Vanishing Act

By: Shankar P.

Those who assume the boss always gets the best deal might get some wicked pleasure in knowing that it has been pretty hot in the corner office, too.

Compensation packages for top managers have faced intense scrutiny in the times of Wall Street’s misadventures, shrinking substantially in the past year, according to Richard Arons, office managing director at Korn/Ferry International, a global executive recruiting firm in Princeton.

Chief executives and their senior management colleagues have taken a hit on their compensation packages “because the bonus pots have become smaller, not because the deal has changed,” Arons said.

The variable compensation component is usually linked to performance, and that is under pressure at many companies that are not doing well in the current economy, said Paul Dorf, managing director of Compensation Resources Inc., a consulting services firm based in Upper Saddle River.

Salaries for chief executives and other top managers usually run north of $500,000; those in senior management typically draw more than $200,000, he said.

Compensation at those levels typically has a bonus component of between 35 percent and 60 percent, with base salary accounting for the remainder, Arons said.

The bonus “is the piece companies can play with,” along with variable compensation models like stock options and restricted stock.

Increases in the base pay, meanwhile, often are as modest for top managers as they are for worker bees, Dorf said. Top executives and other employees down the line don’t change jobs as frequently as they would in a good economy, “so many companies do not feel the need” to offer big salary increases, he said.

On average, Dorf said, companies are now budgeting 2 percent salary increases; “it was double that, or 4 percent, two or three years ago.”

Salary increases for all employee categories for 2010 are forecast at 3 percent, down one-half a percentage point from the previous year, according to The Conference Board, a nonprofit research organization based in New York. It said the 2010 median forecast salary increase budget is the lowest since it began its survey 25 years ago.

“But it was the executive category that took the biggest hit — down 2 full percentage points [from 3.5 percent to 1.5 percent],” the Conference Board said in its salary increase survey, released in September. The survey covered 291 companies and was conducted this April.

CEO and other top management compensation packages get a serious review every time a company changes hands, said Robert F. Coyne, a director in the corporate department of Newark law firm Gibbons P.C. Coyne typically consults with “middle-market companies” that are usually privately held, where compensation packages are insulated from the harsh scrutiny they face at publicly held companies.

In mergers and acquisition deals, much depends on whether or not the acquiring company is keen on retaining the top management of the company being acquired, Coyne said.

For instance, a European foods company he represented in its $38 million purchase last year of a controlling stake in a New York company retained the CEO’s compensation, he said. His client’s “strategic goal was to retain the management talent” and maintain revenue and earnings, he said.

But in another $50 million acquisition, where Coyne represented a New Jersey-based selling company, “the future was a little cloudy.” His client company had “good earnings,” but the California-based buyer was unsure about the seller’s ability to continue that performance, and so made the CEO’s compensation package performance-based, he said.

Coyne said he sees a distinct “trend toward more performance-based, variable components in compensation packages” of top executives, including stock appreciation rights, warrants and restructured stock. Even fixed bonuses of 30 percent or 50 percent of base pay are increasingly becoming performance-linked, he said.

“The scrutiny and the pressure to be more efficient are reasons enough to have your compensation more performance-based,” Coyne said

The variable, performance-based component in top management compensation packages usually is higher in companies backed by venture capital, Arons said.

These firms “want the same risk and reward shared by the senior executives of those ventures,” he said.

Arons said it is not unusual for top executives moving from traditional brick-and-mortar companies to venture capital-backed enterprises to accept lower salaries and more stock.

“First, most [venture capital-funded] companies don’t have as much cash, but have stock,” he said. “Two, they want to attract people who can share in the risk and reward.