Corporate Salaries Rise With Options : Income: The top managers at many of O.C.’s largest public companies have benefited from a lucrative shift to performance-based compensation.

Complaints about the economy notwithstanding, executives at many of the largest public companies in Orange County completed 1992 in better shape than the businesses that paid them.

The managers’ improved fortunes came largely from a shift in recent years to so-called performance-based compensation. Under such plans, executives receive potentially lucrative stock options as incentives to increase corporate revenues, profits or stock price.

One drawback is that stock prices and corporate performance often do not mesh.

A study of the financial and executive compensation reports of 86 county-based public companies, for example, shows that while just 59% of the businesses increased their revenue in 1992, 67% of their top executives increased their annual incomes.

There has been a change in the way they receive such financial rewards, however.

Greater shareholder scrutiny and new federal regulations demanding higher levels of compensation disclosure took hold in 1992.

Some corporations, attempting to avoid shareholder rage, eliminated old-fashioned executive perks--fancy cars, free vacations and prepaid country club dues--and began using performance-based compensation systems. They also began using stock awards as a means of reducing the cash they paid their managers.

The change began showing up in 1992, as half of the executives on the Top 100 list for Orange County saw the cash portion of their compensation drop or stay flat. In 1991, only 33% saw their cash incomes drop.

“In the go-go days of the 1980s, (executives) would expect a 10% to 15% increase from one year to another if they stayed at the same company” just for longevity, said Elliot Gordon, managing director of Korn Ferry International’s Newport Beach office. “Now we’re seeing it much more tied to inflation.”

Instead of automatic raises, grants of stock options and outright gifts of stock have gained popularity. And in 1992, grants of stock and options--and the sale of some of those company shares--helped shatter previous Orange County records for corporate pay.

Leading the list--and showing just how valuable a fistful of options can be--was Quantum Health Resources’ 37-year-old chairman, president and chief executive, Douglas H. Stickney. His salary for the year was $214,017 and he received a $30,000 cash bonus. Combined, they stuck him well down in the pack for total direct compensation.

But Stickney also had options to buy 260,000 shares of his company’s stock and, for tax and other considerations, he selected last year--the year the company went public--to cash them in.

His profit of $6.6 million, or $25.45 a share, vaulted him to the top of the list of big-income executives in Orange County with a total of $6.8 million.

Stickney’s company, too, had its best year yet, earning $9.2 million on $118.2 million in revenue. The year before, it made $5.5 million on revenue of $80.8 million.

“The key today is pay for performance,” said Lawrence Wangler, managing partner of the Newport Beach office of TPF&C;, the compensation consulting arm of Towers Perrin, an international benefits consulting firm. The pay packages “have a high correlation to shareholder value, and there is no charge to earnings” from the non-cash portion of the packages.

Stickney surpassed the previous record of $6.4 million in annual income that ICN Pharmaceuticals Chairman Milan Panic collected--mainly from a $5.6-million stock award--in 1991.

Panic’s income last year was almost 60% less--although still a cool $2.7 million. Most of the money, $2.1 million, came from exercising stock options.

His company lost $65 million because of a charge from its biomedicals subsidiary but posted record 1992 sales of $552 million. Panic, who took a leave of absence for most of the year while serving as prime minister of his native Yugoslavia, got a straight $535,000 salary and no bonus or grant of future stock options and fell far down the Top 100 rankings from his No. 1 position in 1991.

But his replacement at ICN, longtime associate Adam Jerney, replaced him atop the most highly compensated list.

Jerney, ICN’s acting president in 1992 and head of its SPI Pharmaceuticals subsidiary, received stock options last year valued at $2.8 million. Added to his base pay of $321,821, a bonus of $370,000 and miscellaneous other income of $18,438, that brought Jerney’s total annual compensation to $3.5 million--good for first-place ranking on the O.C. Top 100 chart, which does not include the value of options actually exercised during the year.

The push for performance-based pay--also called putting compensation “at risk”--has been fueled in part by the Securities and Exchange Commission. The SEC last year began requiring companies to include in their proxy reports estimates of the value of stock options granted to executives as well as a chart of the company’s performance over several years.

As a result, for those companies whose 1992 fiscal years ended on or after Dec. 31, shareholders can track the relationship between the rise and fall of their stocks’ value and increases or decreases in the pay of the executives whose decisions often affect stock performance.

