MY BIG FAT C.E.O. PAYCHECK
MY BIG FAT C.E.O. PAYCHECK
2005-04-05 at 12:08:00 pm #29433
My Big Fat C.E.O. Paycheck
The spectacle of once-respected corporate titans doing perp walks – Martha
Stewart, Bernard J. Ebbers, Richard M. Scrushy, the list seems endless – has
pretty well tarnished the title of chief executive. But it has done little, it
seems, to scratch the gilt from the corner office.
In fact, the boss enjoyed a hefty raise last year. The chief executives at
179 large companies that had filed proxies by last Tuesday – and had not changed
leaders since last year – were paid about $9.84 million, on average, up 12
percent from 2003, according to Pearl Meyer & Partners, the compensation
Surely, chief executives must have done something spectacular to justify all
that, right? Well, that’s not so clear. The link between rising pay and
performance remained muddy – at best.
Profits and stock prices are up, but at many companies they seem to reflect
an improving economy rather than managerial expertise. Regardless, the better
numbers set off sizable incentive payouts for bosses.
With investors still smarting from the bursting of the tech bubble, the swift
rebound in executive pay is touching some nerves. “The disconnect between pay
and performance keeps getting worse,” said Christianna Wood, senior investment
officer for global equity at Calpers, the California pension fund. “Investors
were really mad when pay did not come down during the three-year bear market,
and we are not happy now, when companies reward executives when the stock goes
Even when companies reported modest increases in executive pay, it was often
because they shifted from stock options, which are listed as compensation as
soon as they are doled out, to outright stock grants to be paid – and accounted
for – down the road.
Of course, corporations have been wrestling for decades with ways to link pay
to performance, with little success. In the 1980′s, they tried tying cash
bonuses to rising sales or earnings, only to find that the payouts encouraged
executives to make decisions that yielded short-term results – and, often,
In the 1990′s, companies tried stock options, figuring that they would be the
best way to tie the executives’ fortunes to those of shareholders. Instead, they
prompted some managers to time decisions to pump up the stock just when their
options vested. Bonuses and options at Tyco and Enron, for example, did little
to prevent widespread accounting frauds at either company.
The secret to linking pay to performance remains elusive. Net income at Eli
Lilly fell 29 percent and its return to shareholders dropped 17 percent last
year, but its chief executive, Sidney Taurel, saw his pay go up 41 percent, to
Similarly, Sanmina-SCI, the electronics contract manufacturer, has lost money
in each of the last three years, and its shareholders’ total return fell 27
percent last year, but the pay of its chief executive, Jure Sola, jumped to $15
million from $1.2 million in 2003.
SOME paychecks remained robust even if at first blush they looked reduced.
Net income at Merck fell 15 percent last year, and total shareholder return
dropped 28 percent. The summary compensation tables in the proxy show the pay of
the chief executive, Raymond V. Gilmartin, dropping 39 percent, to $5.9 million
from $9.6 million.
But Mr. Gilmartin may find it easy to recoup the perceived loss. He got far
fewer options last year, but he is participating in a new long-term performance
plan that will give him $2.7 million worth of shares next year if he meets
earnings targets – and double that amount if he exceeds them by a set amount. He
gets the shares even if the stock price does not rise by a dime. And the
payments won’t show up until the 2007 proxy.
Conversely, Apple Computer had a stellar 2004, yet Steven P. Jobs, its chief
executive, was paid exactly $1 for his efforts. Why? Apple paid him in advance –
in 2003, it gave him $75 million worth of stock.
Shareholders are not giving up on tying pay to performance. But now they seem
less focused on how executives are paid and more concerned about exactly what
they do to earn it.
“It’s easy to manipulate stock price. It’s even easier to manipulate
earnings,” said Paul Hodgson, a senior research associate at the Corporate
Library, an investment research firm specializing in corporate governance. He,
like others, is pressing companies to set pay based on measures that are harder
to fudge, like return on capital employed.
Directors, meanwhile, are spending more time scrutinizing auditor reports and
management strategies, looking for just such fudging. And for that, they’ve been
rewarded. Pearl Meyer’s data show that average total compensation of directors
at 200 large companies probably topped $200,000, up from an average of $176,000
the previous year.
“Directors are meeting more often, so their meeting fees are up,” said
Jannice L. Koors, a Pearl Meyer managing director, “and there’s clearly a sense
that the liability they face, both personally and professionally, has increased,
and thus warrants more pay.”
Inflated pay for deflated performance has become ever more rankling to
shareholders, many of whom are still scrambling to recoup the losses they
suffered after the stock market imploded in 2000.
