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Liberty Mutual isn’t alone in using phantom stock

A so-called phantom stock plan helped former Liberty Mutual chief executive Ted Kelly collect about $50 million a year. Globe Staff

The so-called phantom stock programs that allowed former Liberty Mutual Holding Co. chief Edmund F. “Ted’’ Kelly to collect nearly $50 million a year are used by many large private companies to recruit and retain talented executives, industry executives say.

Compensation Resources Inc., a New Jersey compensation consultancy, found that one-third of 230 private companies it surveyed used some sort of phantom stock program designed to mimic stock and option incentive programs used by publicly traded companies.

At least one other major Massachusetts insurer, MassMutual Financial Group, also created a phantom stock program to attract executives and encourage them to help the company grow. Since Liberty Mutual and MassMutual are mutually owned by policyholders, rather than by shareholders, they do not issue shares traded on stock exchanges.


So they created phantom stock programs as a way to tie executive compensation to the value of the company. If the value of the company goes up, the phantom stock is worth more.

“This stock-like program provides participating individuals with the opportunity to share in the value created in the total enterprise, and in doing so, it also helps create value for our policyholders,’’ said MassMutual spokesman Mark Cybulski.

Still, many private companies choose to rely on salary, bonus, and other types of compensation for executives. Four other major US mutual insurers said they do not issue phantom stock, including State Farm of Bloomington, Ill., the nation’s biggest property and casualty insurer, New York Life, American Family Mutual Insurance Co. of Madison, Wis., and Northwestern Mutual of Milwaukee.

Private companies typically don’t release detailed compensation information to the public, so the pay packages usually fly under the radar.

But the Globe obtained Kelly’s pay from filings with state insurance regulators, showing he earned nearly $50 million a year from 2008 to 2010, which would make him one of the highest-paid chief executives in the country. Kelly later said he earned a similar amount last year.


Both Kelly and the company argued the figures were skewed because they included phantom stock and stock options earned over nearly two decades and only recently cashed in. Liberty Mutual estimated he cashed in roughly 80 percent of the phantom stock during the past four years.

Kelly joined the company as president in 1992 and became chief executive in 1998, before stepping down in June 2011. He remains chairman of the board, for which he is paid $400,000 annually.

David Long, who succeeded Kelly as chief executive, said other Liberty Mutual executives have also received phantom stock.

For instance, Liberty Mutual estimated Long will earn receive phantom stock awards this year with an estimated value of $4 million. But the amount of money he ultimately receives for the phantom stock will depend on the value of the company when he cashes it in.

Liberty Mutual issues both phantom stock and phantom stock options. In publicly traded companies, stock options give executives the right to purchase stock at a set price. The options become valuable only if the stock rises above that price. Similarly, phantom stock options - also called stock appreciation rights - can be traded in for cash only if the stock rises above the option price.

But valuing phantom stock is tricky, because the values are just estimates of what the shares might be worth on the open market, not actual values, said Paul R. Dorf, managing director of Compensation Resources. Some companies use formulas to set the phantom stock value, including factors such as earnings, Dorf said. Others use independent appraisals.


Liberty Mutual’s formula utilizes several factors, including annual profits and the value of its assets.

But, Dorf said, these calculations can’t provide the kind of precise value set in stock markets by investors. “It’s very difficult to make a totally true comparison,’’ he said.

In addition, phantom stock can be a bigger financial hit for private companies, because they must give executives cash for their stock and options, draining their reserves. Executives at public companies typically sell the stock and options to investors on the open market.

Liberty Mutual said it tries to base its executive compensation on the median of its peer companies, many of which are publicly traded and offer stock or stock options.

“Most of our competitors don’t need phantom stock plans because they are public companies,’’ Liberty spokesman John Cusolito said.

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.