“Overall, there haven’t been dramatic changes in compensation packages, but there’s a heck of a lot more contemplation,” said Cary K. Hyden, an Irvine attorney who advises companies on how they pay their executives. “There’s a lot more peer review, where compensation committees are looking at what other companies in the same field are paying their employees.”

Comparisons with past years are difficult because the new SEC rules permit companies to omit information about some types of compensation that had been awarded in 1991 and 1990. Additionally, because companies do not all have the same fiscal years, some proxies include the new format, and others do not.

Despite the changes, some things do remain constant.

Leaders of the biggest companies typically are paid the best salaries. Excluding executives who exercised options, several of the highest-paid executives in Orange County work at Fortune 500 companies, including Rockwell International in Seal Beach, Fluor Corp. and AST Research Inc., both in Irvine.

(Well-known executives of private companies such as Irvine Co. owner Donald L. Bren and home builder William Lyon are not listed because their companies are not required to make public reports. And several large publicly traded companies, including Abbey Healthcare and Clothestime, did not have their documents completed by press time and are not included in the 1992 study.)

Donald R. Beall, Rockwell chairman, collected nearly $3.4 million, including nearly $1.4 million in cash, to place second on the list. Fluor Corp. Chairman Leslie G. McCraw followed at nearly $3 million, including nearly $1.2 million in cash. All told, eight of the top 25 executives on the list came from Rockwell or Fluor.

But executives at the largest companies were not always those who received the greatest windfall from cashing in options.

Stickney and three fellow Quantum executives were among the 25 business leaders who gained most from exercising options. Yet when only salaries and bonuses are considered, all four rank far down on the list of executive pay packages.

Orange County executives are more dependent on stock options and other non-cash methods of compensation than their counterparts in Los Angeles because the businesses here tend to be smaller, newer and more cash-hungry.

“Cash is precious when you are young and new,” said Donald M. Earhart, chairman of I-Flow Corp., an Irvine-based medical products firm. “Options are a way of rewarding our employees because we don’t have a lot to pay.”

That could change soon: The Financial Accounting Standards Board has tentatively approved a proposal to require that the value of options granted in any year be charged against corporate earnings.

For I-Flow Corp., which plans to grant options for up to 2 million additional shares to its senior employees over the next few years, that could subtract millions of dollars from net profits.

Executives with options must have shrewd timing to know when to cash in.

Day Runner Inc. Chairman Mark A. Vidovich reaped $1.8 million by cashing in a batch of options last year, ranking sixth among the executives who profited this way. He said he considered taxes and market restrictions, as well as pending expiration dates on the options, before exercising them.

“These transactions are very complicated and risky,” Vidovich said. “Some people don’t realize that. But they are an excellent way of giving a long-term stake in the company to employees. They’re a motivator. You only make money if you increase the value of the company.”

Analysts said that health care company executives were most likely to exercise options last year because of fears that their stock prices would fall under the uncertainties facing the industry with the election in November of a Democratic President who made overhauling the health system a priority.

Consequently, 11 leaders of health-related companies were among the 25 Orange County executives who gained the most from options.

Tax concerns can also weigh heavily at option-exercising time.

Walt Disney Co. Chairman Michael D. Eisner took the lead last year when he cashed in options on 5.4 million shares of Disney stock, netting $197 million when he sold nearly 3.5 million of the shares. He moved fast to avoid the heavier personal income taxes being proposed for 1992 and beyond by President Clinton. Eisner also said that it would also save the company money, before Clinton’s proposals to limit corporate tax deductions on options took hold.

Local executives, however, said such concerns are overblown. Lawrence H. Smallen, vice president and chief financial officer of Homedco Group Inc., a Fountain Valley home health care company, earned $148,500 by cashing in some of his stock options. His reason for selling: He needed cash to buy a house.

“It’s an individual decision,” Smallen said. “A lot depends on your own situation.”

Still, because executives who exercise options only make profits when the price they buy the stock at is lower than the current market price, most sales occur during periods when investors are running up the company’s stock price--and that typically only happens when there is good news.

For some highly paid executives last year, however, even bad news did not diminish their pay packages.

Each of the five top executives of West Coast Bancorp, for instance, received raises of between 4% and 44%, but the company lost $7 million in 1992, and its assets fell to $361.7 million from $458.1 million.

