Handcuffs made of money

They're called golden handcuffs, and for good reason--stock options that have yet to vest, designed to keep a company's chief executive from seeking "greener" pastures.

For CEOs in the high-tech world, unexercised options are the equivalent of millions upon millions of dollars foregone should they choose to resign from a company before their options can be traded into cash.

Dell Computer CEO Michael Dell held nearly $200.5 million in unexercised options last year, while Cisco Systems CEO John Chambers held $55.3 million and Compaq CEO Eckhard Pfeiffer held $54.2 million, according to data compiled for CNET News.com by Standard & Poor's Compustat.

The largest "golden handcuffs" in technology
Company	CEO	Exercisable Shares (millions)	Unexercisable Shares (millions)
DELL*	Michael S. Dell	$36.215	$200.468
CISCO	John T. Chambers	45.192	55.303
COMPAQ	Eckhard Pfeiffer	188.248	54.220
YAHOO	Timothy Koogle	26.144	49.294
IBM	Louis V. Gerstner, Jr.	95.616	48.120
Computer Associates	Charles B. Wang	147.642	39.659
INTEL	Andrew S. Grove	0	34.337
E*TRADE	Christos M. Cotsakos	10.807	33.406
SUN	Scott G. McNealy	55.551	32.903
AOL	Stephen M. Case	92.575	27.275
*Based on Dell's fiscal 1998 proxy, given that 11 months of the company's fiscal year were accounted for in 1997. Source: Standard & Poor's Compustat, a division of the McGraw-Hill Companies. Methodology/Definitions

"If stock prices are going up and the company is growing, then [unexercised options] can be a fairly strong retention incentive," said Marty Katz, head of the Western office of William Mercer's executive compensation practice.

He added that the incentive of stock options grants could be strengthened if companies handed out some options every year as opposed to doling out larger chunks of options every few years, thus ensuring that unexercised options are constantly in the back of the mind of any executive considering jumping ship.

Other aspects to consider when sizing up the grip unvested options have on a CEO include a company's stock price and the personal wealth of its top dog.

Compensation experts point out that, if a company and its stock price are floundering, and if there is little likelihood that the share price will rise above the options' strike price by the time a CEO's options vest, unexercised options essentially are worthless. Unexercised options also may fail to inspire loyalty in a CEO if they represent only a small portion of the executive's wealth.

"You need to keep enough options on the table that it's a significant factor in a CEO's net worth," said Richard Norton, a compensation consultant for Towers Perrin Northern California.

But even that may not be enough to keep a CEO from bailing.

"If someone is determined to get a CEO, a good executive search person and compensation committee chairman could probably blow away the unvested options in pretty short order," Norton said, noting that large, up-front option grants in a new company, as well as sizable signing bonuses, often lure away in-demand executives.

There also are cases in which CEOs have no unexercisable options to speak of, but the lack of an options grant hardly matters.

Microsoft's Bill Gates is one example. The software giant's chief holds an approximately 22.3 percent stake in the company and has declined to accept options, said Microsoft spokesman Tom Pilla.

"When you have someone who is running the company [he or she] founded, you generally don't have to worry about [using options for] retention," Mercer's Katz said.

CEOs who are granted options often choose not to cash them in immediately and hoard them instead. A case in point is Compaq CEO Eckhard Pfeiffer, whose $188.2 million worth of exercisable options last year earned him a ranking as the high-tech CEO with the most exerciseable options stashed away.

In fact, the Executive Compensation Report found that, of the 24 high-tech CEOs who held exercisable options worth $3 million or more in 1997, the average value of their holdings was $32 million or more--a figure that is substantially larger than the $19 million average for U.S. CEOs in general.

In addition, the percentage of high-tech CEOs who fall into the $3-million-and-above club has risen steadily. In 1994, three out of roughly 60 high-tech CEOs, or about 5 percent, belonged to this category, said Carol Bowie, editor of the Executive Compensation Report. That figure rose to 44 percent in 1995, 51 percent in 1996, and 62 percent in 1997.

"The number of high-tech CEOs who are holding rather substantial values in exercisable options is rising and has risen every year," Bowie said. "And the trend again seems to be continuing."

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