SPECIAL REPORT: EXECUTIVE PAY : The More Things Change. . . : Despite Shareholder Complaints and Regulatory Pressure, Pay for California’s Top Executives Continues to Climb

By many measures, 1992 was a watershed year for executive compensation.

Securities regulators cracked down on disclosure. Accounting regulators spelled out plans for new ways to count pay. And angry shareholders stormed management bastions demanding better performance for their money.

Indeed, it seems that there was only one thing that remained virtually constant: Top executives of California companies earned as much as ever last year. And in some cases, they earned much, much more.

In a year highlighted by public furor over runaway executive pay, the 100 top executives at California’s 100 biggest companies--call them The California 100--earned a whopping $212.98 million. That’s enough money to pay 1,000 college graduates the median annual wage of $37,283 for roughly six years.

And the total would have been nearly twice as high if it included every dollar that Michael Eisner, chairman and chief executive of Walt Disney Co., took home last year.

Using The Times’ pay formula--which is based on figures reported in company proxy statements--Eisner earned about $7.5 million in 1992. However, Mickey’s boss also exercised $197 million in stock options last year. That massive sum was not included in The Times’ calculations because Disney’s fiscal year ended in September and Eisner cashed in the options in December--too late to be reported in the company’s proxy.

The gulf, meanwhile, between executive and hourly worker pay yawned ever wider last year. The average chief executive’s wage increase, while small by historic standards at 4%, still amounted to twice the average increase given production workers, according to a survey by Sibson & Co.

“All through the ‘60s and ‘70s, worker and executive wages tracked pretty closely,” said Mark Edwards, a principal at Sibson, a benefits consulting firm in San Francisco. “But a gap appeared in the ‘80s, and that gap has become a chasm.”

Millard Drexler, president of The Gap, tops this year’s list of the highestpaid executives at California’s biggest public companies. Directors of the trendy San Francisco-based retailing company gave Drexler a $40-million gift of stock in 1992, pushing his total pay to $41.8 million.

That, incidentally, is more than twice the takehome pay of 1991’s highest-paid California executive, National Medical Enterprises CEO Richard K. Eamer, who topped that year’s list by earning a comparatively paltry $17 million. Eamer had earned the bulk of that amount by exercising stock options.

(Eamer took a 12% pay cut, earning a salary and bonus of $1,744,019 in 1992. And then his troubles really started. The Santa Monica-based firm’s founder recently stepped down as chief executive in the wake of a scandal involving alleged fraudulent activity at NME’s psychiatric hospitals. Since March, 1991, the company’s shareholders have taken a beating too, as NME’s stock price has fallen to about $9.25 from $24 a share--about a 60% decrease.)

Another 1992 compensation standout: W.J. Sanders III, chairman and chief executive of Advanced Micro Devices in Sunnyvale, exercised $19.4 million in stock options to push his total take-home past $22 million.

Sanders total earnings--including those stock gains--do not appear in The Times’ annual listing of top California salaries, however. This year, the list excludes gains earned through the exercise of stock options.

Why? Stock options--which are rights to buy a company’s shares at a set price in the future--usually become valuable years after they are granted. But executives tend to exercise them--that is, buy the shares--all at once. The result is huge one-time gains in compensation, even though the stock grants are intended to compensate executives over a period of years.

Nonetheless, past compensation surveys--The Times’ and others--included these numbers because there was no good alternative. Companies simply didn’t have to disclose what portion of the total was earned in the current year.

That changed in 1992, when the Securities and Exchange Commission demanded that companies disclose a value for stock options granted in the current year. This value better reflects an executive’s actual earnings, although it too has some shortcomings.

Because the SEC gave companies two options for calculating the value of stock options--and because some firms continued to report under the old rules--it was hard to compare executives’ pay in 1992. One of the new formulas (the so-called 5% method) tends to exaggerate the value of options; the other (known as the Black-Scholes method) can understate the value. And the one-third or so of companies that reported pay under old SEC guidelines didn’t disclose the value of stock options granted to executives in 1992 at all.

Still, the detailed data reported in this section offers numerous bases for comparison.

For 1992, the median pay of The California 100--the package that was right in the middle of highest and lowest--added up to $1,161,228. The average pay was $2,129,843.

