A Report Card on Executive Pay : Compensation: Pay-for-performance was supposed to ensure that salaries were in line with corporate well-being. But a Times survey has found otherwise.
Pay-for-performance. They’ve been the hottest buzzwords in compensation for nearly a decade.
It explained why executive salaries have risen far more than the rate of inflation. Why U.S. executives earn far more than their counterparts in other countries. And why the gap between what top officers were paid and what they paid their employees continued to widen.
Now the people who helped create this system are trying to explain why it doesn’t work better.
The Times created a grading system to test the pay-for-performance concept and to see how California executives measure up.
The concept behind pay-for-performance plans was to make greed work for shareholders, says Graef Crystal, a professor at UC Berkeley who helped pioneer these plans.
If the company performed better than its peers thanks to good work by its top officers, they should earn more than the average management team. Conversely, those who helped drive their companies into the ground were supposed to earn less than the average.
But it hasn’t always worked out that way, experts say.
Part of the problem is that corporate boards are loath to penalize managers for lackluster performance, according to compensation consultants. When times are good, they’re quick to give raises. But they tend to explain away drops in corporate profitability with talk about increased competitiveness, recession and other factors that are out of the executives’ control, experts say. Moreover, they maintain that they’ll lose their top executives if they start paying less than the average.
“Man’s capacity to rationalize is almost infinite,” Crystal said. “If you pay a lot of money in good times to reward them, and pay a lot of money in bad times to keep them, I don’t think there are any times left. They say, ‘Yes, you’re right. The joke’s on you.’ ”
Problem two, say compensation consultants: If no one wants to pay less than the average, and a lot of people want to pay more than the average, the average keeps rising.
Problem three: These plans are generally structured as “add-ons,” said Gary C. Hourihan, president of Strategic Compensation Associates in Los Angeles.
Many executives have long-term employment agreements that guarantee them a base salary, which rises each year regardless of the company’s fortunes. Then they get bonuses that are supposed to be based on performance. And they get stock options, which are supposed to be worth something only if the company’s stock price appreciates.
“As far as executives are concerned, there is no added risk. There is just added opportunity,” Hourihan said.
However, other experts note that there are risks to executives. At times, company managers are blamed for problems that really are not of their making, they say. And once an executive reaches the top, there is no place to go but out if things don’t work out. And certainly, experts argue that some executives have so vastly improved their companies that they are worth the price, although the total compensation may seem astronomical to outsiders. Some chief executives, such as Walt Disney Co. Chairman and Chief Executive Michael D. Eisner, are credited with taking formerly lackluster companies to surprising heights.
Some compensation experts maintain that executive pay sometimes simply reflects the law of supply and demand, since the available pool of top executives is relatively small.
In the final analysis, Crystal maintains that by using a series of complicated models, he can account for only 30% of executive salaries based on performance and other logical factors. The other 70% “is garbage,” he said.
Similar models have found that the salaries of professional athletes--also often criticized for huge compensation packages--are 70% based on how well they perform, Crystal said.
How do the executives at California’s largest companies measure up?
The Times’ pay-for-performance grading system is an effort to answer that question. It gives the top executives at California’s 100 largest companies a letter grade on an A through F scale.
There are limitations with this system. For one thing, it rates companies and their executives for only a moment in time. It cannot fully account for executives that have allowed their companies to slowly slide into oblivion, or for those unsung heroes who have made their companies into industry leaders while taking little for themselves.
How it was done: Companies and executives received four grades. The first was determined by comparing the company’s return on equity to the average return on equity of the 100 top companies. Return on equity is only one measure of performance, and it can vary from industry to industry. To account for this, The Times segregated financial institutions and graded them against one another, but all the other companies were lumped together. The average return on equity for the entire group was 6%.
The second score rated the company on the basis of whether its profitability rose or fell during the last fiscal year. The third test measured the top executive’s cash compensation--salary plus bonus--against the average cash compensation paid to chief executives at the 100 companies. Finally, the executive got a score for whether his pay rose or fell during the year.
