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Boeing execs next up for stock bonus

By Tim McLaughlin
St. Louis Post-Dispatch

Phil Condit stands to gain despite having resigned.

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Lehman Brothers aerospace analyst Joseph Campbell said the late-June move by Boeing's stock to more than $50 a share already has caused about 4 million shares worth $184 million to vest for executives and managers participating in an incentive-based program.

In a research note circulated Tuesday, Campbell said the program's participants have a "good shot" at receiving an additional $270 million or so this year if the company's stock climbs to $60 a share.

Boeing's stock, which closed at $49.97 yesterday, has risen 18.6 percent this year, but would need to gain an additional 20 percent or so to trigger the additional $270 million worth of vesting Campbell outlined.

"Overall, the Performance Shares program could have as much as $3 billion in the program, giving Boeing managers lots of reasons to focus on items that boost price performance," Campbell said.

The vesting of awarded performance shares is contingent on Boeing's stock clearing a progression of price hurdles based on a 20-day average. If the price targets aren't met, the participants get nothing.

Campbell has an "overweight" rating on Boeing's stock. He is particularly bullish on the defense contractor's prospects and sees an upturn in its sluggish aerospace business next year.

Boeing declined to comment on Campbell's analysis of its executive-incentive program.

After Boeing purchased McDonnell Douglas, the company moved away from stock options and in 1998 embraced performance shares, which vest when the company's share price increases to certain incremental target levels.

About 2,200 to 2,400 Boeing executives and managers participate in the program, said Anne Eisele, a Boeing spokeswoman. That's about 1.5 percent of Boeing's total work force of 157,000 employees.

One big winner in the program appears to be former Chairman and Chief Executive Phil Condit, who resigned late last year amid an ethics scandal that roiled Boeing's stock. Before Condit left, he received 314,199 performance shares in 2003, according to company filings with the Securities and Exchange Commission.
 
Eisele said Condit is still eligible to participate in the program. But his successor, Chief Executive Harry Stonecipher, didn't receive any performance shares in 2003 because he arrived on the scene after they were awarded by the company's board.

The executives' program is far more lucrative than an incentive program designed for the company's rank-and-file employees.

Last week, for example, Boeing said more than 200,000 current and former employees will divide about $142.5 million in cash and stock from a compensation program called ShareValue Trust. That works out to about $900 before taxes for each eligible employee with full participation, the company said.

Nevertheless, Campbell said the executive-incentive program has some design flaws because it has made the payout of performance shares too easy in some years and too difficult in others.

In 1998, for example, Boeing issued about 3.6 million performance shares at a base price of $50.69, but none of the shares vested before they expired in February 2003, according to the Lehman Brothers report.

Performance shares awarded in 2001 and 2002 were set at prices so high that none of their targets has been met yet, the report said.

In 2001, Boeing took a $227 million charge to earnings for performance shares, even though no shares were converted during the year because of the stock's decline.

But awards made in 2003 are turning out to be a different story. Boeing awarded 8.84 million performance shares with a base or issue price of $30.27, or at one of the lowest levels since the beginning of the program, according to Boeing financial statements.

From the 2003 award, nearly 4 million shares have already vested this year as Boeing's stock has risen 45.4 percent in the last year, Campbell said. The awards will vest at 100 percent if the company's stock hits a target of $60.54, according to Boeing's financial statements.