Processed food maker H.J. Heinz Co. has revamped its long-term incentive plan to include performance units. Those incentive grants, with a predetermined value, usually pay out in cash, but only if the company meets certain performance metrics. In the past, long-term incentives consisted solely of options and plain-vanilla restricted stock.

Pittsburgh-based Heinz’s move reflects a major change in executive pay. In general, companies are embracing full-value rewards, whose ultimate value to the recipient is predetermined, at the expense of vehicles whose value depends on stock appreciation, such as options. Performance units are seen as preferable because they only pay out if goals are met and their cost is minimized if performance is low.

Top executives at Heinz, including CEO Bill Johnson, will receive about 60% of their long-term incentives in the new performance units. The remainder will be largely options. Restricted stock will be used on a limited basis, with the possibility for accelerated vesting if the company meets predetermined earnings per share goals.

“What Heinz is doing is at the forefront of the market, and there’ll be tremendous numbers of companies doing the same thing,” predicts Dan Ryterband, a managing director with comp consultancy Frederic W. Cook & Co. He helped Heinz develop its new plan.

A running survey conducted by Ryterband’s firm points to the change. Last year, 99% of 250 top companies granted stock options. But of 72 companies that adopted option expensing in 2004, only 88% did so.

By contrast, the proportion of companies using restricted stock was up by almost 40%, to about two-thirds. Companies granting performance units increased from 17% to 21%. And the prevalence of performance shares, similar to performance units except usually paying out in stock, rose by more than half, to 41% of companies surveyed. “That is a sea change in practice,” Ryterband says.

For Heinz, the new plan has three key benefits. First, it ties executive pay much more closely to corporate performance. Given the intense scrutiny that shareholders and investor advocates are devoting to executive compensation these days, that’s a major improvement.

“Even if the stock price goes up by a factor of 10, you don’t get anything unless you meet those operating goals,” says Ryterband.

Executives will only earn the performance units if the company meets preset targets for net income and sales over a two-year period. If executives have met their stock ownership requirements, their payout is in cash. If not, they get half in cash and half in stock. The ownership requirements range from 15,000 shares to 200,000 shares for Johnson.

Second, the new program communicates more clearly to executives what their pay will be based on.

“Participants see a direct linkage between factors they can control and how much they get paid,” Ryterband says. “Stock options are not that way.” With options, he notes, “you only get paid if the stock price goes up, ant that may or may not coincide with operating performance.”

Finally, the performance unit plan has a built-in safeguard in terms of cost to the company. If the company doesn’t do well, the plan simply doesn’t pay out. If executives do earn their performance units, that means Heinz’s net income has risen, so the company will be able to easily make the payouts.

By contrast; if Heinz only offered restricted stock, it could conceivably incur a large accounting expense even if performance went into the tank. The same will be true of an option plan once expensing comes into play.

For these and other reasons, many comp consultants agree that performance unit plans are likely to spread. One advantage to performance units and shares is that they can be tax-deductible, since they’re performance-based. Restricted stock, the most common full-value award, is not. And, since performance units usually pay out in cash, they don’t increase stock dilution. But restricted stock also sends a message to investors that execs have a direct financial stake in seeing the share price go up.

Paul Dorf, managing director of Compensation Resources, also says some companies are worried that their shareholders may conflate restricted stock with stock options. Investor outrage over executive pay was stoked by outsize option grants at many companies.

“I think that, if you don’t have the word ‘stock’ in some of these programs, it’s more acceptable,” Dorf says. “It’s a perception and emotional issue in part.”

Despite these inherent advantages, many comp experts say it’s unlikely that companies will move entirely toward performance units. High-growth companies, for example, may find it advantageous to issue stock options because options provide a great deal of leverage in their compensation programs.

Even if companies don’t expense options, they still must record the accounting cost in a footnote. That cost is taken once the option is issued and doesn’t change. If the stock price then soars, options may end up being the cheapest way for the company to deliver large amounts of value to employees.

And companies that aren’t growing quickly may want to keep issuing options for public relations reasons. When Microsoft decided last year to stop issuing options altogether, many investors viewed the move as confirmation that the firm’s growth prospects were waning.

Steve Van Putten, New England executive compensation practice leader at Watson Wyatt, says some companies are afraid of being tarred by the markets as past their prime. For the reason, he suggests, most companies are likely to follow Heinz’s approach and offer a portfolio of different types of long-term incentives.

“They don’t want to get completely away from options because that may send a non-growth message to the market,” he says.