Salaries Frozen for Many CEOs

For years, good governance groups and shareholder activists have pushed to make executive compensation more reflective of a company's performance.

We seem to have come closer to that goal in the past year, with salaries of many public company chief executive officers frozen — often at their own request — and fewer than usual cashing in previously issued stock options.

Reflecting the nation's struggling economy and declining corporate profits, 12 of the 42 men and women who led North Jersey companies included in The Record's 15th annual report on CEO compensation received no raises last year.

Three others saw their base pay cut, and five received increases of less than 1 percent. In addition, 17 received no bonus or incentive compensation, according to proxy and 10K forms that the public companies filed with the Securities and Exchange Commission.

"CEO compensation was down dramatically in 2009," said Peter Oppermann, a partner at Mercer Inc., a New York-based human resources consulting company.

"Half the companies that we saw nationally in 2009 froze the salaries for their CEOs," and the North Jersey figures are "a microcosm of what we saw across the United States," Oppermann said.

Still, more than two-thirds of the CEOs surveyed earned more than $1 million in their most recent fiscal year, including four who took home more than $10 million.

It's difficult to draw a direct connection between pay and performance without reading the detailed reports of the compensation committees in the proxies. While stock price and earnings per share are the two most common measures, the committees that determine the makeup and amount of pay packages create their own standards — and then evaluate CEOs by them.

That helps explain why, of those 20 companies whose CEOs took salary cuts or received little or nothing in raises, 12 had stock price increases and eight — including three banks — had stock declines. Conversely, six companies whose stock prices fell gave raises.

Also, many of the executives in both groups received generous stock awards or options that they will be able to cash in three to five years down the road.

"I would not cry for them," said Paul Dorf, managing director of Compensation Resources Inc., an Upper Saddle River-based compensation consulting company that, like Mercer, helps corporations establish compensation policies. "These people are not hurting."

Maybe so, but many took short-term cuts for long-term financial and public-relations gains.

Cuts at Hertz

Park Ridge-based Hertz Global Holdings Inc., for example, suspended its executive incentive compensation program, and CEO Mark Frissora asked his compensation committee to reduce his salary by 20 percent (and other senior executives' by 15 percent) to preserve cash and strengthen the company's financial position.

"Our senior management believes they should show leadership in responding to market conditions," the committee said.

Similar salary freezes were made at Honeywell (where David Cote also received no incentive bonus), Becton Dickinson, and Public Service Enterprise Group.

Like many companies, PSEG tries to peg executive salaries near the midpoint of what their counterparts at similar companies earn.

On that basis, CEO Ralph Izzo's $950,000 salary was far below the peer median rate of $1.25 million.

However, given "the challenging economic environment" at the end of 2008, Izzo volunteered to forgo a 2009 salary increase as part of a companywide freeze on salaries for all non-union employees and most unionized workers.

With the outlook uncertain for this year, Public Service froze Izzo's salary at $950,000 again, also at his request.

Not only do such moves save money, but they're also good public relations, sending a message to investors and employees.

By not taking a raise, the CEOs "look like heroes, responding to shareholders for a change," Dorf said.

"We're seeing a lot of companies doing this because it's good business. It didn't change their lifestyles and they ended up with a tremendously positive message."

Besides, the freezes are only temporary, and CEOs often make up for their loss of salary through increases in other parts of their compensation package.

So when the auto rental business picked up in the second half of the year, Hertz restored the cuts and Frissora got a $2.2 million cash incentive payment.

And PSEG's compensation committee decided to use Izzo's $1.25 million target salary, not the $950,000, as the basis for his incentive payment. As a result, he got $1.3 million in incentive pay, up from $1 million in 2008.

Pay vs. performance

The correlation between pay and performance has been a priority for good governance organization such as the Interfaith Center on Corporate Responsibility in New York, which has filed resolutions to tie CEO compensation more closely with performance with about 70 companies this year.

To Gary Brouse of Hackensack, the center's program director of corporate governance and policy, salary freezes reflect the economic climate more than closer ties between pay and performance.

"They're kind of laying low on this because of the climate," Brouse said.

Of course, it's easy to have your pay remain at $518,400 in a year you've cashed in more than $11 million in stock options, as Francisco D'Souza of Cognizant Technologies Solutions of Teaneck did.

New SEC rules

Still, it's encouraging to see the increased transparency, he said.

New SEC rules require companies to discuss their incentive compensation plans and risks "that are reasonably likely to have a material adverse effect on the company," Oppermann said.

In addition, the financial reform bill being debated in Congress includes a "say on pay" provision that would make it easier for investors to have input into executive compensation.

It would only be advisory, but could put additional pressure on companies to make sure that compensation is tied to performance.

One thing seems certain: CEOs will continue to be well paid, especially as the nation's economy improves and low-priced stock options increase in value.

Highest paid among CEOs surveyed was David Snow, chairman and CEO of Franklin Lakes-based Medco Health Solutions Inc., whose total compensation topped $23 million last year.

Included are salaries, restricted stock awards, bonuses, annual incentive compensation, benefits and previously issued stock options that were exercised.

But stock options granted and gains in value of pensions — which are included in other CEO pay calculations — are excluded based on the fact that gains are realized only when the money is paid out.

As was the case in better times, the biggest chunk of compensation for Snow and the other highest-paid CEOs — especially those from the largest corporations — came from cashing in stock options granted in previous years.

Heeding investors

In recent years, in response to investor demand and regulator mandate, the proxies have included detailed information on the rationale behind compensation packages to the CEO and other senior executives.

As spelled out at Medco, compensation is "based on the fundamental principle of pay-for-performance" and the CEO's performance that is "directly supportive of our business strategies and the creation of shareholder value."

Acting in direct response to investor complaints, compensation committees are increasingly calling for givebacks on incentive payments based on inflated earnings and creating multiyear look-backs to control excess risk-taking.

"There is a growing belief that executive compensation ought not to encourage the taking by management of those institutions of unreasonable or unnecessary risks," the compensation committee at Wayne-based Valley National Bancorp said.

To combat that, the period over which incentive compensation is based should be more closely aligned with the "risk horizon," the length of time needed to see whether or not the risk produced the intended beneficial result.

If not, incentive compensation would be reduced or eliminated.