All grades were measured on a bell curve. In each category, 10 got As, 10 got Fs, 20 got Bs and 20 got Ds. The remaining 40 received C grades. But, since few companies measured strongly or particularly poorly in all categories, few received either As or Fs as their final grade.
EXECUTIVE REPORT CARD
Top 1990 ChangeFrom Company Executive Return Prev.Year Adia Services Walter W. Macauley .09/D -.04/C Advanced Micro Devices W. J. Sanders Iii -.08/D -.15/D Allergan Gavin S. Herbert .16/C .03/B Amdahl John C. Lewis .13/C 0.00/C American Building Maintenanc R. David Anacker .14/C .01/C American Medical Holdings In James F. Lyons -.04/D None American President Companies W.b. Seaton -.12/F -.14/D Apple Computer John Sculley .33/A .02/B Applied Materials James C. Morgan .11/C -.09/D Argonaut Group Charles E. Rinsch .18/C .01/C Ast Research Safi U. Qureshey .18/B .25/A Atlantic Richfield Lodwrick M. Cook .29/A -.02/C Avery International Charles D. Miller .01/D -.15/D Bankamerica A. W. Clausen .19/B -.03/C Beckman Instruments Louis T. Rosso .11/C -.05/D Bergen Brunswig Robert E. Martini .15/C .02/B Broad Eli Broad .10/D .03/B Businessland David A. Norman -.14/F -.31/F Caesars World Henry Gluck .16/C -.15/D Carter Hawley Hale Stores In Philip M. Hawley .13/C .19/A Castle & Cooke David H. Murdock .13/C .01/C Charles Schwab Charles R. Schwab .11/C 0.00/C Chevron Kenneth T. Derr .15/C .13/A Citadel Holding Edward L. Kane .11/C .07/B Clorox C.R. Weaver .19/B .03/B Collins Food International James A. Collins .15/C -.01/C Computer Sciences William R. Hoover .14/C 0.00/C Conner Peripherals Finis F. Conner .22/B .01/C Consolidated Freightways Raymond F. O’Brien -.05/D -.08/D FHP International Robert Gumbiner .20/B 0.00/C First American Financial D. P. Kennedy .02/D -.08/D First Capital Holdings Gerry R. Ginsberg .02/D -.16/D First Executive Fred Carr -1.34/F -.48/F First Interstate Bancorp J.J. Pinola .19/B .26/A Fleetwood Enterprises John C. Crean .13/C -.05/D Fluor Leslie G. Mccraw .17/B .02/B Foundation Health Donald D. Crowley -.23/F -.28/F The Gap Donald G. Fisher .29/A .02/B Glenfed Norman M. Coulson .09/C -.01/C Golden West Financial Herbert M. Sandler .16/C 0.00/C Granite Construction David H. Watts .14/C -.02/C Great Western Financial James F. Montgomery .10/C .05/B GTE California Charles A. Crain .18/B .01/C Guy F Atkinson Of Calif Thomas J. Henderson -.20/F .13/A H F Ahmanson & Richard H. Deihl .08/D -.01/C Hewlett Packard John A. Young .12/C -.03/C Hilton Hotels Barron Hilton .12/C 0.00/C Homefed Robert F. Adelizzi -.31/F -.42/F Intel Andrew S. Grove .15/C -.02/C Intermark R. Charles Scott .05/D .06/B Jacobs Engineering Group Joseph J. Jacobs .17/B 0.00/C Landmark Land Gerald G. Barton None None Litton Industries Orion L. Hoch .17/B 0.00/C Live Entertainment Wayne H. Patterson .17/B .01/C Lockheed D. M. Tellep .15/C .15/A Longs Drug Stores R. M. Long .18/B 0.00/C LSI Logic Wilfred J. Corrigan -.19/F -.07/D Magnetek Frank Perna Jr. .25/B .06/B Marshall Industries Gordon S. Marshall .14/C -.02/C Mattel John W. Amerman .34/A -.11/D Mckesson Alan Seelenfreund .19/B .04/B Mercury General George Joseph .23/B .02/B