Area Executives' Pay Rose 12 Percent in 2003

05/02/04
By: Ilene Aleshire, Star-Telegram.com

Executive pay packages continued to climb last year in North Texas, but not as fast as in 2002, as several boards responded to shareholder concerns by putting the brakes on CEO pay and stepping up efforts to link pay to performance.

Total compensation for chief executives rose an average of 12 percent in 2003, to $9.1 million, including stock options and other long-term incentives, according to a Star-Telegram review of proxy statements filed in recent weeks by 25 North Texas companies.

The year before, compensation for CEOs rose almost 35 percent.

The pay increases are on track with compensation trends nationwide. Average CEO compensation in the United States increased by about 10 to 14 percent in 2003, said Paul Dorf, managing partner of Compensation Resources, a New Jersey-based consulting firm.

Most of the increase in compensation among North Texas CEOs last year was tied in some way to company performance rather than what some analysts call "pay for pulse" -- income reaped regardless of how well a company does.

"Compensation committees began to develop rudimentary backbones during the 2003 calendar year," said Patrick McGurn, executive vice president of Institutional Shareholder Services. "They took their foot off the accelerator."

The committees, composed of company directors, have come under increasing pressure from shareholders and the government to rein in executive pay levels and link more executive pay to performance.

"Government officials are saying, 'If you don't clean it up, we're going to clean it up for you,' " McGurn said.

The fact that executive compensation didn't rise as much in 2003 -- even though the year saw a better economy and higher profits for most companies -- shows the increasing pressure on companies to slow down pay increases, he said.

Stock options that reward executives based solely on a rising stock price are starting to fall out of favor.

"One of the problems is that a rising tide raises all boats," Dorf said, meaning that a company's stock price may go up with the market regardless of what executives are doing.

Some shareholder groups have been critical of options, saying that they encourage executives to focus on pushing up the stock price at all costs and citing Enron as a poster child for the kind of abuses this can lead to.

In addition, the government has proposed requiring companies to account for options grants on their balance sheets as an expense. Up until now, companies haven't had to do that, which meant options didn't affect profits -- making them an attractive choice for executive pay.

Some companies -- including Verizon, 7-Eleven, TXU Corp. and Encore Acquisition -- have been putting more emphasis on performance shares, or restricted-stock grants that are tied to various measures of company performance.

New York-based Verizon, which employs more than 13,000 people in North Texas, changed its formula for executive compensation last year, cutting the number of options it gave Chief Executive Ivan Seidenberg and replacing some with grants of restricted stock, said spokeswoman Sharon Cohen-Hager.

"What they're trying to do is set performance measures for compensation, with the understanding that shareholders are looking for that," she said.

Seidenberg's base salary of $1.5 million remained unchanged in 2003 from the previous two years, while his annual bonus rose 2 percent to $2,755,000.

But his stock options were cut by 35 percent from the previous year, and instead he was given a restricted-stock grant that will not pay off if the company's total return to shareholders is below average compared to the Standard & Poor's 500 index and similar telecommunication companies during the next three years.

Seidenberg's long-term incentives were cut by more than 10 percent in 2003 at his request, in recognition of the difficulties that telecommunication companies have been facing, Cohen-Hager said.

Overall, total compensation fell almost 48 percent in 2003, although he still received $19 million, according to company documents. Cohen-Hager said Seidenberg's compensation reflects that he runs one of the country's 20 biggest companies.

"It is a very large company, a very complex business," she said. "To run a business like this these days is more than challenging."

Charles Peck, a compensation specialist for the Conference Board, said that base salaries appear to be up only modestly but that he expects to see larger bonuses, generally tied to stock prices and profitability, when all the proxies are in.

"It's been a pretty good profit year," he said.

Base salaries for CEOs at the North Texas companies reviewed by the Star-Telegram rose 5.4 percent in 2003, a smaller increase than in 2002, when they were up 8.9 percent. Average bonuses were up 25.8 percent, down from an average increase of 71.6 percent in 2002.

Southwest Airlines specified in its proxy that its executives, as a group, can't get a bigger percentage salary increase than nonexecutives. Southwest also said that executive compensation has been trimmed, in many cases voluntarily in response to the challenges faced by airlines since the 9-11 attacks. CEO James Parker's compensation fell about 3.5 percent in 2003, to $654,129, mainly because of a decline in option values.
Peck and McGurn said that the pressure for overhauls in executive pay -- particularly the push for greater ties to company performance -- isn't going to end any time soon.

Widespread outrage about scandals at companies such as Enron and Global Crossing has stepped up pressure -- particularly from powerful institutional investors -- on company directors, Peck and others said.

One of the biggest such players, the California Public Employees' Retirement System, has been meeting with compensation committees and corporate directors for the past six to eight months, spokesman Brad Pacheco said.

The giant pension fund is concerned about giving high pay to executives without regard to how well the company is doing and is putting companies on notice that it will take action if it's not happy with what it sees.

"We will vote against any compensation plan in a proxy if it doesn't contain a performance component," he said.

CalPERS is putting together a list of companies that it considers to have the worst compensation policies, as well as recognizing companies that have been willing to improve their policies. That list is to be ready this month, Pacheco said. And the pension fund plans to make it easier to compare executive compensation with company performance on its Web site.

McGurn described the recent changes in executive compensation as a step in the right direction, but he quickly added that he considered it a baby step. While there has been a slowdown in pay increases, he said, "the numbers are still eye-popping in many instances."