Few begrudge Daniel A. Carp, the chief executive of a newly revitalized
Eastman Kodak, his $2,172,988 bonus this year, which brought his total
compensation to about $4.4 million. But they are likely to squawk about the rich
pay package – $7 million in salary and bonus, 5 million options and nearly $27
million worth of restricted stock – that Blockbuster awarded to John F. Antioco,
its chief executive. After all, Blockbuster lost $1.25 billion last year.
Pay inflation will not end soon because companies are afraid to lose talent,
said Ira Kay, who runs the executive pay practice at the consulting firm Watson
Still, companies are rethinking the different pieces that make up a pay
package. Many, for example, are reigning in common safety nets for chief
executives – like contractual promises of huge severance if the company is
acquired, or even if the C.E.O. is fired for incompetence.
They are also increasingly trying to link pay packages – most specifically,
the size of bonuses, or the conditions attached to the vesting of restricted
shares – to actual corporate performance, particularly total return to
shareholders. “Finally, companies are focusing on the performance part of the
pay-for-performance equation,” Ms. Koors said.
Examples are easy to find. When net income at Aramark, a food services
company, slid 13 percent, total pay for Joseph Neubauer, its chairman and chief
executive, fell 20 percent – and his bonus shrank 47 percent. When net income at
Unisys, the computer maker, plunged 85 percent last year, Lawrence A. Weinbach,
then its C.E.O., got no bonus and saw his overall pay drop by 17 percent.
An even starker example is the arrangement for John R. Alm, who became chief
executive of Coca-Cola Enterprises, the soft-drink bottler, in January 2004. His
contract stipulates that he will lose all his restricted stock if he is no
longer at the company when his shares vest in five years. More significantly, he
will forfeit all the shares if the stock price has not climbed 10 percent at
vesting time, and he will lose half of them if it has not increased by 20
Still, many shareholders are not satisfied. Reviewing C.E.O.’s pay – and how
company boards’ compensation committees set it – is at the top of the to-do list
for many institutional investors and shareholder activist groups, now that they
have succeeded in making companies more forthcoming about revenue, profits and
other financial results.
“Whether compensation committees are effectively linking pay to performance
is now a major corporate governance concern,” said Martha L. Carter, a senior
vice president of Institutional Shareholder Services, which advises big
Only one concern – the proliferation of stock options – has abated. A new
regulatory requirement to expense options, combined with a sluggish stock market
that made many of them valueless in 2000 through 2003, has caused a stampede
away from options. Several compensation consultants say they expect that options
will soon represent less than 30 percent of total compensation, down from more
than 60 percent today.
Not all alternatives are being warmly received. Shareholders decry plans that
do not use “hard” measures of performance, such as total return to shareholders.
For example, few are applauding Microsoft’s two-year-old decision to grant
restricted stock on the basis of customer satisfaction and market share, or
Disney’s plan to tie compensation to performance against the Standard &
Poor’s 500 index.
Shareholders do want companies to adopt “claw back” provisions that force
executives to repay bonuses paid for results that later must be restated, a
situation that has kept Qwest, for one, in the news this year.
They are also resisting rich change-of-control clauses that provide windfalls
to any C.E.O. whose company is acquired, even if that chief gets a high-ranking
job at the new company. The $95 million or so that James M. Kilts will probably
receive as a result of selling Gillette to Procter & Gamble is raising ire
even among those who laud his performance as Gillette’s leader.
They also decry “pay for failure” contracts that heap riches on dismissed
chiefs. Carlton S. Fiorina, for instance, left Hewlett-Packard with a severance
package that included $14 million in pay, a $7.38 million bonus and $21.1
million in additional compensation from restricted stock holdings and pension
Shareholders complain about how difficult it is for outsiders to glean such
things as the tax implications of deferring executive compensation or the worth
of supplemental retirement plans and other forms of “stealth compensation” that
do not readily leap off the proxy. “The way the proxies are now, you can’t
really figure out how anyone, even Carly, got paid,” Ms. Wood of Calpers said,
referring to Ms. Fiorina.
Ms. Carter of Institutional Shareholder Services concurred. “Companies have
simply got to do a better job of disclosing total pay packages, and how they
play out in different scenarios, such as the C.E.O. being fired or the company
being acquired,” she said.
In January, for the first time, institutional shareholders, led by Calpers,
invited top compensation consultants to a meeting in New York to discuss their
concerns – and to persuade the consultants that they were part of the
A TOP complaint was that the consultants feed data to compensation committees
piecemeal, reporting what other companies are offering in supplementary pensions
one day, the trend on bonuses a few days later, the value of stock options a
week after that. The directors, in turn, set the different components of their
own chief executive’s pay package in equally disjointed fashion.
