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CEO's Fat Checks Believe Troubled Times
Executives continue to reap hefty bonuses, stock option grants
Stock prices may still be down, but CEO pay continues to rise.
If early 2002 proxy statements are a barometer, the disconnect between executive compensation and performance remains wide. While average worker salaries are rising just 3.6%, many CEOs are getting double-digit salary increases, fat bonuses, large stock option grants and lavish perks more reminiscent of the bull market 1990s than a 30-month-long bear market, according to a USA TODAY analysis of hundreds of corporate proxy statements.
“It does seem like the same old,” says Paul Hodgson, a pay analyst with corporate governance Web site thecorporatelibrary.com. “There isn’t any widespread drop in salaries, bonuses or options.”
Corporate malfeasance, Wall Street’s collapse and greater scrutiny of directors and greedy executives should be crimping CEO pay packages, compensation consultants contend. That may prove true when most big firms whose fiscal years end in December file proxies early next year.
So far, though, there’s scant evidence of substantial compensation cuts among many companies that already have completed their fiscal year. Strong performers continue to be handsomely rewarded, but so are some relative non-performers. While some CEO compensation packages are being cut, others are being boosted with huge stock option grants potentially worth millions. And to offset paper losses on current option holdings, many companies are awarding relatively risk-free restricted shares or boosting the size of new grants, which should further enrich executives as stocks rebound. Among 2002 compensation packages:
Ø Proctor & Gamble CEO Alan Lafley, $87.8 million. Lafley’s stock option grant potentially is worth up to $79 million, says Annick Dunning, an analyst at the non-profit Investor Responsibility Research Center (IRRC). Lafley’s 2002 salary rose 17%. Directors also OK’d a $21 million bonus in 2004 if earnings and stock price targets are met.
Ø Symantec CEO John Thompson, $66.2 million. The internet security company granted Thompson options valued at up to $52.4 million. His base pay increased nearly 17% to $700,000. He earned 12.6 million exercising options.
Ø General Mills CEO Steve Sanger, $62.8 million. Sanger’s stock option grant is potentially worth $56.7 million – on top of a 2001 grant valued at up to $49 million. Sanger’s base pay rose 12.7%.
Ø Tenet Healthcare CEO Jeffrey Barbakow, 143 million. Barbakow gained $111 million exercising stock options, and he received fresh options worth up to $26.4 million. “This was his first stock option exercise since he became CEO in 1993,” says Tenet spokesman Harry Anderson.
Paying for performance?
Few shareholders would quibble with the compensation awarded to some executives. P&G stock rocketed 43% the past fiscal year. Tenet has averaged annual 24% gains in Barbakow’s decade as CEO. Drugmaker McKesson, up 41% provided CEO John Hammergren with a pay package the IRRC values at about $54 million and a potential $10.8 million incentive award in 2005.
But other executives were richly compensated while shareholders saw little gains. Medtronic shares rose just 0.7%. CEO Arthur Collins’ compensation package included stock options worth up to $22.7 million, while his pay and bonus rose 27%. Collins gained $14.3 million exercising stock options.
Most CEOs have employment contracts that call for minimum base salaries that are reviewed annually by directors. Raises, bonuses and long-term incentive awards are usually at directors’ discretion. Shares of gaming equipment maker WMS Industries fell more than 60% during the past fiscal year, while CEO Brian Gamache’s compensation package rose 4.4% to $7.6 million. His base salary rose 47% to $550,000 and directors gave him 14% more stock options than in 2001.
Directors’ rationale on compensation can appear tenuous. Smithfield Foods CEO Joe Luter’s $46.8 million pay package includes stock options valued at up to $39.5 million. Smithfield says the award is an inducement for Luter to remain with the pork processor until 2004, when he turns 65. Luter, CEO since 1975, got options valued at $12.6 million in 2001.
National Semiconductor’s board based some of the $700,000 bonus and $21.5 million stock option grant to CEO Brian Halla on the company’s “incremental financial improvement” and goals as nebulous as college recruitment.
Several companies issued fresh options to replace those no longer exercisable due to lower prices. Computer parts maker Adaptec replaced 1.2 million options held by CEO Robert Stephens priced at up to $49.87. His new options, priced at $15.29, are worth $27.8 million. Adaptec repriced options “to incentivize and retain employees.”
Such practices set bad precedents, says Paul Dorf, director of consultant Compensation Resources. “You either meet your goals or you don’t. You don’t encourage CEOs if you don’t hold them to what’s been agreed to.”