Company President and Chief Operating Officer William J. Mylymok’s salary jumped to $375,000 from $301,000. He resigned from the company early this year but will continue to be paid $150,000 for his services as a consultant.

In the company’s proxy report, West Coast directors said that despite the raises, the company paid its executives no more than what other financial service companies paid theirs--and paid less in some cases.

Sometimes it is hard to fit pay and performance together.

At Presley Cos., a Newport Beach-based home builder, as with many other public and private residential builders, performance crumpled as the recession continued pulling down land values and slowing home sales.

The company recorded an 8% increase in revenue but posted a $10.5-million loss for the year, yet President Wade H. Cable ranked among the county’s 25 highest-paid executives. Even without options, Cable augmented his $399,500 salary with a $976,000 bonus for a total of almost $1.4 million.

How come?

Well, his bonus, although paid in a money-losing year, was earned in earlier, profitable years. It had just been deferred until 1992.

And while his gross pay still topped $1 million, it was down 32% from 1991.

The story was a bit different at Community Psychiatric Centers, where Chief Executive Officer Richard L. Conte collected a $487,715 salary, a $150,000 bonus and options to buy 50,000 shares valued at $459,879. His total compensation hit $1.1 million, about three times his pay in 1992. The company, while improving its bottom line, saw its return to shareholders fall as earnings plunged 49% to $23.1 million from $45.2 million.

Community Psychiatric officials, in a lengthy compensation committee report, pointed out that Conte was new to the position last year and already has started to turn things around. By the end of the year, the company’s hospitals posted increases in patient volume, for the first time since early 1991; new efforts to contain costs have been launched, and development of a transitional-care division was established.

“The accomplishments of management have exceeded the committee’s expectations,” the report stated.

One of Conte’s first moves when he took his new position in May, 1992, was to create a compensation committee, which has pledged to tie greater portions of pay to performance and extend stock option grants to more employees.

“The committee recognized that the company’s performance had deteriorated seriously in the face of the fundamentally changed business climate and that there was a pressing need to implement management and operational changes in which compensation policy would be of great significance,” company officials wrote in the proxy report.

“You’re seeing fewer of those cases, where the stock goes down but compensation goes up,” said Hyden, the Irvine attorney. “They’re still there, particularly when an executive is hired to turn a company around. But (corporations) are so much more sensitive now, because they know they are under a microscope.”

Winners and Losers PacifiCare Health Systems

Here is how $100 invested Sept. 30, 1987, in PacifiCare Class A common stock compares to a similar investment in Standard & Poor’s Health Care Composite Index and Standard & Poor’s 500 Index:

*

Investment 1988 1989 1990 1991 PacifiCare Class A Stock $117.10 $487.9 $287.8 $531.8 S&P; Health Care Composite Index 86.49 119.8 132.1 195.0 S&P; 500 Index 87.56 116.3 105.6 138.4

Investment 1992 PacifiCare Class A Stock $1,541.7 S&P; Health Care Composite Index 186.9 S&P; 500 Index 153.6

Community Psychiatric Centers

This comparison shows how $100 invested Nov. 30, 1987, in Community Psychiatric Centers common stock performed against a similar investment in Standard & Poor’s 500 Index and a peer group of other small psychiatric providers:

*

Investment 1988 1989 1990 1991 1992 Community Psychiatric Centers $103 $141 $121 $56 $51 S&P; 500 Index 123 161 156 187 222 Peer group* 124 222 224 161 162

**Includes National Medical Enterprises, Ramsay Health Care and Comprehensive Care Corp. Sources: PacifiCare, Community Psychiatric Centers

Pay and Performance

In spite of the prolonged recession, more than half of the highest compensated executives at 86 publicly traded Orange County companies received an increase. Of these, 16% received increases of 200% or more. How 86 Orange County-based companies and their executives fared in 1992:

*Executives’ compensation Increased: 67.0% Decreased: 29.2% Unchanged: 3.8% Companies’ revenues Increased: 59.0% Decreased: 6.0% Unchanged: 5.0% *Sources: Individual companies, Times files; Researched by JOHN O’DELL / Los Angeles Times

Big Profits From Stock Options

The following lists the 25 most lucrative annual compensation packages with stock options. (Legend for title abbreviations: CEO=chief executive officer; COB=chairman of the board; COO=chief operating officer; VP=vice president; EVP=executive vice president; SVP=senior vice president; P=president; SO=subsidiary officer)

