When Capital One’s Richard Fairbank and Nigel Morris set out to create one of the nation’s top credit-card banks, public companies had already begun to change the way they were paying their top executives and directors.

Pressure from shareholders had induced corporate organizers to reconsider a common practice of the ‘70s and ‘80s — fat salaries for execs, big fees for directors and limitless expense accounts for both. Reformers, led by a few of the most powerful pension funds, advocated linking compensation with company performance to align corporate leaders’ interests with those of shareholders.

Giving stock to executives has become fairly common. Now a number of companies, including some from more traditional industries, have introduced stock options and outright grants as alternatives to the retainers and meeting fees traditionally used to induce movers and shakers to serve on corporate boards.

"It is not yet prevalent for large companies to tie their board compensation to performance, but the trend is definitely toward stock [as compensation], and we think it’s a healthy trend," says Steve Harris, head of the compensation group for the William M. Mercer Co.’s southern U.S. region.

Some Mercer clients now require their directors to own stock. Most shareholder groups endorse the concept, and so do many consultants who specialize in compensation plans. They believe a stock-based plan in the text of proxy statements and other securities filings makes a company more attractive to investors.

The Council of Institutional Investors, a Washington, D.C.-based advocacy group for pension funds and similar investor groups, believes directors should have a financial stake in every company they govern. "Absent unusual and compelling circumstances, all directors should own company common stock, in addition to any options and unvested shares granted by the company," the council’s policy states. "Directors should be compensated only in cash or stock, with the majority of compensation in stock."

Among Virginia’s public companies, Arlington’s Capital One Financial may have taken this concept the farthest. When the company was formed as a Signet Bank spinoff in 1995, Fairbank, Morris and their advisers set up a compensation plan that provides no safety nets. Management gets nothing unless the company performs at a certain level, currently set at 20 percent growth per year compounded over the next three years.

The compensation for Capital One directors, though, was pretty conventional in the beginning. Directors were paid an annual retainer of $20,000, plus 7,000 shares of stock. A year ago, however, the board decided members should be subject to the same economic incentives as company executives.

Now directors get no fee, and their options for 15,000 shares are worthless unless the company meets market-value targets. "We decided to do it this way because we believe we’ve got a great company," says Stanley Westreich, chairman of the credit-card company’s compensation committee. "If the shareholders don’t do well, then we [the directors] work for nothing. It’s as simple as that."

Capital One’s performance has made its new approach to compensation pretty attractive so far. The company’s market value grew by 44 percent in 1998 and is projected to grow another 30 percent this year. "I think we’re different from a lot of directors in that our group tends to be more entrepreneurial," says Westreich, president of Westfield Realty Co. in Fairfax. "We’re willing to accept the risk."

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Harris says he advises Mercer clients to review plans of comparable companies before they start overhauling their own director-compensation schemes. Then they need to decide how they want to be seen in the marketplace.

Trigon Blue Cross Blue Shield started reviewing the compensation packages of competing health insurers long before it actually went public in January 1997. Each year, Trigon conducts a survey to determine the going rate for directors within its industry.

Ronald M. Nash, senior vice president of corporate services for the Richmond-based insurer, says the survey helps his company decide what it will cost to attract directors with the expertise and business acumen Trigon wants. Trigon must stay within range to be competitive.

Trigon offers its directors a $20,000 annual retainer, plus $1,250 per meeting for a seven-meeting schedule. As an incentive to have a stake in the company, directors are given stock options. They also have a choice of taking meeting fees in stock, rather than cash. Nash says it has been a popular option.

Bigger companies can afford to pay more. Nash has seen some larger banks pay annual retainers as high as $60,000, with $2,000 for each meeting. "Most public companies today are trying to link their directors’ compensation to performance in some way," he notes. But health care companies have not moved in that direction as quickly as others.

Most innovation in director compensation has come from companies with an entrepreneurial bent. John L. Colley Jr., a professor in U.Va.’s Darden Graduate School of Business, says investment bankers are pushing the idea of stock options to companies preparing to go public, telling them to set aside 4 percent to 5 percent for the board and top managers.

"It makes it easier for them to peddle the stocks of new companies if they can show investors that executives and directors have a stake in the company," Colley says.

Such reasoning makes sense to anyone reviewing stocks today, but not too long ago a director’s stock ownership was considered a conflict of interest. "Proponents argue that it [stock ownership] at least gives the director a stronger tie to the business," Colley says. "Others, however, say it might make them overlook a major gaffe by the CEO because they know news of the CEO’s errors could hurt their stock value."

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While the trend is toward stock ownership as a key component of director compensation, it isn’t right for everyone. Consultants say the best compensation plan is one that matches a company’s personality.

Take CareerBuilder, one of Virginia’s hottest new initial public offerings, for example. Richard Wathen, head of investor relations for the Reston-based Internet employment service, says his company’s compensation package for directors is designed to suit its board structure — a mixture of insiders and venture capitalists.

Like Capital One, CareerBuilder offers no cash payment to its directors, only stock options. Each outside director gets an option of 5,000 shares that vests during the director’s one-year term. "With 22 million shares issued, that’s not a huge stake," Wathen says. But as they also represent the venture capitalists who financed the company’s IPO, CareerBuilder’s non-employee directors already have a much bigger stake. When their options are vested, the stock goes, not to the individuals, but to the venture capital firms that they represent. All of CareerBuilder’s 125 employees are eligible for stock options as well.

Capital Automotive Inc., which went public in February 1998, makes an even split between the traditional and the modern in its compensation package for directors. As an Arlington-based real estate investment trust that specializes in trading properties owned by auto dealerships, Capital Automotive designed its plan to draw seasoned players.

"We wanted to attract good people," says President and CEO Thomas D. Eckert, "but it is also particularly important that the directors have a stake in the company. Everybody involved with the company is on the same program at some level because we want everyone to be driven to perform."

Capital Automotive gives each outside director a $15,000 annual retainer plus 15,000 options to purchase shares at market value on the grant date — the day they join the board.

So far, the approach appears to have succeeded in attracting the kind of people Eckert wants. Among its current directors are William E. Hoglund, former president of Saturn; Craig L. Fuller, former senior vice president of Philip Morris and chief of staff for then-Vice President George Bush; and R. Michael McCullough, former chairman of Booz, Allen & Hamilton Inc.

Capital One’s executives like to say their banking institution is at the head of the pack when it comes to linking compensation to performance. They refer to the stock option plan as an "entrepreneur grant program" and claim it is a tool that empowers their 12,000 employees, as well as the company’s directors.

"All companies today call themselves entrepreneurial, but which ones can say their top executives and directors won’t be paid at all if the company doesn’t perform?" asks Sam Wong, Capital One’s vice president for communications. "You won’t find anyone else in Virginia doing this."

Even so, Harris says it doesn’t take 100 percent stock compensation to make a difference.