While The California 100 were certainly well paid, these executives were not necessarily the best-paid executives in the state. Rather, they are the top-ranking executives of California’s 100 largest publicly held companies (as ranked by annual revenue). A handful of executives at smaller firms earned more, and some private companies paid more too.

A case in point: David A. Sydorick, executive vice president of Los Angeles-based Jefferies Group Inc., earned $4.5 million in 1992 thanks to a $3.6-million bonus related to his division’s results. However, with just $235.4 million in revenue, Jefferies Group, an investment firm, was far too small to make our survey.

And even if Jefferies had been included, Sydorick wouldn’t have been listed in the California 100, because he is in charge of a Jefferies division, not the whole company. The list would have included the firm’s top executive, Frank Baxter, who earned $925,016.

Company size restraints also kept Joseph B. Costello, president and chief executive of Cadence Design Systems in San Jose, off the list. But Costello--between salary, bonus and stock--earned about $5.4 million in 1992.

How could executives earn so much in a year highlighted by such dissent and heated debate over executive pay? Easy.

Pay is fueled as much by competitive egos as it is by reasonable assessments of an individual manager’s contribution, consultants say.

“It is a pride issue, much like a professional athlete,” says Gary Hourihan, president of Strategic Compensation Associates in Los Angeles. “It is not the money and the spending power--because these guys honestly are earning more than they could ever spend; it is the fact that somebody else is making more and not necessarily doing any better.”

In other words, the public debate actually may increase pay levels for the simple reason that it focuses attention on some of the loftiest compensation packages. Managers at competing firms then take the information into their company directors when they want to increase--or merely justify--their compensation.

Nonetheless, experts maintain that some progress is being made in making pay “sensitive” to corporate performance--a connection that shareholder advocates and many others consider essential. Although the company’s size and industry also come into play when setting salaries, most companies are attempting to structure pay plans so that executives profit when shareholders profit and suffer when shareholders are hurt.

One sign: In 1992, hundreds of executives nationwide--including more than two dozen in California--took cuts in pay. In percentage terms, Safi U. Qureshey, president and chief executive of Irvine-based AST Research Inc. took the deepest pay cut among The California 100. Qureshey’s combined salary and bonus fell to $1,276,000 from $2,792,000--a drop of 54%.

“Two or three years ago, we would have been hard-pressed to come up with a company executive who had taken a pay cut,” says Edwards, the Sibson consultant. “This year, there are many companies cutting salaries, many more imposing salary freezes and some where pay increases are very slight.”

There are, of course, anomalies--companies that seem out of sync with the national trend.

Consider Occidental Petroleum Co. and its chairman and president, Ray R. Irani, who ranked fourth on The Times’ survey. Irani’s 1992 pay package totaled $6.3 million--about $2 million more than the next-best-paid oil company executive, Chairman and CEO Lodwrick M. Cook of Atlantic Richfield Co.

In terms of shareholder performance, West Los Angeles-based Occidental ranked in the lowest category, under an analysis prepared for The Times by Strategic Compensation Associates.

(SCA divided the 100 biggest firms into three groups by size, then ranked companies within each group by their performance, with “1” being best and “3” being worst. The performance ranking was based on the company’s risk-adjusted return to shareholders.

(Occidental scored a “3,” largely because the company’s return to shareholders was miserable. If you invested $100 in Occidental in December, 1987, you would have had $105 five years later. If you had invested the same $100 in Arco, you would have had $209. If you had invested the same $100 in a certificate of deposit earning 6%, you would have ended up with $135.)

How does Occidental’s board of directors explain the disparity?

Irani’s pay is the result primarily of an employment contract, according to the compensation committee report published in Oxy’s proxy. But the board increased Irani’s base salary last year because he had “substantially completed” a restructuring program designed to make the company more profitable.

It didn’t. Yet Occidental’s board blames that on the economy and commodity prices, not on Irani.

Nonetheless, Occidental’s other employees took pay cuts last year totaling $3.6 million, the proxy says. Irani’s concession: He agreed to take part of his pay in stock rather than cash. An Occidental spokesman declined to elaborate.

Then there’s Stanley R. Zax, chairman and president of Zenith National Insurance Co. in Woodland Hills.

Zax earned $2 million, including a $1-million bonus, even though his company’s profit dropped and Zenith’s total return to shareholders has been substantially worse than other companies in the same industry.

