BY PRADNYA JOSHI
June 27, 2005
That package alone would have been enough money to make Karmazin one of the 10 highest-paid executives at publicly traded companies in New York City. But after being out of work for five months, he added his name to the payroll of upstart Sirius Satellite Radio Inc. as chief executive. That gave him another cool $144 million last year - making him far and away the top-paid executive in New York City.
While Karmazin's riches give him a huge boost on the executive-pay ladder, many other executives in just a mere 12 months also have amassed tens of millions in wealth.
Karmazin even outdid his former boss at Viacom Inc., chairman and chief executive Sumner Redstone, who got nearly $59 million in pay last year. Redstone's top deputies - Tom Freston and Leslie Moonves - took home pay totaling about $55 million each.
And, as every year, Wall Street's top honchos did well, too - including American International Group's controversial former chairman and chief executive, Maurice "Hank" Greenberg, who was forced to resign in March in the wake of state and federal investigations into financial practices at the insurance firm. He took home $29 million last year.
Newsday's executive compensation special report doesn't examine just the pay figures of the No. 1 person at the city's publicly traded companies. On Newsday's behalf, the firm Aon Consulting also took a wider look at others in the executive suites. This showed that sometimes the chief financial officer at one company made a lot more than the No. 1 person at another.
The list shows, for example, that publishing firm McGraw-Hill Cos.' chief executive Harold McGraw III made half as much last year as the No. 2 people at brokerage house Bear Stearns Cos.
In a class of his own
But Karmazin dominates the Top 100 executives list with his month and a half of work at Sirius.
The satellite-radio company, whose staff of 514 employees is tiny by New York standards, faces a fierce fight for customers with agressive competitor XM Satellite Radio. On top of that, the company had accumulated a deficit of $1.9 billion as of last year.
Despite its financial condition, Sirius agreed to reimburse Karmazin if the tax man imposes any so-called excise taxes on any income or benefits he receives from the company.
Karmazin is promised a yearly $1.25 million salary, plus an annual bonus from Sirius. But last year most of Karmazin's pay package came from the 30 million shares in stock options the company awarded him when he joined on Nov. 18. He also was granted 3 million shares of Sirius stock outright.
Stock options allow an employee the right to buy a company stock at a set price, so the more a company's stock rises above the pre-set price, the richer the holder gets when the options are cashed in.
Value of stock options
With stock options, executives don't make money if their company's stock falls in price after the options are given. But on the flip side, if the stock price increases even just by a few dollars, executives can win - and sometimes win big.
Karmazin won't be able to fully cash in on all 30 million options right away. But if Sirius' stock gains a mere $5 per share in five years, Karmazin could realize a profit of $150 million on them. He will make another $15 million on the restricted shares. In addition, if Karmazin is terminated or Sirius gets acquired before five years are up, he will be able to capture his windfall sooner.
Karmazin doesn't "have to deliver much in terms of stock price to make money," said Paul Hodgson, senior research associate at The Corporate Library, an independent investment research firm.
Karmazin, through his media relations department, declined to comment for this story.
In defense of Karmazin, the man who started out as an ad salesman for WCBS radio may just be the dynamic personality to make the nascent satellite-radio company succeed. His close alliance with Sirius' star shock-jock, Howard Stern, helps boost the company's visibility, and certainly investors are paying more attention to the firm with Karmazin at the helm.
"Is that a good deal? I don't know; ask me in five years," said Dan Dalton, director for the Institute for Corporate Governance at the business school at Indiana University. "The Sirius contract may be worth its weight in gold."
Concern about pay
Yet, the continuing escalation of executive pay packages is giving corporate watchdogs renewed concern that companies are quick to forget the lessons of the go-go 1990s. In this new era, boards of directors promised to tie executive pay to company success, but it seems pay is rising faster than profitability, stock prices or other measures.
"Performance-related elements of pay in this country aren't sufficiently working," Hodgson said.
Other firms represented at the top of Newsday's executive pay list have drawn the scrutiny of regulators or good-governance advocates. The Corporate Library examines eight criteria, including executive pay, to judge whether corporate boards are effectively policing their companies, but when it comes to Viacom, it gives the company a failing "F" grade.
"Viacom has been overpaying its executives for lackluster performance for at least the last three or four years," Hodgson said. A Viacom spokeswoman declined comment.
Meanwhile, Greenberg at AIG faces a lawsuit filed by the New York Attorney General Eliot Spitzer in his widening investigation into insurance industry practices. Spitzer accuses him and others at AIG of negotiating and directing fraudulent transactions to boost the company's stock price.
While Greenberg is just one example of a former chief executive facing regulatory scrutiny, Hodgson laments that executives rarely have had to give up their wealth even after overseeing a company accused of breaking the rules. "It's not so much pay for failure but potentially pay for fraud," he said.
But others say that Wall Street firms not embroiled in the new scandals saw healthy profits last year and their executives saw their pay bump up accordingly.
"Most of these firms are well-managed; most of these firms have gotten their costs under a lot better control," said Alan Johnson, president of Johnson Associates, Inc., a consulting firm on Wall Street compensation. However, he said, "there are clearly storm clouds out there" when it comes to the profits and financial health of brokerage houses in 2005. If that trend continues, Johnson expects that the executives next year should take hits to their bonuses and stock rewards if their pay is truly tied to performance.
A rich global picture
Many executive pay surveys just take a look at the largest companies in America - which tend to face the most scrutiny and therefore respond more quickly to public outcry over excessive packages. But Aon Consulting has analyzed the pay for nearly 4,000 chief executive officers around the world in all different revenue categories. In that soon-to-be-released study, Aon looked at the median pay of the executives - half made more and half made less - and found it went up across the board, regardless of how large or small the company:
Total compensation rose 12 percent to a median of $364,985 for chief executives of firms with under $100 million in revenue.