Merisel Computer Products In Michael D. Pickett .01/D -.20/F National Medical Enterprises Richard K. Eamer .19/B .06/B National Semiconductor Charles E. Sporck -.03/D 0.00/C Northrop Kent Kresa .20/B .29/A Occidental Petroleum Armand Hammer -.44/F -.49/F Oracle Systems Lawrence J. Ellison .30/A -.05/D Pacific Enterprises James R. Ukropina -.03/D -.15/D Pacific Gas & Electric Richard A. Clarke .13/C .01/C Pacific Telesis Group Sam Ginn .14/C -.02/C Pacificare Health Systems In Terry Hartshorn .24/B -.01/C Pinkerton’s Thomas W. Wathen .32/A -.05/D Potlatch Richard B. Madden .11/C -.05/D Price Co. Robert E. Price .20/B -.02/C Raychem Robert J. Saldich -.17/F -.22/F Rockwell International Donald R. Beall .15/C -.03/C Rohr Industries R.H. Goldsmith 0.00/D -.08/D Ross Stores Norman A. Ferber .29/A .06/B Rykoff Sexton Roger W. Coleman .06/D -.06/D Safeway Stores Peter A. Magowan -.47/F -.46/F San Diego Gas & Electric Thomas A. Page .16/C .01/C SCEcorp Howard P. Allen .14/C -.01/C Seagate Technology Alan F. Shugart .17/B .17/A Security Pacific Robert H. Smith .40/A .22/A Southern California Gas Richard D. Farman .14/C -.01/C Sun Microsystems Scott G. McNealy .12/C .03/B Syntex Paul E. Freiman .44/A -.08/D Tandem Computers James G. Treybig .10/D -.02/C Teledyne George A. Roberts .18/B .07/B Times Mirror Robert F. Erburu .09/D -.07/D Transamerica James R. Harvey .09/C -.03/C 20th Century Industries Melville P. Windle .25/A -.03/C Unocal Richard J. Stegemeier .16/C .04/B Varian Associates J. Tracy O’Rourke -.01/D -.08/D Vons Companies Roger E. Stangeland .30/A .43/A Walt Disney Michael D. Eisner .24/B .01/C Wells Fargo Carl E. Reichardt .24/B 0.00/C Western Digital Roger W. Johnson .08/D -.03/C Wickes Cos. Michael A. Jamieson .22/B .33/A
Top Exec Change From Final Company Salary Prev.Year Grade Adia Services 544,846/B 45,471/C C Advanced Micro Devices 651,167/C -233,285/A C Allergan 866,793/C 464,685/D C Amdahl 1,031,148/C 165,802/C C American Building Maintenanc 351,804/A 14,799/C C+ American Medical Holdings In 1,088,436/D NA ./ C American President Companies 791,250/C 203,750/C D Apple Computer 2,198,866/F -52,309/B C+ Applied Materials 613,346/C -215,495/B C Argonaut Group 480,914/B 25,057/C C Ast Research 762,200/C 427,200/D C+ Atlantic Richfield 2,264,672/F 334,326/D C- Avery International 950,000/C -54,332/B C- Bankamerica 712,500/C -1,025,000/A B- Beckman Instruments 431,300/B 33,376/C C Bergen Brunswig 834,333/C 35,420/C C Broad 852,750/C 41,000/C C Businessland 509,501/B 118,249/C D Caesars World 1,010,739/C -315,366/A C Carter Hawley Hale Stores In 1,314,586/D 607,086/D C Castle & Cooke 1,305,000/D 5,000/C C- Charles Schwab 1,867,900/F -74,788/B C- Chevron 1,102,488/D 428,874/D C Citadel Holding 125,000/A NA ./ B Clorox 1,127,231/D -182,669/B C+ Collins Food International 458,988/B -266,766/A B- Computer Sciences 759,615/C 34,944/C C Conner Peripherals 704,138/C 0/C C Consolidated Freightways 605,661/C NA ./ D FHP International 1,164,000/D -48,000/B C First American Financial 275,020/A -15,900/B C First Capital Holdings 850,000/C -250,000/A C First Executive 612,683/C 7,949/C D First Interstate