Investors Seeking Voice on Execs’ Pay May Get It
For many shareholders of Pacific Enterprises, there will never be any justice.
In 1990, the company’s disastrous diversification program began to come unraveled, and the Los Angeles firm posted a net loss of $43 million versus a profit of $211 million in 1989.
In that same year, Pacific’s former chief executive, James R. Ukropina, was paid a $575,000 salary. And for contributing to what the company defines as “attainment of annual and long-term objectives,” Ukropina also was paid a $215,000 bonus--despite the firm’s huge loss.
Tuesday, Pacific finally brought down the ax on its misguided thrusts into retailing and oil exploration, saying it will refocus on its main business, Southern California Gas Co.
But in the process, the financially weakened company suspended the cash dividends that many of its elderly shareholders depended upon. The stock, which traded as high as $61.25 a share in 1987, now sells for $18.75, a 69% plunge from its peak.
Pacific’s decision to pay Ukropina a substantial bonus in 1990, even as the company foundered badly, illustrates why the executive pay issue has ballooned into the most significant challenge to American corporate power since the mid-’80s takeover rage.
Angered by the dramatic escalation of corporate salaries, bonuses and other perks over the past decade, members of Congress, the Securities and Exchange Commission and shareholder groups are mounting an all-out attack on companies whose executive compensation appears absurd in relation to the performance of the executives themselves.
The SEC, which has long forbidden shareholders from putting pay-related issues up for vote at companies’ annual meetings, now seems likely to allow some form of non-binding shareholder oversight of executive compensation--just in time for the spring meeting rush.
SEC Commissioner Mary Schapiro notes that in the past, the agency has considered pay to be within the boundaries of a company’s “ordinary business”--and thus beyond the purview of shareholders. The idea has been that shareholders shouldn’t be permitted to obstruct management in running the business day to day.
But the social outcry over compensation has reached such extraordinary levels, Schapiro says, that “you have to think that this is no longer ordinary business. The average shareholder ought to have some say.”
In Congress, Sen. Carl Levin (D-Mich.) has introduced the Corporate Pay Responsibility Act, which would give shareholders the right to amend corporate policies that determine chief executives’ pay. In the House, Rep. Martin Sabo (D-Minn.) offers the Income Disparities Act, which would go much further than Levin’s proposal. It would prohibit a firm from expensing for tax purposes any executive salary in excess of 25 times the pay of the lowest-paid worker in the same company.
While it isn’t clear how far Congress might be willing to go on this emotional issue, executive-pay consultants say they’re trying to persuade their corporate clients that the need for change is extremely serious--especially given the backdrop of the worst economic recession since the 1930s and spiraling layoffs that have devastated rank-and-file workers across America.
“We’re concentrating on the need to show that there is a link between performance and pay,” says David Leach, a principal at the management consulting firm of Towers Perrin in Los Angeles. “I think it’s going to have to change; if the companies don’t do it, it may be legislated.”
The challenge to corporate America has been fueled partly by the growing publicity over pay disparities between American CEOs and their foreign counterparts. As the accompanying charts show, American CEOs are paid vastly more than CEOs in other countries, both in absolute dollars and in compensation relative to the wages of the average worker:
* Towers Perrin estimates that the typical American CEO of a company with $250 million in annual sales earned $633,000 in 1990. That was more than double the pay of British or Japanese CEOs at similar-sized companies.
* Likewise, the typical American CEO is paid 25 times the compensation of his average worker, Towers Perrin says. In Japan, that multiple is 11; in Germany, 10.
Admittedly, various consulting firms have come up with substantially different numbers in measuring American executives’ pay, especially against foreign counterparts. These are estimates, not holy scripture. Even so, the basic conclusion is almost always the same: Something is out of whack in American corporate compensation schedules--especially when shareholders consider what they get for their money.
The real issue, says Leach, “is not how much, but how “ pay is determined.
Take the case of Standard Brands Paint Co., a Torrance-based paint retailer whose profits have been falling for six years. The company, with $300 million in annual sales, now teeters on the verge of Chapter 11 bankruptcy. Its stock, $31 in 1987, now trades for $1.88.
Stuart Buchalter, the CEO who has presided over Standard’s long decline, earned $429,874 in fiscal 1990. In addition, he was paid $23,750 under a “target bonus plan”--even as the company’s earnings plunged further.
Why would Standard’s board of directors pay a bonus to Buchalter in a disastrous year? A company spokesman says the bonus was based on Buchalter’s ability to reach certain cash-flow targets “to keep the company going.”
In other words, though Standard was collapsing, it hadn’t yet collapsed completely-- so the directors decided Buchalter deserved a bonus.
Likewise, in the case of Pacific Enterprises’ ex-CEO, Ukropina, a Pacific spokesman said Ukropina’s bonus in a terrible year for Pacific was based on the directors’ judgment of the company’s financial performance, and Ukropina’s individual “contribution.” Despite what shareholders saw on their bottom line, the directors--who are, of course, hand-picked by management--saw something different. So Ukropina got his bonus.
In the past, such puzzlements went over most shareholders’ heads. Not anymore. In fact, the biggest reason to believe that the system is going to change is the new attitude of private money managers, many of whom have in the past ignored the pay issue, leaving it to their more vocal peers at public pension funds.
Roger Engemann, whose Pasadena money management firm invests $2.8 billion for clients, says he is a firm believer that “a good executive deserves a lot of bucks.” But he also admits that “a lot of (CEOs) are outrageously overpaid.”
While Engemann and most of his peers in the money management field oppose allowing shareholders to specifically set executive pay, more now want the right to make their voices heard on the issue through non-binding shareholder votes.
“I think I would like that privilege, and I’d like other people to have that right,” Engemann says. “It might just give (CEOs) a real message.”
EXECUTIVE PAY: HOW MUCH IS TOO MUCH?
The executive pay issue seems likely to reach a fevered pitch this spring, as more shareholders scrutinize American executives’ salaries versus the performance of their companies.
U.S. Leads in CEO Pay
Estimated 1990 typical compensation, including cash, benefits and incentives, for chief executive officers of companies with $250 million in annual sales.
Country: CEO Pay (in thousands) United States: $633 Canada: $389 Germany: $377 Britain: $308 Japan: $308 Sweden: $233 Singapore: $221 Source: Towers Perrin
CEO Pay vs. Worker Pay
Estimated typical CEO pay as a multiple of typical manufacturing workers’ pay. So a typical U. S. CEO makes 25 times his average worker’s pay, while German CEOs make only 10 times as much as their workers.
Country: CEO Pay Multiple United States: 25 Singapore: 24 France: 16 Britain: 16 Canada: 12 Japan: 11 Germany: 10 Source: Towers Perrin
Stock Option Benefits
Stock option grants, which allow executives to buy hundreds or thousands of their companies’ shares at below-market prices in the future, have become a major source of compensation.
Pct. of CEOs Median Amount Companies surveyed getting options of Option Grants Profits to CEO 100 top U.S industrial firms 96% $1.8 million $636,000 100 top U.S. service firms 86% $1.7 million $433,000 Source: U.S. Senate Subcommittee on Oversight of Govt. Management, using KPMG Peat Marwick data from 1991 compensation surveys
