Pay for Performance: How Executives Rate : Compensation: The Times grades top officers in the county’s 25 largest companies in four areas.
Grading businesses by comparing executives’ compensation with the return earned for stockholders each year is a thankless task, compensation specialists agree.
No matter what the result, just about every firm on the list is bound to be displeased.
But pay for performance is the name of the game these days: It is the magic formula most publicly traded companies have used to justify the sometimes huge raises their top executives seem to pull down year after year.
The problem in determining how equitable the system is, says compensation specialist Andy West of the Wyatt Co. consulting firm, “is that the rules change every year, and we really have very poor measurement procedures. About all anyone looks at to justify pay is ‘Did we sell more, and did we make more money?’ ”
That can work when the answers are “yes.” But many executives today get pay raises even when earnings go down.
Pay is the measurement by which most executives determine how much their companies love them, West said. And because good executive talent is hard to get, he said, most companies live in fear of losing top managers and are loath to do anything to disappoint them.
Difficult as it might be, The Times Orange County Edition decided to find out just how executives at Orange County’s biggest public companies stack up in the pay-for-performance game.
To do so, The Times created a grading system that gives the top executives in the 25 largest companies in the county letter grades on an A-through-F scale.
The system has limits: It rates companies and their executives for only a moment in time; it cannot fully account for executives who have allowed their companies to slide into oblivion, and it cannot account for those who have taken only a little for themselves as they turned their companies into industry leaders. It also does not consider changes in employment agreements that can cause sizable leaps in compensation for no discernible reason.
Thus, in grading the 25 public companies with the largest annual revenue for 1990, the best and worst grades were bestowed on companies that, in review, do not seem to deserve their rankings.
ICN Pharmaceuticals earned a B+ even though its chairman posted a $22-million loss in 1990, and JM Peters Co. got a D on the strength of a $1-million increase in chairman James M. Peters’ pay in a year the company earned $25 million. Peters’ extra pay came from a bonus--the first he had taken in several years.
To arrive at the final grades, companies and executives were each given four individual grades.
The first was determined by comparing the company’s return on equity to the average return on equity for all 25 top companies. The second rated the company on whether return on equity--one way of measuring profitability--rose or fell during its last fiscal year. The third compared the executive’s cash compensation--salary plus bonus--to the average cash compensation for the chief executives at all 25 firms. Fourth, the executive was scored on whether his pay rose or fell during the year.
All grades were measured on a bell curve. The top 10% got As, the bottom 10% got Fs; 20% got Bs and 20% got Ds, and the remaining 40% received Cs. Because few companies measured strongly or weakly in all categories, none received an A or F as its final grade.
So, keeping in mind that the companies are only being graded on their performance relative to one another and not to the entire universe of businesses in Orange County, here are the pay-for-performance standings of the county’s 25 biggest public companies:
Executive Report Card
1990 Change From Company Top Executive Return Previous Year Allergan Gavin S. Herbert .16 /C Archive Corp. D. Howard Lewis .12 /C AST Research Safi U. Qureshey .18 /B Beckman Instruments Louis T. Rosso .11 /C Bergen Brunswig Robert E. Martini .15 /C Carl Karcher Enterprises Carl N. Karcher .08 /C Clothestime Michael P. DeAngelo .01 /D CMS Enhancements Jim Farroquee .02 /D Community Psychiatric Center James W. Conte .18 /B Downey Savings & Loan Assn. Gerald H. McQuarrie .16 /B FHP International Robert Gumbiner .20 /B Fidelity National Financial William P. Foley II .18 /A First American Financial D. P. Kennedy .02 /D Fluor Leslie G. McCraw .17 /C Furon Peter Churm .09 /C ICN Pharmaceuticals Milan Panic 1.66 /A J M Peters Co. James M. Peters .18 /B MAI Basic Four * William B. Patton NA National Education Corp Jerome W. Cwiertnia -.10 /F Nichols Institute Albert L. Nichols .09 /C PacifiCare Health Systems Terry Hartshorn .24 /A Westcorp Ernest S. Rady .08 /C Western Digital Roger W. Johnson .08 /C Wynn’s International James Carroll .07 /D Standard Pacific L.P. Arthur E. Svendsen .19 /B
Top Executive Change From Final Company Annual Salary Previous Year Grade Allergan .03/B $866,793/D $464,685/D C- Archive Corp. -.06/D 299,915/B 322/C C AST Research .25/B 762,200/C 427,200/D C Beckman -.05/C 431,300/C 33,376/C C Instruments Bergen Brunswig .02/C 834,333/D 35,420/C C- Carl Karcher Enterprises -.26/F 398,169/B 0/C C- Clothestime .06/B 430,152/B 0/C C CMS Enhancements -.17/D 249,774/A 95,974/C C Community -.03/C 1,200,000/F 525,000/F D Psychiatric Center Downey .10/A 419,954/B None B Savings & Loan Assn. FHP 0.00/C 1,164,000/F -48,000/B C International Fidelity 0.00/C 895,170/D 77,465/C C National Financial First -.08/D 275,020/A -15,900/B C American Financial Fluor .02/C 898,906/D -884,286/A C Furon -.07/D 581,149/C 0/C C- ICN 5.96/A 574,048/C -2/B B+ Pharmaceuticals J M Peters Co. -.16/D 1,403,240/F 986,740/F D MAI Basic Four* NA 334,446/B 0/C C+ National .09/B 436,133/C 188,479/D D+ Education Corp Nichols Institute -.03/C 456,979/C -378,346/B C PacifiCare -.01/C 620,340/C -4,480/B B- Health Systems Westcorp .01/B 354,573/B 40,093/C C+ Western Digital -.03/C 586,508/C 118,927/D C- Wynn’s -.02/C 576,980/C 128,480/D D+ International Standard -.22/F 1,003,071/D -848,514/A C Pacific L.P.
* Now MAI Basic Systems
NA Complete data not available
METHODOLOGY
Grades for Orange County’s largest public companies were compiled in the following way: The 21 non-financial companies were separated and ranked according to their fiscal year ’90 return on equity.
The four financial institutions were separated and graded in the same way. Because there were only four financial institutions, the top one received an A, the next a B, the next a C and the last got a D.
A similar system was used to separate financial institutions and non-financial companies before grading them on the changes in their returns on equity from fiscal year ’89 to fiscal year ’90.
To grade the companies on the basis of their top executives’ total compensation and the changes in that compensation from fiscal year ’89 to fiscal year ‘90, the financial institutions and the non-financial companies were not separated. In other words, the top financial institution in these categories does not automatically get an A. Instead, it gets the same grade a non-financial institution at the same level would get.
Return on assets was not used in any computation.
In certain categories, particularly the change in executive compensation, no grades were given to companies for which we had no data. Those companies have an NA in the appropriate column.
