It’s Still a Golden State
The returns investors reaped during the bull market of 2003 were small change compared with what chief executives at some of California’s biggest companies pocketed.
Take Meg Whitman, CEO and president of EBay Inc.
Investors enjoyed a 77% rise in the value of their EBay shares last year, while Whitman saw her compensation swell 163%. Her $42.7-million package equaled nearly 10% of the Internet auctioneer’s profit.
Or consider Wilfred J. Corrigan, CEO of LSI Logic Corp., where profit dropped 6% and sales fell 7%. Corrigan’s raise was 560%. At Countrywide Financial Corp., Angelo R. Mozilo’s pay doubled to $35.2 million. Robert D. Glynn Jr. of PG&E; Corp. took home 131% more. And Computer Sciences Corp.’s Van B. Honeycutt collected 120% more in 2003 than the year before, according to the Los Angeles Times’ annual survey of CEO compensation.
The median boost, meaning half were larger and half smaller, for the 102 chief executives in the survey was 5%, compared with a median raise of 11.4% the year before. For 11 of the CEOs in the latest survey, pay more than doubled; 12 received raises of 50% or more.
But for 45 of the chief executives, total compensation in 2003 was less than in 2002, the survey found. CEO pay across the country rose at a more modest pace in 2003 -- 7.2%, compared with 10% for the previous year, according to an annual survey of 350 big U.S. companies conducted by Mercer Human Resources Consulting.
Smaller increases in CEO compensation, or in some cases actual declines in pay, reflect last year’s shift from stock options in favor of more hard cash and grants of actual stock. The shift can lower the face value of compensation packages -- but it also turns pay into a sure thing from something merely speculative. Although stock options can prove lucrative if the company’s stock price rises, they are worthless when stock values fall -- as was the case for the first three years of the decade.
What’s more, executive compensation experts don’t foresee any big pullback in CEO pay, even though an estimated one-third of shareholder resolutions on this year’s proxies are demanding just that.
“It is really hard for pay to go down,” said Jack Marsteller, compensation consultant with Towers Perrin in Los Angeles. He cites competition for good CEOs as one reason. Others blame complacent boards of directors.
“There is not going to be a tremendous reduction in CEO pay -- probably ever,” Marsteller said.
The Times study examined CEO compensation at the 100 largest publicly traded companies in California -- a break from past years, when the focus was limited to Southern California. The survey, conducted by Aon Consulting’s EComp Data Services, covered 102 executives, because two of the companies have co-chief executives.
In the accompanying chart, executives are ranked by their total compensation for the latest fiscal year. That figure includes salary, bonus and perquisites such as company cars, stock awards and the present value of stock options granted in 2003.
Among CEOs who lost money, some of the reductions can be tied to a decline in the company’s stock value, which made the present value of stock option grants less valuable. Stock options are rights to buy shares at a set price in the future and become valuable if the stock price rises.
In some cases, however, what appears to be a drop in compensation could prove to be just the opposite.
One example is H. Raymond Bingham, chief executive of San Jose-based software firm Cadence Design Systems Inc. Bingham, whose company went from a profit to a loss on 13% less revenue, missed out on his bonus in 2003. But the biggest reason his pay declined 36% was that the stock options his company gave him were worth about $2.4 million less than options granted a year earlier.
Did he get fewer options? No. He got 50% more -- 750,000 shares, compared with 500,000 in 2002. The present value of those options, determined by using a complicated formula that looks at the company’s stock price, performance and volatility, was vastly lower.
Should the stock rebound, however, the larger number of shares potentially will translate into a bigger payoff for Bingham.
Similar situations occurred at Qualcomm Inc., Charles Schwab Corp. and Wells Fargo & Co. At all three companies, the chief executives incurred cuts in total compensation but received more options than they did the year before.
In other cases where chief executives saw smaller paychecks, the company replaced a large number of stock options with more cash or a smaller grant of restricted stock.
Restricted stock is an outright gift of shares. Where stock options are valuable only if the stock’s price rises, restricted shares have an immediate value (as does cash, obviously).
Of the 45 executives who took a cut in total pay, two received additional restricted shares and 26 saw increases in cash pay. In many cases, the added cash was substantial.
R. Chad Dreier of Calabasas home builder Ryland Group Inc., for example, saw his total compensation decline 31%. However, his cash pay soared 46%, to $10.6 million from $7.2 million the year before. At Sempra Energy, CEO Stephen L. Baum’s total pay was reduced 34%, but cash rose 20%, to $3.2 million from $2.6 million the year before.