The top dogs at midsized companies, with $100 million to under $1 billion in revenue, saw their packages grow 26 percent to $1.28 million.
CEOs at large companies, with $1 billion up to $5 billion in sales, saw a 29 percent rise in executive pay to $3 million.
The head of "jumbo companies," with revenues greater than $5 billion, saw total pay jump 16 percent to $7.6 million.
"Are the rank-and-file workers seeing a similar increase in their pay packages? I think the answer clearly is no," said Peter Lupo, national compensation-practice leader for Aon Consulting.
Pay for the average worker in the United States went up just 2.4 percent in 2004, according to federal statistics. That didn't keep up with the national inflation rate of 2.7 percent.
Although low-ranking employees don't usually share in the cash bonuses, stock awards or other perks that executives receive, even mid-level managers aren't seeing big bumps in their packages, Lupo noted.
Reformers blamed corporate directors for inordinately relying on stock options, which they say amounted to excessive riches for executive pay in the 1990s. That's because company stock had to see healthy increases if executives had any hope of cashing in on their wealth. And in many cases, boards of directors thought, the more the options, the merrier the executive would be in driving up the share price.
Companies also were supposed to be controlling executive pay and temptations to manipulate performance by increasingly rewarding executives with only restricted stock and decreasing stock options.
With restricted stock, executives don't have to pay anything to receive the shares outright; however, boards can set conditions on them - such as yanking the stock back if the executive quits or is fired before a set number of years. And because restricted stock still is worth something whether the stock price rises or falls, boards don't have to give out as many shares.
"Restricted stock can be a great recruitment tool and can be a great retention tool," said Jan Koors, managing director at Pearl Meyer & Partners, a Manhattan-based consulting firm.
But in practice, it seems that, while executives are getting fewer restricted stock shares than stock options, the dollar value of the restricted stock is much higher than the estimated value of options, Lupo said.
Is there any hope for setting controls? If, as the old saying goes, sunshine is the best disinfectant, then new federal rules requiring better disclosure may be in the works.
"Under the new guidelines, companies are going to have to be much more careful," said Dalton of Indiana University.
Very few people complained or even noticed that Walt Disney's chief executive, Michael Eisner, was regularly the highest-paid chief executive in corporate America; for instance, in 1992 Eisner's pay package approached $200 million. But now that the stock price is dragging, Eisner faces hostile shareholder questions and lawsuits at every turn.
"No one has ever been very concerned about these large numbers when pay was truly tied to performance," Dalton said. "When people get really, really upset is when companies don't make any money."
10 Highest-paid executives at New York City publicly traded companies:
MEL KARMAZIN, formerly of Viacom, now of Sirius radio; 2004 total: $144,442,764. LEW FRANKFORT, chairman and chief executive of Coach Inc., 2004 total: $79,157,873. SUMNER REDSTONE, Viacom chairman and CEO, 2004 total: $58,668,522. TOM FRESTON, Viacom co-chief operating officer, 2004 total: $55,184,951. LESLIE MOONVES, Viacom co-chief operating officer, 2004 total: $54,896,961. RICHARD FULD JR., Lehman Brothers chairman and CEO, 2004 total: $35,241,803 E. STANLEY O'NEAL, Merrill Lynch chairman and CEO, 2004 total: $32,134,673 HENRY PAULSON JR.- Goldman Sachs chairman and CEO, 2004 total: $29,789,359. LLOYD BLANKFEIN, Goldman Sachs chief operating officer, 2004 toatal: $29,529,342 MAURICE GREENBERG, then-chairman and CEO, AIG 2004 total: $29.482,630.
New York City executives who got the biggest raises Rank, Company name Executive name 2004 title One-year change in salary, bonus and restricted stock
1 iStar Financial Jay Sugarman Chairman and CEO 1,500%
2 Revlon Jack Stahl President and CEO 664.3
3 SL Green Realty Marc Holliday President and CEO 612.7
4 Cohen & Steers Joseph Harvey President 548
5 Avon Products Andrea Jung Chairman and CEO 525.6
6 Monster Worldwide William Pastore Chief operating officer 369.5
7 BlackRock Robert Kapito Vice chairman 165.1
8 American Express James Cracchiolo Group president, global financial services 160.6
9 Triarc Nelson Peltz Chairman and CEO 145.1
10 Altria Group Roger Deromedi CEO, Kraft Foods Inc. 144.2
SOURCE: AON CONSULTING'S ECOMP DATA SERVICES
Biggest gains in value of stock options Rank, Company name Executive name 2004 title Potential option gains
1 Cendant Henry Silverman Chairman and CEO $319,804,526
2 Sirius Satellite Radio Mel Karmazin CEO $87,000,000
3 Lehman Brothers Holdings Richard Fuld Jr. Chairman and CEO $81,890,250
4 Viacom Sumner Redstone Chairman and CEO $80,775,690
5 American Express Kenneth Chenault Chairman and CEO $73,695,723
6 Sirius Satellite Radio Joseph Clayton Former CEO and current chairman $68,840,000
7 J.P. Morgan Chase James Dimon President and chief operating officer $59,910,137
8 Coach Lew Frankfort Chairman and CEO $54,748,258
9 Merrill Lynch E. Stanley O'Neal Chairman and CEO $41,999,033
10 Estee Lauder Fred Langhammer President and CEO $41,060,408
SOURCE: AON CONSULTING'S ECOMP DATA SERVICES