(By comparison, Louis Foster, chief executive of 20th Century Industries--which is bigger, more profitable and has had better stock performance--earned half that amount.)

How does Zenith explain the high pay?

“More than strict corporate performance, the board took into account the forward-looking leadership position established by Mr. Zax,” the company says in its proxy. Zax, who owns 4.1% of the company’s stock, declined to go beyond that statement.

The California 10

The highest-paid executive at California’s biggest companies reaped a bountiful harvest last year. Together, the Top 10 earned $92.6 million--including their salaries, bonuses, long-term pay, stock options granted* and other compensation. The Times’ sample included the two highest-ranking executives at California’s 100 biggest (judged by sales) publicly held companies. 1. Miller S. Drexler, President Gap Inc.: $41,862,955 2. Finis F. Conner, Chairman, CEO Conner Peripherals: $8,567,513 3. Michael D. Eisner, Chairman, CEO Walt Disney Co.: $7,458,981 4. Ray R. Irani, Chairman, CEO Occidental Petroleum Corp.: $6,315,105 5. William J. Almon, Vice Chairman Conner Peripherals: $6,073,347 6. Charles R. Schwab, Chairman, CEO Charles Schwab Corp.: $5,274,407 7. Lodwrick M. Cook, Chairman, CEO Atlantic Richfield Co.: $4,590,109 8. James R. Maher, President, CEO National Health Laboratories: $4,232,116 9. Frank C. Herringer, President, CEO Transamerica Corp.: $4,126,000 10. Sam L. Ginn, Chairman, CEO Pacific Telesis Group: $4,097,421

* Companies used two methods for assigning a value to stock options granted; one formula tends to overstate value, the other to understate it. Also, under prevailing SEC rules, a number of companies did not report this form of compensation in 1992. For its rankings, The Times used the data each company provided its shareholders.

Source: Standard & Poor’s Compustat Inc.

A Widening Divide

The compensation of top U.S. corporate executives has grown nearly ninefold over the last three decades, climbing at almost double the rate of the typical American factory worker’s pay. The most dramatic acceleration in CEO compensation has come in the last 10 years.

Pay Gain Indexes

CEO Index* 1992: 874

Production worker Index** 1992: 445

By Comparison. . .

President’s Salary: Lyndon Baines Johnson, 1965: $100,000

Bill Clinton: $200,000

Average NFL Player’s Salary

1965: $22,000

1992: $448,000

U.S. Hourly Minimum Wage

1965: $1.25

1992: $4.25

Price of McDonald’s Hamburger, Fries and Shake

1965: 52 cents

1992: $2.45

* Based on increases in chief executive total cash compensation (salary plus bonus).

** Based on increases in average hourly wages paid to non-supervisory manufacturing employees.

Sources: Sibson & Co., Bureau of Labor Statistics, Congressional Quarterly, World Almanac, NFL Players Assn., McDonald’s Corp.

The Stock-Options 10

The element of executive pay that generates the most fireworks is the exercising of stock options. Typically, executives promised the right to buy shares at a set price exercise that right when the price of the shares has gone up. That can result in instant millions--on paper, at least. This chart lists the 10 California executives who exercised the most valuable stock options in 1992 (among the top-ranking executives of the state’s 100 biggest publicly held companies.)

Company Executive Title 1 Advanced Micro Devices W.J. Sanders III COB, CEO 2 Quantum Corp. Stephen M. Berkley COB, CEO 3 Mattel Inc. John W. Amerman COB, CEO 4 Applied Materials James C. Morgan COB, CEO 5 Applied Materials James W. Bagley P, COO 6 Golden West Financial Marion O. Sandler COB, CEO Corp. 7 Fleetwood Enterprises John C. Crean COB, CEO 8 Silicon Graphics Inc. James H. Clark COB 9 Amgen Inc. Daniel Vapnek SVP 10 Apple Computer Inc. John Sculley COB, CEO, CTO

Stock Options Exercised 1 $19,391,461 2 $9,654,128 3 $8,600,987 4 $6,634,748 5 $6,565,000 6 $5,625,125 7 $5,529,258 8 $5,339,038 9 $5,288,783 10 $4,865,508

Source: Standard & Poor’s Compustat Inc.