Pensions are out and stock options are in at


(CBS) - Get Report


The radio and television giant told its employees it's scrapping its traditional pension plan in favor of a hybrid program that will provide much less cash for most employees' retirement accounts but offer every employee an annual stock options grant.

CBS says the new plan will help align the interests of employees and shareholders more closely. In addition, the company says the program may help it recruit a new generation of employees who are highly aware of the wealth options can generate and are less interested in the security pensions offer because they don't intend to spend their lives at one company.

The plan also will boost CBS' reported profits, since businesses don't have to report the cost of options on their income statements. On other hand, cash contributions to a pension plan must be reported as an expense. (It's not that options are free, Timmy; it's just that all the grown-ups like to


they are. Talk to your friends at the

Financial Accounting Standards Board

for details.)

CBS executives acknowledge that the change will cut the company's reported costs, although they won't discuss how much money they expect to save on pension contributions. But they say their primary motivation for the change is not to cut costs but to give employees a bigger stake in the financial success of the company. In an email to employees explaining the new plan, Chairman Mel Karmazin called the program "our best opportunity to have employees share in the great financial success I'm confident lies ahead."

While many big companies are moving away from traditional defined-benefit pension plans, which offer guaranteed income at retirement, CBS' decision to sharply reduce future payments to its pension plan in favor of options is "a little unusual," says William Sohn of

Buck Consulting

. Most companies don't offer options to so many employees.

The options grant, which will be offered on April Fool's Day each year, will consist of options with a strike price equal to the company's market price and a total exercise price equal to 10% of an employee's annual pay. As an example, if an employee makes $37,000 per year, and CBS stock trades at 37 on April 1, the employee would receive options for 100 shares of CBS that can be purchased for $3,700. If the CBS stock price then rises to 50, the options would be worth 13 per share, or $1,300. The options can be exercised any time between three and 10 years after they are granted and will vest immediately for most employees, says David Zemelman, senior vice president.

By way of comparison, Karmazin and Les Moonves, another top CBS executive, together received more than 1.3 million options with a total exercise price of more than $27 million in 1997, according to CBS' 1998 proxy statement.

The company will continue to offer a 401(k) plan as well as a reduced pension plan for current employees who are younger than 55 or whose combined age and years of service are less than 70, a spokesman says. Older employees will still be eligible for the old plan, while new employees won't be covered by any pension.

CBS promises that all employees, even those in their 40s, who traditionally have the most to lose from changes like this one, will come out ahead as long as the company's stock rises by an average 10% annually. In his email note Karmazin highlighted the company's recent gains, noting that "in the last two years, CBS stock has doubled in value."

Of course, the long-term history of shares in

Westinghouse Electric

, which bought CBS in 1995 (then moved its headquarters to New York from Pittsburgh and renamed itself CBS), isn't quite as pretty. Westinghouse stock lost almost two-thirds of its value in the early 1990s. And even including the company's recent gains, Westinghouse/CBS has been roughly flat since the start of the decade.

Admittedly, the new CBS is a very different animal than the old Westinghouse, a lumbering, badly run industrial giant. But Westinghouse's poor performance serves as a reminder that there's always a chance that the options CBS is so generously offering its employees could expire worthless. In that case, the slow and steady security of a pension plan might not look so bad after all.