Cash is King

Post-dot-com implosion finds companies rewarding brass with bigger paychecks and bonuses instead of stock options

When it comes to CEO pay, cash is in, options are out.

As the economy improves and companies report heftier profits, many top executives took home fatter salaries and larger bonuses last year, two studies show.

But don't get overly outraged. CEO compensation is actually down slightly. That's because the estimated value of executive options issued by companies was lower due to the weak stock market early last year, the studies indicate. And that's one of the reasons why options will be less commonly used as compensation in coming years, experts say.

"There's been a shift over the last few years,'' said Ted White of the California Public Employees' Retirement System, the country's largest pension fund.

The trend reflects the demise of the go-go years of stock market valuations that created overheated share prices and huge options-related gains for executives, at least on paper. After the stock market crashed, a new, sober compensation environment emerged from the rubble.

Experts cited four specific reasons for the change in compensation trends:

-- After a lengthy bear market, many executives are starting to request bigger cash bonuses instead of more stock options, which could be worthless if the stock price doesn't appreciate. "There's far more certainty in cash," White said. -- The Financial Accounting Standards Board, the organization that sets accounting standards for U.S. companies, is moving toward forcing companies to count stock options as an expense
 
-- just like any other form of compensation -- thus removing one of the key benefits of awarding options.

"If you have to expense stock options ... why not look at other forms of compensation?'' said Dan Moynihan, a principal with Compensation Resources, an executive compensation consultancy in New Jersey.

-- Shareholder watchdogs, including CalPERS, have becoming increasingly critical of giant stock option packages, saying they reward executives handsomely for simply having the luck to oversee a company during a bull market. CalPERS has heavily lobbied companies to shift to cash bonuses and other forms of compensation tied to performance.

-- The stock market slide in 2002 made the estimated value of options awarded in early 2003 worth less than options awarded in early 2002. A study by Equilar, a San Mateo company that tracks executive compensation, found that slightly fewer CEOs at S&P 500 companies received stock options in 2003 compared with the year before.
Options worth less

The number of options they received was about the same. However, the estimated future value of those grants shriveled because of the companies' falling stock prices, said Equilar chief executive David Chun, even though many stocks rebounded last year.

Average overall CEO compensation, however, fell only 1 percent to $6.9 million because executives received higher bonuses, salaries and other forms compensation to offset the decline in options, according to Equilar, which analyzed filings by 345 companies, or 69 percent of the S&P 500.

A separate study of 350 large companies by Mercer Human Resource Consulting found that CEOs' annual salary and bonuses surged 7.2 percent last year, but overall compensation actually dropped 4 percent to $6.2 million on average
 
-- largely because executives received less value in stock options.

In the Bay Area, for instance, both Agilent Technologies in Palo Alto and PeopleSoft in Pleasanton tweaked their compensation packages last year to give their CEOs more cash, but fewer options.

Reward for making profit

At first glance, Agilent chief executive Edward Barnholt received a handsome raise last year: $1.3 million in salary and bonus, up 43 percent from 2002. That largely reflects the fact that Barnholt received a bonus after the maker of testing equipment ended a string of losses and turned a profit, said Terri Zimmerman, director of executive compensation.

At the same time, Agilent, which makes measurement and testing equipment, reduced Barnholt's options package. In 2003, he received options to buy 600, 000 shares, 20 percent fewer than the year before.

Zimmerman said Agilent gave Barnholt fewer options last year both because it shrank slightly in size and because other companies it models its pay package after have become stingier with stock options.

Instead, Zimmerman said, companies are giving out a "mix of total compensation that includes more cash. ... There won't be as many options to give out."

With the smaller options package, Barnholt's total compensation dipped 44 percent to $7.3 million last year (using the assumption that the stock will rise an average of 5 percent a year for 10 years).

Meanwhile, PeopleSoft chief executive Craig Conway received $3.3 million in cash in 2003, up 15 percent. But he earned only about one-third of the options he received in 2002.

The Pleasanton softwaremaker explained in a filing with the Securities and Exchange Commission that it gave Conway 100 percent of his annual $1.5 million target bonus because of his "outstanding performance in leading PeopleSoft" and kicked in another $500,000 bonus to reward him for his "extraordinary performance" in acquiring J.D. Edwards & Co.

However, PeopleSoft declined to explain why it had slashed his options package. Conway received options to buy 1.5 million shares in 2003, down from 4.1 million in 2002.

One possibility is that PeopleSoft was criticized by executive compensation consultants last year for paying Conway more than other executives at similar size firms.

Equilar estimated that Conway's 2002 compensation package was worth a total of $112 million, mostly in the potential value of stock options, more than any other executive at an S&P 500 firm.

With the cut in options, Conway's compensation fell by more than three- quarters to $20.3 million last year if the stock rises 5 percent a year over 10 years, or to $46.3 million if the stock rises 10 percent a year during that span.

Still, a quick glance at other local companies shows that not all of them gave their CEOs more cash while cutting their options.

For example, Intel chief executive Craig Barrett received more cash and options last year, reflecting the Santa Clara chipmaker's strong profits last year.

Barrett received $2.1 million in cash, up one-fourth from 2002. The number of options he received more than doubled to 1.35 million. Intel said the options could be worth $10.3 million if the stock appreciates at 5 percent a year for 10 years, or $26.2 million if it rises 10 percent a year.

Barrett's overall compensation jumped 32 percent to $16.7 million, assuming the stock rises by 5 percent annually over 10 years, or $32.5 million if the stock rises by 10 percent each year.

Intel spokesman Bill Calder said Barrett's bigger bonus reflects the fact that the firm's stock doubled and its profits rose 81 percent "despite a significant downturn in the industry." He said most of the options were awarded as a "long-term performance incentive and retention grant, which the board generally grants only six to seven years."
Fiorina collects less

Meanwhile, Hewlett-Packard chief Carly Fiorina saw both her cash and options dip. The Palo Alto computer-maker gave Fiorina $3.3 million in 2003, down 15 percent from 2002. She received 700,000 options, down from 850,000 a year earlier. HP estimated the options are worth $3.3 million.

Including options, Fiorina's pay total compensation last year dipped 38 percent to $6.8 million.

In its proxy, HP did not explain why it reduced her bonus and stock options in 2003. Spokesman Brian Humphries said, however, that HP replaced some of Fiorina's options with a plan to give executives additional cash bonuses in the future, based on their performance over several years.

Because many Bay Area firms have yet to file their annual proxy statements, it's too early to say whether pay at local companies went up or down, or who took home the largest paycheck.

   Greenbacks come out ahead

   Average CEO salaries based on filings by 345 companies in the S&P 500

   Type of pay                         2002          2003            Change

   Median salary                       $921,000      $950,000        3.1%

   Median bonus                        $883,994      $1,064,099      20.4

   Portion of CEOs receiving a bonus   83.2%         83.8%          

   Value of options                    $3,901,200    $3,152,036     -19.2