CEO Salaries – Do Executives Deserve Big Bucks?

To the rank and file, reports that William J. Marino, the chief executive officer of Horizon Blue Cross Blue Shield of New Jersey, received $8.7 million in compensation in 2009 might have made their blood boil.

Their year wasn't nearly as prosperous. Some 200 of them were laid off. They agreed to a three-year contract with an average annual raise of 2.5 percent. As a gesture of gratitude, they were allowed to wear jeans and sneakers on a Friday in March.

When the dust settled, Horizon became the latest example of executives whose compensation packages have become untethered from the rest of the labor force - the result, experts said, of a cozy board of directors, increasingly strict accounting measures and good intentions gone awry.

Advocates said compensation packages are designed to attract the best leaders who ultimately are responsible for their companies' performance. But critics abound. They said executives are richly rewarded whether or not they succeed, widening the gap between the haves and have nots.

The pay difference has "become so great, I don't know where that ends," said Chester Spell, a management professor who teaches courses about compensation at Rutgers University's School of Business in Camden. "That's the greatest harm. It's an issue of fairness."

Big disparities

The world of executive pay can appear far removed from Main Street.

William C . Weldon, chairman and chief executive officer of New Brunswick-based Johnson & Johnson, received a compensation package of $30.8 million in 2009: a $1.8 million salary; $2.8 million in stock; $5.2 million in stock options; $12.8 million in incentive bonuses; $8 million for pension and deferred compensation; and $196,587 for personal benefits - a car and driver, use of the corporate plane, a home security system and meals in the executive dining room, according to the company's proxy statement.

It was 5.7 percent more than the previous year. And it came during a year in which the company announced it would lay off more than 7,000 workers, or 6 percent to 7 percent of its work force because of slow consumer demand, according to Bloomberg News Service.

The board of directors said it rewarded Weldon for exceeding expectations despite the recession and looming changes from health care reform. And it praised him for initiating "a major restructuring to streamline the global workforce and reduce costs to allow investment in growth opportunities."

There is little doubt that executives often need to take painful steps to ensure that their companies survive both daily and long-term challenges they face. It includes keeping labor costs in check so the company can remain profitable and, for publicly traded companies, reward shareholders.

But executives during the past two decades have fattened their bank accounts, while their employees haven't kept up. Median executive pay - salary, bonuses, stock options - rose from $4.2 million in 1989 to $8.7 million in 2007, or 107 percent, adjusted for inflation, according to the Economic Policy Institute, a liberal research group in Washington, D.C.

By comparison, the U.S. median household income, adjusted for inflation, rose from $48,334 in 1989 to $50,233 in 2007, or 3.9 percent, according to the U.S. Census Bureau.

Behind the scenes

How did executives pull away from the pack? Some of the reasons, according to experts: -- Conflict of interest. Executive compensation is determined by boards of directors, whose members often are other executives.

Three of the four members of Johnson & Johnson's compensation committee are former executives: Charles Prince, retired chairman and chief executive officer of Citigroup Inc.; Anne M. Mulcahy, retired chairman and chief executive officer of Xerox Corp.; and William D. Perez, retired president and chief executive officer of Wm. Wrigley Jr. Co. The fourth, Michael M.E. Johns, is chancellor of Emory University in Atlanta.

Weldon, meanwhile, also is a director at JPMorgan Chase & Co., where he was paid $245,000 in cash and stock last year, according to JPMorgan's proxy statement. Joining him on that board are executives from Honeywell International Inc., Comcast Corp., and Yum! Brands Inc., to name a few.

One natural check and balance - shareholders - has little power. The recently passed financial reform law allows shareholders to have a say on executive pay every two or three years, but it isn't binding, according to a summary by Calvert Asset Management Co. Inc., a company that advocates socially responsible investing.

Some companies, including Pfizer Inc., already give shareholders an advisory vote.

"The people who have been appointed and promoted by the executives are the same ones who turn around and decide what the executive should be paid," said Charlie Cray, director of the Center for Corporate Policy, a Washington, D.C.- based watchdog group. -- Smart accountants. The Internal Revenue Service in 2007 got tougher on deferred compensation, trying to discourage executives who pushed off part of their pay for the future, when their income - and tax brackets - are lower.

It forced companies to look again at their programs to make sure they didn't have a deferred compensation plan that the IRS considered to be nonqualified.

Otherwise, their executives would have been saddled with a hefty tax penalty, said Sarah Krom, an accountant at Cowan, Gunteski & Co. Inc. in Toms River.

'Fairness' elusive

Horizon, for example, decided that its long-term incentive plan, a formula that rewarded executives for work that was done in previous years and paid out over three subsequent years, would not have met the IRS' new standards, Peggy Coons, vice president of human resources at Horizon, told a state Senate committee in June.

So the company last year restructured the program, giving executives what it called an earned incentive award at the end of a threeyear performance period.

It explains why Marino took home $3 million more in 2009 than in 2008. Executives "would still be paying taxes on it, but at a lesser rate," Krom said. "They wouldn't be subject to a tax penalty for not being in a qualified plan." -- Good intentions gone wrong. Companies once were allowed to deduct all of their executive compensation. Hoping to rein in pay, Congress in 1993 changed the IRS code so that companies could deduct compensation of no more than $1 million, unless it was performance-related. Rather than bring compensation back down to earth, the opposite happened.

More companies kept salaries below $1 million, but granted stock options and designed incentive programs, some of which were vaguely worded, said Paul R. Dorf, managing director of Compensation Resources Inc., a consulting firm in Upper Saddle River. "Every time the government passes regulations there is an impact to the design of the compensation programs," Dorf said.

It has left experts scratching their heads trying to figure out what's fair. Executives paid by stock options could prosper in a bull market, regardless of the decisions they make. Executives paid by incentives could prosper based on the wording of a customer-service questionnaire.

"People that defend (executive pay) say they have a lot of responsibility. But that's always been true," Rutgers' Spell said. "I don't know how you assess that sort of thing."