If share prices for their companies decline or remain flat, some of these executives may be better off with their compensation of hard cash and actual stock.
San Diego-based compensation expert Graef Crystal believes that the more modest stock grants were less a sign of get-tough policies by compensation committees than a reflection of chief executives’ disdain for stock options that failed to pay off during the bear market of 2000-02.
“There’s the burnt-child reaction -- ‘No way. I don’t want any more options. They’re all under water,’ ” Crystal said.
Although shareholder activists are making bigger waves over high pay levels, they have an uphill fight to force changes. Activists rarely have seats on the corporate boards where pay is set and employment contracts are signed. Instead, directors are usually CEOs of other companies, who have little incentive to see pay cuts for their peers.
“It’s a very awkward dance because you have all these people who are all on the same side trying to determine what’s the right amount to pay these people,” said Brian Dunn, head of Aon Consulting’s global compensation practice in Stamford, Conn. “One of the reasons we have issues with U.S. executive compensation is because we haven’t quite figured out the right balance of power.
“In American corporations, shareholders have largely turned over the control of those entities to management,” Dunn said.
Some shareholders would contend that they have little choice. Securities regulations do not allow shareholders to exercise much power over the companies whose shares they own. Even large and powerful institutional shareholders say that unless existing rules change, there’s little they can do.
“Until we are able to have a choice of directors, I don’t think anything is going to change,” said Fred Buenrostro Jr., chief executive of the California Public Employees’ Retirement System, the nation’s largest public pension fund.
The reason: Shareholder proposals on most issues of corporate governance -- whether involving pay or company operations -- are only advisory. Although a majority, or even high minority, vote sends a signal to management, the company and its directors can decide to ignore shareholders’ direction.
What about ousting a recalcitrant board? That’s tremendously difficult, said Richard Ferlauto, director of pensions and benefits policy for the American Federation of State, County and Municipal Employees.
Management selects the slate, and there are no competing candidates. Unhappy shareholders generally have two choices: Vote for management’s candidate, or withhold their votes. Even if 99 out of 100 shareholders withhold, the one shareholder who votes for the management candidate swings the election. In other words, shareholders can use their votes to protest, but they can’t necessarily force anyone to listen.
One of the complaints made most frequently by shareholder activists is that CEO pay too often bears no relation to performance.
Consider LSI’s Corrigan, who earned $5.3 million in 2003, a 560% raise. The company posted a $309-million loss in 2003, compared with a $292-million loss the year before. Revenue was down about 7%.
Despite the poor profit and revenue numbers, LSI spokesman Kevin Brett said Corrigan deserved a raise after voluntarily cutting his pay in 2001 and freezing compensation in 2002. And LSI shares rose 35% in 2003.
“Our industry is widely cyclical. In 2001, the industry had its worst-ever downturn and LSI Logic could not defy gravity,” Brett said. “Under Will’s leadership, the company came through the darkest hour of the semiconductor industry and is positioned to grow.”
Fluor Corp. officials also defended a 45% raise to Chief Executive Alan L. Boeckmann, who took home $7.3 million.
Fluor profit and revenue fell last year, but its shares rose about 10%. Lew Smith, vice president of human resources, said Boeckmann was a relatively new CEO and the board was “adjusting his pay upward as he gets more experience.”
The company also gave Boeckmann a big stock grant because his previous stock grant didn’t generate a big enough profit, Smith said.
At Beverly Hills-based Hilton Hotels Corp., CEO Stephen F. Bollenbach received a 40% raise, even though profit sank 17%. But Hilton’s stock rose 23% in 2003.
“In a tough environment for the hotel business, our shares performed well,” said Marc Grossman, senior vice president of corporate affairs at Hilton.
In addition, despite profit being down, the company exceeded its earnings-per-share target, Grossman said.
“We go to the board at the beginning of the year with a certain target based on our forecasts and what we expect our hotels to achieve,” Grossman said. The company forecast a tough year; it had a tough year; Bollenbach hit his targets; he got a raise.
That formula for setting compensation is not unique, Crystal said, but it’s also a sure-fire method to boost pay even in the face of declining performance.
“The craziness of the system is that you are going to be judged by your performance based on the budget, and you set the budget,” Crystal said. “In that sort of a system, you are only going to underperform the budget once -- and that’s only if you’re not very bright.”
