NCR Sets High Hurdles for New CEO
01/02/06
By: Jill Brown, Agenda
IN A MOVE LIKELY TO WIN favor among shareholders, $6.3 billion NCR Corp’s board has granted its new CEO Bill Nuti, performance-based options that require three years of consecutive strong performance.
“nuti needs to perform in two ways to get paid,” says Dan Ryterband, managing director of Frederic W. Cook & Co., who advised the board on the plan. “First, he has to achieve the performance targets to vest in the options, and second, he must drive stock price upwards in order to profit on the vested awards.”
The comp plan is designed with recruiting and shareholder interests in mind in an era of close compensation scrutiny. “We wanted to attract a really good CEO, so we wanted to give him areally good package,” says Linda Levinson, chair of the compensation committee of NCR. “We were also cognizant of the environment where everyone was looking at the size of package.”
When Nuti signed on in August of 2005, NCR granted him 650,000 options, of which 250,000 are traditional, time-vesting options with a four-year vesting schedule (25% per year). The remaining 400,000 vest only if cumulative net operating profit performance goals are met over the 12 quarterly periods between Jan. 1, 2006, and Dec. 31, 2008. There is no interim vesting, and performance is measured only at the end of the entire performance period.
That means that if the performance goals are not achieved, Nuti will forfeit 61% of his stock options, even if they are deeply in the money. “We wanted to create a win-win package where we could attract a really good CEO with really outstanding upside but take some of the risk away from the shareholders,” says Levinson. “If (Bill Nuti) vests in all of these options, the shareholders really win too.”
Wile performance-based options are unusual, they are becoming more popular. McDonald’s, Tiffany and Kimberly Clark recently started tying a portion of their executives’ options to performance hurdles. Overall, 18% of option grants last year were performance-based, according to a recent study by Equilar.
Performance-based options have been especially rare for compensation packages awarded to new CEOs. In a new hire package, companies have rarely required anything other than a standard time-based vesting schedule for options.
“I have advised about 20 Fortune 500 companies in the past few years on the structure of new hire packages for externally recruited CEOs, and with the exception of incredibly large awards none have used a similar approach,” says Ryterband.
Shareholders favor performance-based options over time-vested options, however. It’s part of an overall emphasis among shareholders on pay for performance. When an executive is granted time-vested options, they vest simply if an executive stays long enough at the helm. Performance-based options raise that bar.
“If we were just giving him time-vest options, all he would have to do is stay,” Levinson says.
What slso makes NCR unique is the aggressive nature of its performance hurdles.
“That is a true performance-based option grant,” says Paul Dorf, managing director of Compensation Resources. “That is strictly meant to satisfy institutional investors. It would be interesting to see how many companies would be able to see 12 quarters of consecutive performance. That’s a tough standard.”
A possible downside to the NCR plan, according to Dorf, is that the three-year performance standard is long enough to backfire. “It’s pretty tough to know where we will be in three years,” says Dorf. “That could become a major demotivator: Something happens in the White House, and there goes my value.”
Reponds Levinson: “This is an issue in general when you set goals more than a year in advance, and, frankly, six months in advance. If we used market price, then multiples do change due to external events. Then the CEO has absolutely no control. But that’s one of the reasons we set operating goals.”
Nuti’s record bodes well for a strong performance at NCR. Morningstar anlyst Mark Lanyon argues that while NCR’s business portfolio contains several growth opportunities, the key to the company’s future success is its comprehensive restructuring and focus on operating margin expansion. He notes that Nuti recently made headlines as Symbol Technologies’ CEO for his aggressive restructuring efforts.
“What’s particularly wonderful is that we knew we had the right guy because of Bill’s willingness to accept a package like this,” says Levinson. “It reinforced that we had found a CEO with the right ethics and right drive.”
