Pay for Idaho's CEOs on the rise despite economy

06/16/03
By: Julie Howard, The Idaho Statesman

Bonuses, salary hikes still norm in 2002

2002 was a belt tightening year for corporate America.

But not for its CEOs.

Most of Idaho’s public companies paid their top executives more during one of the worst recessions in history.

Here are some highlights from The Idaho Statesman’s second annual survey of CEO pay, which looks at public companies with annual revenues of more than $10 million

·         Once again, Idaho’s biggest public company paid its leader the most. Albertsons Inc. paid Larry Johnston $2.2 million in salary, bonuses and other compensation during 2002, making him the highest paid CEO of a pubic company headquartered in the state, even though his total compensation dropped by 40 percent over 2001.

·         Salary and bonus increases, for the most part, correlated with shareholder return. Of five companies that saw their stock rise during 2002, returning CEOs were paid more. Two companies that saw shares fall – IdaCorp and Washington Group International – still gave their top executives more pay. Four other firms with falling share prices paid their executives less during the year.

·         Micron Technology, the state’s largest private employer, paid the top executive Steve Appleton the least in salary and bonuses. Appleton has refused his $800, 000 annual salary since October 2001.

·         Most CEOs received bonuses for the year, including several whose companies were not profitable. Washington Group International President and CEO Steve Hanks received 2002’s largest bonus, $1.46 million, pushing his total compensation up enough to be Idaho’s second highest paid CEO for the year.

The fact that most Idaho CEOs saw their salaries rise during an economic slowdown doesn’t surprise those who track executive compensation.

“This is just a continuance of a trend from previous years where pay continues to rise while profits and stocks are down,” said Gundars Kaupins, a human resources professor at Boise State University.

Other Compensation

Micron’s Steve Appleton was the lowest paid CEO in 2002, but he was awarded stock options potentially worth $5 million.

While the firm’s proxy statement says Appleton was only paid $110,777 for the fiscal year that runs from September to August, he also received more than $5 million in stock option grants for the same time period. In addition, he had another $746,346 in unexercised stock options from previous years.

Stock option grants aren’t counted in regular compensation because they only have value if the stock rises. The idea behind options is to provide an incentive for the executive to work hard to increase shareholder value. The $5 million value placed on the 400,000 options granted to Appleton during 2002 is calculated using a method approved by the Securities and Exchange Commission. The true value, however, won’t be evident until he cashes in the options – Appleton has 10 years before the options expire.

A similar story goes with Idaho’s top earner, Albertsons’ Larry Johnston. His salary and bonus netted him $2.2 million regular compensation, but a restricted stock grant valued at $9.99 million during the year pops his total earnings to more than $12 million for 2002.

Restricted stock, unlike options, is an outright gift. Johnson will receive those shares over a five-year vesting period and the valuation is calculated on the market value at the time it was given.

The AFL-CIO tracks corporate executive compensation with a special Web site called PayWatch. That site factors in all compensation, from base salary to stock options. According to that site. Johnston received more than $33 million for his 2001 pay. Including stock options and restricted stock grants. Salary and bonuses for that year came to $3.7 million of that amount.

National glimpse

Nationally, base salaries of CEOs increased 6 to 8 percent in 2002 from the previous year, according to Compensation Resources, a compensation consulting firm in New Jersey. That compares to increases of 2 to 3 percent for the average employee, said Dan Moynihan, principal with Compensation Resources.

But moderation was seen in bonuses, stock options and perks.

“We saw bonuses shrink considerably as well as equity (stock) compensation,” said Moynihan. “There were some smaller stock grants and because of the market, they had a smaller value to them. That created a decline in overall compensation.”

And fewer executives were getting all-expenses-paid country club memberships.

“We did a survey in ’01 and found 50 percent of publicly traded companies were offering country club memberships to their top executives,” said Moynihan. “In ’02, it was 23 percent. We’re seeing boards of directors saying it’s a non-deductible expense – and just how much business is done on the golf course these days?”

Austere times and media focus on corporate scandals have led to rollbacks in executive perks, said John Challenger, CEO of human resources firm Challenger, Gray & Christmas in Chicago.

“We’re in a time of frugality and company profits are hard to come by,” said Challenger. “Shareholders are looking for a CEO that represents that type of culture.”

But Challenger said shareholders often don’t quibble about country club memberships, because of their use for entertaining top customers, or even about corporate jets, which saves valuable CEO time. “The thing that happened last year was more of a concern about transparency and making sure shareholders know what all the perks are,” said Challenger.

Luxury cars, cell phones, high-speed Internet access at home are all likely to continue among the ranks of top management, and one new perk is emerging.

“As some money is moving out of country club memberships, executives are getting it back in executive physicals or long-term care insurance,” said Moynihan. “You get a 50-year-old executive with 80-year-old parents and there’s a sudden awareness that the problems of their parents could happen to them.”

Future pay

The level of CEO pay in the United States is not likely to change soon.

The reason is demand.

“It’s what the market will bear and the market is high right now,” said BSU’s Kaupins, who teaches compensation benefits. But a slow transition could be under way.

There has been a closer look at boards of directors, who set the compensation and benefits for top executives. In recent years, boards have been filled with more independent directors who are more tied to shareholder returns than to the CEO.

“Boards of directors have tended to be friends and relatives of CEOs who lavish the perks on,” said Kaupins. “Are they going to vote a pay cut for someone who got them on the board?”

Ultimately, boards recruit CEOs who can lead the company to a profitable future. To do that, boards have to offer lucrative pay and incentives, “This is the person that could make or break the company,” said Kaupins. “It’s a huge responsibility.”