Cashing in coming and going

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Last year, Timothy Callahan got it coming and going.

In April, he resigned as chief executive of Chicago-based Equity Office Properties Trust, receiving "separation pay" of $1.65 million, roughly equal to a year's salary and bonus, plus accelerated vesting of options and restricted shares.

Then he was hired in August as CEO at another Chicago-based real estate investment trust, Trizec Properties Inc. Under his employment agreement, he received a fully vested grant of 1 million stock options, valued at nearly $4.9 million.

As investors and prominent officials continue to howl about outsized CEO compensation--particularly as stocks continue to sag--companies have begun to adjust those packages, concoct new ways to link pay to performance and, in some cases, put a lid on raises.

But one area that shows few signs of restraint is in "golden parachutes" and "golden handshakes"--payments given to executives who leave before their time--and "golden hellos," used to help lure new top officials.

Callahan's are far from the largest such packages. A handful of area companies last year paid a total of more than $35 million in special welcoming or departing awards.

Nationally, the average "golden hello" is worth about $15 million, not counting salary, performance bonuses or stock options, according to a study by Paul Hodgson of The Corporate Library corporate governance research center.

"There is still this idea that there aren't that many CEOs out there, so if you want the one you want, you have to pay through the nose for him or her," Hodgson said.

A typical "golden hello" includes payment for options and other future compensation surrendered when leaving the old job, even though they were not guaranteed. Plus, Hodgson notes, new executives usually receive equity in their new employer.

"Where they're losing out and need to be made whole, I'm not exactly sure," he said.

Richard Harris, a senior executive compensation consultant in the Chicago office of Mercer Human Resource Consulting, said, "The golden hellos have a lot to do with the situation with the company--how desperate the situation is and what they think of the person they're bringing in."

At Trizec, Callahan's annual cash pay is significantly lower than that of predecessor Christopher Mackenzie, who last August was granted a lump-sum severance of $4.9 million. To help lure Callahan, the company gave him the options package roughly equal to Mackenzie's golden handshake.

"Tim was recruited last summer when our board knew it needed to attract a very competent CEO with a proven track record," said Trizec spokesman Rick Matthews. The board, he said, deemed the package "appropriate," given the situation.

Golden packages stable

There are signs companies are somewhat tempering the annual pay packages for CEOs, but golden hellos and handshakes seem largely immune.

"We're certainly not seeing any kind of depression in the packages," said Jack Dolmat-Connell, a senior vice president at Clark/Bardes Consulting and author of a study of 2003 executive compensation.

Awards given to new or departing CEOs among local companies last year were dwarfed by some of the headline-grabbing packages of recent years, including the more than $42 million given to Jill Barad to leave Mattel Inc. in 2000.

Including UAL Corp., which fell off the list of the 100 largest local companies by market capitalization after filing for bankruptcy, executives at just six firms that hired CEOs last year received special payments valued at more than $37 million, above salary and other routine compensation.

And that figure doesn't include the $21 million William Aldinger was promised in retention stock grants after Household International Inc. was taken over this year by HSBC Holdings PLC, the more than $46 million package former Motorola Inc. President Edward Breen received last year to take over troubled Tyco International Ltd., or the restricted stock and options package valued at more than $40 million awarded to new CDW Computer Centers Inc. CEO John Edwardson in 2001.

U.S. Cellular Corp. CEO John Rooney, who came from Ameritech Corp. in 2000 and received a tiny fraction of the package Breen was awarded, sees the situations at Tyco, Qwest Communications and other troubled companies with new CEOs as vastly different.

"They walked into some nasty situations," Rooney said. "They're doing a lot of heavy lifting just to save that company for the shareholders."

Hodgson, however, notes that those companies also present opportunities.

"Going to work for an organization that is at its lowest ebb and then granting stock options at the market price is probably the best place to go if you want to make a lot of money," Hodgson said.

On a larger scale, others said, giant welcoming packages represent poor succession planning.

"When you have to go outside to do your hiring, it leads to a bidding up of the price of scarce resources, and that's what led to some of the excesses in CEO compensation," Allstate Corp. CEO Edward Liddy said at a recent Executives' Club of Chicago compensation forum.

Not all of the recently minted CEOs, however, took home such sizable packages--and some aren't worth nearly as much now as they were when granted.

Rooney received options valued at $2.4 million when he came on board in 2000, followed by grants valued at a combined $1.6 million in the next two years. Those options, however, are now underwater, with the exercise price on the largest grant, $69.19, nearly triple the stock's current price.

"I feel pretty sanguine about that, because my shareholders also have investment returns much less than they anticipated," Rooney said. "So I'm sort of riding it out with them."

Some companies have drawn criticism for changing options' exercise price or canceling options and issuing new ones to increase the likelihood they'll pay off. But Rooney said that won't happen for him.

"We would not reprice our options," he said. "Why should I be more immune than anyone else? ... The shareholder doesn't have the option to reprice."

Compensation climbs

Those welcoming and departure packages aside, compensation continued to ratchet up in 2002, although more slowly than in the past. Many experts argue that board compensation committees have become more engaged, challenging aspects of pay packages. But that hasn't yet translated into lower pay overall.

Dolmat-Connell compares it to the game Whack-a-Mole, in which children bop toy rodents on the head as they pop up.

Too many options? Whack them, but watch restricted stock peek its head up.

"If you close off one opening, they're going to try to exploit others," he said. "There's a lot of pressure there."

Indeed, the Tribune's annual analysis of CEO pay, conducted with Aon Consulting's eComp Database, found that among the 100 largest companies in Illinois and northwest Indiana, fewer megagrants of options meant that the average grant fell 26 percent, to just under $3 million, But the average cash package jumped 21 percent, to $1.72 million.

Overall, the median total CEO compensation rose just 3 percent last year, to $3.2 million.

In the past two years, even with stocks sinking, raises of major local-company CEOs averaged just under 10 percent.

Nationally, according to a study of 350 large U.S. firms by Mercer Human Resource Consulting, median total compensation rose 2.2 percent in 2002, with long-term incentives flat, but a 10 percent increase in cash.

Overall, 13 local CEOs received cash and equity packages last year valued at $10 million or more, and 1 in 4 topped the $6.1 million median package in the national Mercer study.

Locally, the five biggest packages each topped $17 million and averaged $22.2 million; the top 10 all surpassed $11.5 million and averaged $17.8 million.

One in 5 CEOs received $2.5 million or more in cash, and the same proportion got options valued at $5 million or more. Another 20 percent, however, were granted no options at all, and 1 in 6 didn't receive a bonus.

The largest package went to the CEO of the largest local company by market capitalization, North Chicago-based Abbott Laboratories.

Miles White received nearly $3 million in cash, a restricted stock award worth $11.5 million and options valued at $22.8 million, for total compensation of more than $37.1 million, up 40 percent from 2001.

The restricted stock accounted for a major portion of that increase. Abbott spokeswoman Melissa Brotz said the company awards such packages once every five years, and that grant was made in February 2002--on the heels of improved overall results and a 15 percent increase in Abbott's stock price in 2001.

"It happened to come at a time when the company had happened to perform extraordinarily well," she said, adding she doesn't expect White to have another such grant for five years.

Amid the current climate of corporate scandal and investor mistrust, even CEOs themselves are increasingly speaking out about excessive pay.

For several years Tellabs co-founder Michael Birck has criticized the eye-popping pay lavished on many of his corporate brethren.

"I do think there has been greater attention paid to the compensation of the few," he said. "And that is good."

Copyright © 2014, Los Angeles Times
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