| |
Restricted Stock, Bigger Bonuses Boost Pay of CEOs
06/20/04
By: Bill Sulon, The Sunday Patriot-News
As stock options continue to fall out of favor with more corporations, top executives are finding financial solace from other sections of the corporate war chest.
Under increasing pressure from shareholders and regulators to account for stock options as expenses at the time they are awarded, many companies are cutting back on that form of compensation. Instead, they are rewarding executives with bigger bonuses and more restricted stock tied directly to the company’s performance.
The result: Total compensation for CEOs continues to rise, but the pay gap between top executives and average workers is narrowing.
At public companies based in central Pennsylvania, or those with a large presence in the region, the median total compensation for CEOs in 2003 rose 52 percent, to $2.9 million, from $1.9 million in 2002.
The median base salary for those executives rose 9 percent, to $799,000 while bonuses increased 40 percent, to $898,000.
Executives saw their biggest gain with restricted stock, which rose 129 percent, to a median of $1.9 million in 2003 from $845,000 in 2002.
In January 2005, companies will be required to report stock options as expenses in the year they are issued, a move that is expected to yield fewer stock options, bigger bonuses and more restricted shares.
Some critics argue that putting a value on stock options is an arbitrary, if not impossible, task. That’s because options have significant, little or no value depending on the stock price at the time the executives are eligible to exercise, or redeem, the shares.
Supporters say options, already listed by companies as an expense for tax purposes, also should count against the corporate bottom line. Failure to list options as expenses, backers say, results in rosier financial statements that do not accurately reflect a company’s financial health.
Stock options reward executives if the stock price goes up. Restricted stock, as the name indicates, has strings attached, typically in the form of performance requirements that must be achieved over a specified period.
Unless a stock price drops to zero, restricted stock has some value. Stock options are valuable only if the stock price exceeds a pre-established level. Consequently, restricted stock awards generally are smaller than stock options awarded.
Stock options gained popularity in the early 1990s, ironically replacing restricted stock as a preferred way for companies to reward executives for increasing shareholder value. At the time, critics derided restricted stock as “pay for pulse,” and not a worthy incentive for CEOs and other top executives.
“People have short memories,” said Blair Jones, senior vice president of Sibson Consulting in New York. “Restricted stock was considered evil, and stock option were praised 15 years ago. Even if a company did poorly, executives still had a gain. Restricted stock was still paid even if the stock price dropped. Stock options were viewed as a more performance-based reward over the long-term.”
The pendulum is swinging back. Last year, companies issued restricted stock to 20 of the top 50 highest-paid executives with midstate connections, compared with eight out of 50 in 1996. The trend was driven in part by accounting scandals at East Pennsboro Twp. – based Rite Aid Corp., Enron Corp., Global Crossing and other companies that cast a harsh light on options.
The focus intensified when some top executives unloaded their stock before financial irregularities were uncovered and before share prices plunged. Chastened companies began searching for new – and – old – ways to reward their top executives.
More companies are trying to avoid one shortcoming of stock options – the move by some executives to drive up share prices at all costs, including the elimination of jobs – by establishing pay packages with long-range goals in mind.
“Not replacing employees may be profitable in the short run, and may impress investors, but it doesn’t work in the long run,” said Paul Dorf, managing director of Compensation Resources Inc. in Upper Saddle River, N.J.
In addition to receiving more restricted stock, top executives are getting bigger bonuses relative to base salary than they received five years ago, Dorf said.
In 1999, CEOs who met corporate goals typically received bonuses that amounted to half their base salaries. Executives who exceeded the goals got bonuses equivalent to 75 percent to 100 percent of their salaries.
Today, many executives who achieve goals get bonuses that match their salaries, and those who surpass the goals are often rewarded with bonuses that are twice as much as their base pay, Dorf said.
“It’s a direct change that’s due to the desire of boards of directors for executives to focus on performance” and not solely on stock price, Dorf said.
Stock options, however, were a key factor in driving up the total compensation last year of top executives with the largest companies that operate in central Pennsylvania. Among the 10 highest-paid CEOs, seven got there by exercising stock options whey were awarded years earlier.
The biggest CEO pay package last year went to Comcast Corp.’s Brian L. Roberts, who took home $31.2 million in total compensation, including a $6 million bonus that was three times as much as his $2 million base salary.
Roberts wasn’t the biggest breadwinner at Comcast. His father and Comcast founder Ralph J. Roberts took home $44.3 million last year, including $32.6 million in exercised stock options. Ralph Roberts is chairman of the Comcast board’s executive and finance committee.
Among companies based in south-central Pennsylvania, Select Medical Corp.’s Robert A. Ortenzio was the highest-paid CEO in 2003, with total compensation of $15.8 million, including $13.3 million in gains from stock options.
Ortenzio’s father, Rocco A. Ortenzio, chairman and co-founder of the Lower Allen Twp. –based health-care services provider, received #31.5 million in total compensation last year, including $29 million from stock options he exercised.
Peter M. Carlino, CEO of Penn National Gaming Inc. was the second-highest paid executive in the region, with total compensation of $7.7 million, including $5.8 million in exercised stock options.
Third among area CEOs was Hershey Foods Corp.’s Richard H. Lenny, who took home nearly $3.6 million in 2003. Lenny’s base pay rose 11.7 percent, to $950,000, and his $1.7 million bonus was 27 percent more than in 2002. But his total compensation fell 9 percent, in part because he received $1 million in restricted stock in 2002, and no restricted stock last year.
The AFL-CIO, which tracks trends in executive compensation, prefers the use of restricted stock over stock options for rewarding top executives, said Brandon Rees, research analyst for the labor organization’s office of investment.
“They should use performance-vesting restricted stock – where they get the shares only if they meet performance benchmarks,” Rees said. “We don’t want them time-based, where they get them merely for showing up.”
According to the AFL-CIO, top executives in 2003 earned 301 times what the average worker in the country took home. That ratio is down from a peak of 531 times more in 2002, but well above the 85-to-1 ratio in 1990 and 42-to-1 in 1980, Rees said.
“We still have a long way to go before CEO pay returns to historic norms,” Rees said. “We’re seeing increased investor concern about excessive compensation, and rightly so. Every dollar in excessive compensation comes out of shareholders’ pockets.”
|
|
|
