State of the Art

Jeffrey Banks's company is living proof that innovative compensation strategies aren't just for the Fortune 500

Many owners of fast-growing companies complain that they don't have the time or the money to put together a comprehensive executive-compensation plan. Jeffrey Banks knows otherwise. The 44-year-old founder and chief executive of Metropolitan Outdoor Advertising Corp., one of the country's largest billboard advertising firms, built a $30-million company using one management principle. "I wanted to run a business that was responsible to my employees as well as my shareholders," he says.

In an industry in which competition for both billboard locations and customers is fierce, Banks needs to be able to recruit and retain top marketing and management talent. He founded Metropolitan 12 years ago with $500,000 in profits from a small billboard company he had owned and sold.

At first Banks and his wife, Karen, were Metropolitan's sole employees, but from the time his first billboard on the San Francisco Bay Bridge netted him Qantas Airways as a client, he used cash flow to finance some additional leases and hire a small sales force. Thanks to the couple's good eye for properties and tight fist when it came to controlling operating expenses, the company was in the black by the end of its first year. Then Karen, a former banker, negotiated a line of credit that helped finance the acquisition of a tiny company whose chief assets were some undervalued billboards with high-glitz potential. But, says Jeffrey Banks, "I knew if I wanted to hold on to the people I was hiring, I would have to share the benefits of my success with them."

So Banks, a former middle linebacker with the Cincinnati Bengals and the New York Jets, read up on executive compensation. Quickly he realized that the best executive-compensation plans operated like jigsaw puzzles, with various pieces that could be divvied up among the key players in a company. Some pieces could be designed according to an individual executive's -- or the owner's -- needs; others could be shared among all employees. As companies grew larger and more profitable, additional pieces could be added to the puzzle. And as long as the overall plan was well designed, pieces could be subtracted during capital-intensive or difficult business phases.

The first piece of Metropolitan's executive-compensation puzzle was a profit-sharing plan Banks instituted in 1980 for the company's 12 employees, including himself and his wife. It was a particularly golden year for Metropolitan, and Banks realized the company was generating more cash flow than it needed to support the next year's growth plan. So he allocated a share of profits to each employee, based on his or her salary. The funds were deposited in a retirement account in each employee's name.

Flexibility was the byword of that early plan: Banks made no guarantees about the level or even the frequency of contributions. But he made contributions during 7 of the next 11 years, and as the staff grew he also maintained his original goal of keeping what is often used solely as an executive benefit as a company-wide program.

The question arose of what to do with all those dollars once they were segregated into the individual retirement plans. Banks wanted his employees' retirement money to be managed conservatively and profitably, so he brought in Steve Adams, a managing director at Van Kasper & Co., a regional brokerage firm in San Francisco, to direct an investment program that divides assets 50-50 between growth-oriented stocks and bonds. The program has averaged a 13.5% annual rate of return.

By the mid-1980s Banks felt he had to come up with other ways of binding his top employees to the company. Metropolitan had expanded into billboard markets in southern California, Texas, Idaho, and elsewhere, which meant he needed to rely on his regional managers for much of the company's site selection, marketing development, and day-to-day office supervision.

So in 1985 he divided his company into seven corporations, drawn up according to regional markets, with stock that was wholly owned by his holding company, Metropolitan Outdoor Advertising. That gave Banks the stock of eight companies (including the holding company) to play with when he devised incentive packages that would motivate his key employees.

The next year he brought in a new regional manager with an incentive package that included the potential to earn a stake of up to 5% in his local division. Eventually three other regional managers came on board with the same plan. But while it was appealing as a way of locking each executive's financial future in to his division's growth and profitability, the method had its drawbacks. "As the divisions kept growing, it became increasingly difficult to keep tracking the different stocks' values," says Banks. He remained convinced about the benefits of stock ownership as a way to motivate managers, but he was willing to consider alternative incentive methods.

Banks investigated a phantom stock plan. "At first I didn't get it," he says. "If executives didn't actually receive stock, where were the benefits and performance incentives?" But he was willing to give it a try. After all, his employees would be able to earn the same capital-gains profits (as long as the company's market value kept rising) that they would have gotten from true stock ownership. But because no shares of stock changed hands, there would be no tax bill for employees until the phantom stock payouts occurred.

The new plan was a success. "One type of phantom stock is so much easier to administer than the stock of seven divisions," Banks says, "and it still works great as a way to motivate executives."

But Banks didn't stop there. He set up a pool containing 8% of his holding company's stock, to be awarded on a discretionary basis to Metropolitan's most valuable executives and regional managers. "I'll always maintain majority control of our board, but this is another way of tying our top performers to the company's future," he says. So far, he has distributed just under half of the pool's stock.

For all of Banks's best intentions, executive compensation has occasionally taken a hit at Metropolitan. The most recent dates back to last year's $27-million acquisition of a billboard firm, which was financed primarily through bank loans. "We've got covenants tied to our current leverage that will make it difficult for us to do very much in the way of executive compensation for the next 18 to 24 months," he acknowledges.