POWER WORD PLAY (A Word, Term, or Concept an Executive Ought To Know): RESTRICTED STOCK

When you peruse the financial media and see articles on executives and their compensation, you will often see the term “restricted stock.” In the executive compensation context, restricted stock is a grant of stock that may vest immediately or over time and may or may not be tied to performance measures like year-end profitability.

Restricted stock is usually given as part of a compensation package that will include base salary and other benefits.   For example, John Thain, who lost his position as the former CEO of Merrill Lynch, took a job in February as the new CEO of CIT Group, the middle-market financial company.  He is being paid a salary of $500,000 and 180,000 shares of restricted stock valued at $5.5 million as of February of 2010.   Thain’s stock will vest over several years.

Because the executive usually must be employed for a period of time for the restricted stock to vest, this is a tool for a company to obtain a degree of commitment and longevity from an executive.  It can also be used to make whole an executive who has given up benefits and compensation from his old employer to take a job with a new employer.

Although still widely used, stock options have come under criticism for contributing to risky economic or short-term-quarterly-profit-maximization behavior. There seems to be an increasing use of restricted stock.  For example the 23 March 2010 Wall Street Journal noted that TARP Pay Czar Kenneth Feinberg, the US Treasury Department’s special master, “has sought to limit cash payment at the firms he oversees, requiring that employees get the bulk of compensation in restricted stock tied to long-term performance.”  TARP is an acronym for Troubled Asset Relief Program, our US government financial bailout for companies that were deemed too big to fail.

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