Bancorp 599,487/C -469,553/A B Fleetwood Enterprises 1,070,520/C -149,078/B C Fluor 898,906/C -884,286/A B Foundation Health 556,504/B NA ./ D The Gap 1,876,064/F 130,083/C C Glenfed 681,361/C -75,457/B C Golden West Financial 724,562/C 59,036/C C Granite Construction 550,000/B NA/ C Great Western Financial 1,350,933/D 52,685/C C GTE California 375,045/A None B Guy F Atkinson Of Calif 460,000/B 100,500/C C H F Ahmanson & 1,297,500/D 108,047/C D+ Hewlett Packard 1,498,360/D -86,339/B C Hilton Hotels 1,050,000/C 82,726/C C Homefed 522,441/B -75,364/B D+ Intel 860,300/C 137,297/C C Intermark 651,574/C -177,398/B C Jacobs Engineering Group 648,550/C 43,111/C C Landmark Land 428,102/A 22,639/C B Litton Industries 1,336,099/D 266,000/D C- Live Entertainment 1,308,782/D NA/ C Lockheed 1,011,250/C 247,307/D C Longs Drug Stores 440,314/B 18,222/C C+ LSI Logic 406,901/A -87,170/B C Magnetek 863,438/C 146,415/C C+ Marshall Industries 457,285/B -35,908/B C+ Mattel 2,560,221/F 1,381,661/D D+ Mckesson 657,363/C 151,913/C C+ Mercury General 501,737/B -9,872/B B Merisel Computer Products In 271,821/A NA/ C- National Medical Enterprises 1,879,109/F 205,207/D C- National Semiconductor 593,850/B 68,525/C C Northrop 1,125,000/D 712,084/D C Occidental Petroleum 2,407,326/F 72,994/C F+ Oracle Systems 1,599,756/F -134,619/B C Pacific Enterprises 991,000/C 94,125/C D+ Pacific Gas & Electric 1,099,517/D 404,236/D D+ Pacific Telesis Group 1,875,740/F 868,694/D D Pacificare Health Systems In 620,340/C -4,480/C C Pinkerton’s 600,601/C NA/ C Potlatch 653,450/C -223,298/ C+ Price Co. 240,386/A -8,306/C B- Raychem 450,000/B 135,000/C D Rockwell International 1,492,102/D 130,631/C C- Rohr Industries 322,494/A -86,736/B C Ross Stores 450,598/B -82,868/B B Rykoff Sexton 597,921/B 56,547/C C- Safeway Stores 1,405,652/D 192,652/C D- San Diego Gas & Electric 977,921/C 331,006/D C- SCEcorp 1,025,367/C 60,067/C C Seagate Technology 1,406,273/D 643,349/D C Security Pacific 789,600/C -238,300/A B+ Southern California Gas 527,200/B NA/ C Sun Microsystems 1,406,600/D 625,223/D C- Syntex 814,583/C NA/ C- Tandem Computers 543,366/B 64,863/C C Teledyne 819,700/C 475/C C+ Times Mirror 881,971/C -264,503/A C Transamerica 1,410,856/D 25,206/C C- 20th Century Industries 481,000/B 254,000/D C+ Unocal 1,191,557/D 126,788/C C Varian Associates 782,192/C -98,309/B C- Vons Companies 984,440/C 338,594/D B- Walt Disney 11,233,229/F 1,643,869/D D+ Wells Fargo 1,468,333/D -54,167/B C Western Digital 586,508/B 118,927/C C Wickes Cos. 500,700/B NA/ B
FRED CARR Company: First Executive Corp. Performance: F Salary: C Final Grade: D Comments: His company is bankrupt and regulators have seized its big insurance subsidiaries JAMES A. COLLINS Company: Collins Foods Int’l. Performance: C Salary: B+ Final Grade: B- Comments: The Sizzler chain’s founder took a big pay cut. ROBERT E. PRICE Company: Price Co. Performance: C+ Salary: B Final Grade: B- Comments: His salary, like the Price Club’s products, is a relative bargain. BARRON HILTON Company: Hilton Hotels Performance: C Salary: C Final Grade: C Comments: Performance was average; so was the hotel baron’s pay raise.
