60% or less, a minimum of $10 million will be made available for distribution. The pool grows by 200,000 shares for each 1% improvement in Fleet's efficiency ratio, to a maximum of $40 million.

For example, if Fleet's efficiency ratio reached 56% and its stock price rose $13 per share, a pool of two million shares, at $13 each, would be created. That means $26 million would be available for distribution.

Assuming 20,000 employees would be eligible, each would get $1,300.

Equal Distribution

Mr. McQuade said the pool would be divided equally among all regular full- and part-time employees on the payroll as of March 31, 1995, up to and including those at the senior vice president level. Those who join Fleet after Dec. 31, 1994, will be ineligible.

"We expect our shareholders to benefit from Flee Focus, and we wanted to share some of that with our employees," said Mr. McQuade.

Because it is available to lower-level employees, plans like the phantom stock option are rare in the banking industry.

"Banks are just getting around to programs like that," said Dale Arahood, a compensation consultant in Wheaton, Ill. "It's a pioneering effort."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.