Consultants acknowledge the problem, and larger firms have begun to add up
total compensation, both for peer-group companies and for the client’s proposed
pay package. “They used to only ask us for information about direct pay, because
they got data about benefits and perks from others,” said Pearl Meyer,
chairwoman of Pearl Meyer & Partners. “But compensation committees are now
taking a more holistic approach to executive pay, so we are now giving them all
of the information.”
Governance experts say the full board increasingly wants a better handle on
compensation committee deliberations. Many directors fear that they will all be
held accountable for egregious pay packages.
“The Dick Grasso situation has made a lot of directors more cognizant of the
need to get the total picture, see how all the pieces – the base salary,
restricted stock, options, perks, retirement benefits – add up,” said Eleanor
Bloxham, president of the Corporate Governance Alliance, a consulting firm in
She was referring, of course, to the brouhaha that arose when directors at
the New York Stock Exchange said they were ignorant of the full extent of the
pay package they had approved for the exchange’s former chairman, Richard A.
Several companies are voluntarily disclosing much more pay information to
their shareholders. These companies have replaced what Ms. Koors called “the
standard proxy boilerplate” – a statement that pay was set competitively – with
fuller descriptions of how boards derived the packages they awarded.
The proxy for Becton Dickinson, for example, included a summary table that
laid out the value of total compensation. Honeywell’s proxy listed the value of
perks like legal fees and personal use of corporate planes and cars. Siebel
Systems has promised investors that next year it will begin disclosing the
operational and stock-price hurdles that management must scale for restricted
shares to vest.
“The companies know that new disclosure rules are coming, so they want an
‘attaboy’ from shareholders for being ahead of the curve and doing it
voluntarily,” Ms. Koors said.
Slowly but steadily, companies are responding to shareholders’ clamor for pay
packages to reward long-term thinking, too. This year’s proxies show that
companies increasingly insist that executives and directors hold about five
times their pay in stock, thus making it harder for them to cash in on any
short-term lift in the company’s fortunes.
Cardinal Health, for the first time, is requiring its chief executive to hold
shares equal in value to five times his salary, and its directors to hold the
equivalent in shares of four times their annual retainer. Cendant this year
increased its ownership rule for its chief executive to six times salary, from
“Companies are basically saying to their chiefs, ‘We want to keep you on the
hook, to make sure that you are not benefiting from a short-term gain that is
not sustainable,’ ” Ms. Koors said.
EXECUTIVES who do not lead the company down a profitable path may find it
harder to develop other ways to cash in.
Thomas J. Neff, the chairman of American operations at the executive
recruiting firm Spencer Stuart, says he has seen a move away from grants of
restricted shares that automatically vest after three or five years. In their
place, companies are giving shares that vest only if the company hits preset
goals for book value, total return or other measures the board deems crucial to
Mr. Neff says that fewer companies are agreeing to automatically vest all
options or restricted shares if the chief leaves and that many now offer one or
two years of compensation, maximum, upon departure, a sharp drop from the three
to five years of pay that used to be routine. “Boards are no longer routinely
letting the C.E.O.’s lawyer draft the contract,” he said.
Several companies have clearly learned from past mistakes. The contract of L.
Dennis Kozlowski at Tyco International called for an immediate payout of about
$135 million if he was dismissed, and a retainer of $3.4 million annually for
the rest of his life. His voluntary resignation released Tyco from the terms of
the agreement, but directors clearly are cognizant of how expensive fulfilling
the contract terms could have been.
Tyco’s new severance policy limits compensation to twice the executive’s base
salary and bonuses at the time of termination. In a merger or change-of-control
situation, departing executives would receive up to 2.99 times their base salary
and bonus. And Tyco now awards stock options that are priced higher than the
share price on the day of issue.
Directors are less likely to clamp down on the pay of newly recruited bosses.
Consider the package for C. John Wilder in his first year as the TXU
Corporation’s chief executive: $1 million in salary, a $16 million bonus and $37
million in long-term incentives.
Newcomers have boards at a negotiating disadvantage, compensation experts
say. Because they took a gamble by switching jobs, most successfully insist on
either a hefty sign-on bonus in cash and stock, or a soft landing – that is,
rich severance – in case they fail.
Both eventualities get shareholders’ dander up, but experts say the boards
have little choice.
“You need to supercharge the offer,” Mr. Neff said, “to create an incentive
for a person to come in.”