Sky Is No Limit for Executive Pay : Compensation: The Times’ annual California survey finds employment pacts that seemed far-fetched just a few years ago are fast becoming the rule.
For a picture-perfect illustration of how incomprehensible some executive pay packages have become, take a look at The Times’ list of California’s highest paid executives.
The best-paid Californian is not only dead, he reached this pinnacle of pay because he died. Occidental Petroleum Corp. was forced to write a $25-million check to Armand Hammer’s estate to pay off the remaining years on the 92-year-old industrialist’s seven-year employment agreement when he died last December. Another $1.2 million was paid out in stock.
An anomaly? To be sure.
But what troubles many experts about executive pay is that there are so many anomalies that they have become the rule. It is the rare salary package that makes sense these days.
“It is crazy,” said Graef Crystal, a professor at UC Berkeley who is a compensation expert. “There are so many aberrations that it is terrible on the whole. There are a few pockets of rationality, but that’s it.”
Indeed, 1990 was a year to make even the most stalwart defenders of executive salaries throw up their hands. For years, compensation consultants have been rationalizing incredible hikes in executive pay with talk about pay for performance.
Sure, they acknowledged that pay was climbing at a heady clip. But, in many cases, so were stock prices and corporate profits. When profits ebb, salaries will fall as well, they assured critics.
Well, corporate profits are down. In 1990, they fell 7% nationwide. What happened to pay? CEO salaries went up 7%.
However, in California, the median cash compensation--which excludes gains from stock options and perks--dropped a touch, thanks to a handful of corporate boards that pared their top executives’ pay packages, The Times’ annual survey of about 500 publicly held companies found.
Nevertheless, there are far more million-dollar compensation packages than ever before, according to the survey. In 1990, 191 California executives earned more than $1 million in total pay, up from 163 a year ago.
Worse still, compensation critics complain that the gap between the average chief executive’s salary and that of rank-and-file workers has soared. The average CEO now makes 85 times more than his workers. The disparity is more acute at bigger companies.
American chief executives also earn far more than their counterparts in other countries. Average pay for chief executives of large U.S. firms is $633,000, versus $308,000 in the United Kingdom and Japan and $377,000 in Germany.
It’s gotten so bad that a congressional subcommittee is studying the issue. Sen. Carl Levin, D-Mich., introduced legislation last week that would allow shareholders to object to runaway executive pay.
The Times list of the most highly compensated executives only serves to underscore the point.
The 10 top-paid public company executives in the state earned $108 million between them. That’s enough money to buy every shirt, shoe, cosmetic, cookie, coat, hat and tie sold in a year in the Broadway Plaza downtown, with enough left over to take every Los Angeles worker out to lunch--at a nice place.
The 100 top-paid executives earned $305.3 million--an average of more than $3 million each.
Why do they earn so much? There is no pat answer. Nearly every executive has a justification.
A spokesman for Charles Schwab, who ranks second on the list, maintains that Schwab wouldn’t have made the grade if The Times knew how to count properly.
Less than $2 million of Schwab’s take was from salary and bonuses. But he gained $13 million in a stock deal that went like this: Schwab sold his company to BankAmerica Corp. in 1983 for $55 million. B of A had some problems, and its stock price tanked. Schwab wanted out, so he and a lot of other public shareholders bought his old company back in 1987.
In March of the same year, the company instituted what it called the “former shareholders plan.”
“Certain” shareholders who held Schwab stock before the BankAmerica deal got rights to purchase Schwab common for a fraction of today’s market value. The company allocated these stock “warrants” on the basis of the losses, if any, suffered by each former shareholder. Schwab, his wife, father-in-law and two other company insiders got 51% of the warrants, which were registered for sale in 1990.
Schwab’s 1990 profit on the warrant deal is included in The Times list as part of his compensation package. Not included is the $500,000 or so that the deal netted his wife.
Hugo Quackenbush, a Schwab Co. spokesman, calls these profits “investment gains” and maintains that they shouldn’t be counted.
Then there’s Genentech Inc.
Last September, a subsidiary of Roche Holdings Inc. was merged into the San Francisco-based biotechnology company. As part of the deal, several of Genentech’s top officers got cash payments in exchange for canceling their stock options.
The $8.3-million payment to President R. Kirk Raab pushed him to sixth place on The Times list. Robert Swanson, 10th on the list, reached his lofty compensation level thanks to a $4.55-million payment for not exercising his stock options.
Bram Goldsmith, chief executive of City National Corp, John Sculley of Apple Computer, Lloyd E. Cotsen of Neutrogena and Millard S. Drexler of Gap also made the top 10 by exercising stock options granted years ago. Because each of these companies has seen relatively strong gains in market value, the executives were able to post between $4.5 million and $8 million in paper profits.
Only Michael D. Eisner and Frank G. Wells, the chief executive and president, respectively, at Walt Disney Co., ranked among the top 10 because of salary alone. Their salaries are based largely on corporate performance, which has improved dramatically since they’ve taken the helm at Disney.
Compensation experts maintain that they are the “rule”--the graphic illustration of how executive compensation and pay-for-performance plans are supposed to work.