Mylan Labs Chairman Milan Puskar wasn’t eligible for an annual bonus because the company’s bonus plan lapsed. But directors gave him $1 million – double his 2001 bonus – after comparing his compensation to other drug company CEOs and considering subjective factors, including “leadership and guidance.”
Many companies continue to use the same pay practices in effect for years. Since 1990, apparel maker Tommy Hilfiger has based designer Tommy Hilfiger’s bonus on a percentage of sales. His 2002 bonus: $22.4 million.
Other firms simply guarantee bonuses. Rayovac CEO David Jones’ contract calls for a $400,000 bonus in 2003 regardless of company performance. C. Michael Armstrong’s 1997 contract at AT&T stipulates that the company makes up any shortfall in cash if his restricted shares are worth less than $10 million in October 2003.
Perks still flourish
Companies continue to foot bills for assorted executive goodies. Among the most popular: personal use of corporate aircraft, which companies count as compensation. Last year, Rayovac’s Jones racked up $80,000 for using the company plane. He was also provided $70,000 toward interest on a promissory note and $60,000 for housing. He’s entitled to buy a company-owned home for a “nominal amount” in “April.
Archer Daniels Midland provided CEO Allen Andreas $51,433 for use of aircraft and $46,623 for a security system. H.J. Heinz’s pay package for CEO William Johnson is valued at $9.4 million, including $45,665 for financial counseling. Sara Lee CEO Steven McMillan, whose pay package is valued at up to $39.3 million, got $142,829 for use of corporate transportation.
Lower-level executives also got nice perks. Media company Meredith gave Kevin O’Brien, the new head of its broadcast group, $90,000 for country club initiation fees on top of stock options valued at $7 million. Michael Hiemstra, CFO of industrial products maker Parker Hannifin had compensation valued at $17.9 million; $69,350 for country club fees.
Sharing the blame
Several CEOs took it upon themselves to reduce their pay after their stocks or company prospects plummeted. Trip Hawkins, CEO of software maker 3DO, makes just $20 a week down from $295,000 a year. And Michael Brown, CEO of digital tape provider Quantum, slashed his salary 37.5% to $600,000.
Directors with long-term ties or consulting deals with management get much of the blame for keeping CEO compensation packages lofty.
“You’ve got people who’ve become immune to new ideas and are resistant to change,” says Dick Marty of ExecuCounsel.com, a Toronto-based recruiter and board adviser. “Most just want nice relationships with their CEOs.”
The bull market made it difficult for even critical directors to challenge CEOs on compensation packages. Moreover, investors and institutional shareholders tended to overlook excessive compensation awards while stock prices climbed.
Despite the market’s collapse and mounting shareholder unrest, many directors remain loath to question pay, partly because of pervasive belief that demand for CEO talent remains strong.
“There’s still a marketplace for really good CEOs, so you don’t want to lose your guy,” says Columbia University professor John Whitney, a director on several boards and author of Taking Charge: Management Guide for Troubled Companies and Turnarounds.
Headhunters who are poaching corner suites for seasoned executives – especially to turn around troubled companies – continue to drive big pay packages. Troubled industrial conglomerate Tyco International forked out an estimated $45 million package to hire ex-Motorola president Ed Breen.
Compounding rising pay: executive compensation surveys conducted by outside consultants that companies and their boards heavily rely on to set CEO pay packages. Many boards like to set CEO salaries at or slightly above median pay. If peer group salaries are rising, most boards feel compelled to match gains of other CEOs.
“Compensation consultants and executive recruiters have caused this creeping elevation of everything the past few years,” says Marty. “Directors still aren’t able to step back and say, ‘These just don’t make common sense.’”
Compensation consultants say many big payouts surfacing now were awarded before Wall Street’s sell-off gained momentum and growing scandals tainted much of Corporate America. “We’re talking to hundreds of companies, and what we’re seeing now is companies re-evaluating pay,” says Ira Kay of consultant Watson Wyatt.
Still, most consultants doubt there’ll be much overall change in 2002 pay. With directors still digesting new regulatory guidelines and investor unrest, “Whatever changes in compensation boards decide on probably won’t occur until next year,” says Brent Longnecker of Resources Consulting Group. “Pay and bonuses are already cast in stone.”
The biggest potential changes are likely in option grants. Boards are apt to grant fewer options as pressures mount for companies to charge them as an expense. Boards may also grant options linked to specific performance over a longer period, extend the time they must be held or even prohibit them from exercising options until they leave.
“There is definitely increased sensitivity on management’s part about what to ask for in the coming year,” says Blair Jones, head of leadership performance and rewards practice at Sibson Consulting. “Companies considering big pay increases or stock option grants are stepping back and saying. This won’t smell good, this isn’t the right time.’”
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