* Rank: 1. Executive: Douglas H. Stickney Title: CEO Company: Quantum Health Resources Inc. Stock options exercised: $ 6,618,125 All other compensation: $ 244,017 Total income: $ 6,862,142 Chg. from prev. yr.: 3,493% *Rank: 2. Executive: Robert F. Byrnes Title: COB, CEO Company: Tokos Medical Corp. Stock options exercised: $ 4,441,655 All other compensation: $ 1,907,000 Total income: $ 6,348,655 Chg. from prev. yr.: 1,138% *Rank: 3. Executive: Thomas C. K. Yuen Title: COO Company: AST Research Inc. Stock options exercised: $ 4,042,500 All other compensation: $ 1,546,500 Total income: $ 5,589,000 Chg. from prev. yr.: 99% *Rank: 4. Executive: Leslie G. McCraw Title: COB, CEO Company: Fluor Corp. Stock options exercised: $ 1,462,765 All other compensation: $ 2,968,170 Total income: $ 4,430,935 Chg. from prev. yr.: 43% *Rank: 5. Executive: Vincent L. Kontny Title: P, COO Company: Fluor Corp. Stock options exercised: $ 1,127,511 All other compensation: $ 2,123,933 Total income: $ 3,251,444 Chg. from prev. yr.: 54% *Rank: 6. Executive: Jeremy M. Jones Title: COB, P, CEO Company: Homedco Group Inc. Stock options exercised: $ 510,000 All other compensation: $ 2,474,306 Total income: $ 2,984,306 Chg. from prev. yr.: 564% *Rank: 7. Executive: Hugh K. Coble Title: SO Company: Fluor Corp. Stock options exercised: $ 971,626 All other compensation: $ 1,503,017 Total income: $ 2,474,643 Chg. from prev. yr.: 9% *Rank: 8. Executive: Gerald M. Glenn Title: SO Company: Fluor Corp. Stock options exercised: $ 873,750 All other compensation: $ 1,505,931 Total income: $ 2,379,681 Chg. from prev. yr.: 24% *Rank: 9. Executive: Mark A. Vidovich Title: COB, CEO Company: Day Runner Inc. Stock options exercised: $ 1,825,740 All other compensation: $ 488,246 Total income: $ 2,313,986 Chg. from prev. yr.: 687% *Rank: 10. Executive: Safi U. Qureshey Title: CEO, P Company: AST Research Inc. Stock options exercised: $ 877,500 All other compensation: $ 1,428,100 Total income: $ 2,305,600 Chg. from prev. yr.: 18% *Rank: 11. Executive: Milan Panic Title: COB, P, CEO Company: ICN Pharmaceuticals Inc. Stock options exercised: $ 2,126,284 All other compensation: $ 574,041 Total income: $ 2,700,325 Chg. from prev. yr.: 45% *Rank: 12. Executive: John Siefker Title: SVP Company: Pacificare Health Systems Inc. Stock options exercised: $ 1,542,000 All other compensation: $ 326,334 Total income: $ 1,868,334 Chg. from prev. yr.: 529% *Rank: 13. Executive: William C. Shepherd Title: P, CEO Company: Allergan Inc. Stock options exercised: $ 95,278 All other compensation: $ 1,701,946 Total income: $ 1,797,224 Chg. from prev. yr.: 135% *Rank: 14. Executive: Gavin S. Herbert Title: COB Company: Allergan Inc. Stock options exercised: $ 616,070 All other compensation: $ 1,103,365 Total income: $ 1,719,435 Chg. from prev. yr.: 24% *Rank: 15. Executive: William P. Foley Title: P, CEO Company: Fidelity National Financial Inc. Stock options exercised: $167,735 All other compensation: $1,465,798 Total income: $1,633,533 Chg. from prev. yr.: 79% *Rank: 16. Executive: Terry Hartshorn Title: P, CEO Company: Pacificare Health Systems Inc. Stock options exercised: $ 331,250 All other compensation: $ 1,223,747 Total income: $ 1,554,997 Chg. from prev. yr.: 70% *Rank: 17. Executive: Dennis K. Marquardt Title: EVP, CFO Company: Day Runner Inc. Stock options exercised: $ 1,060,280 All other compensation: $ 355,221 Total income: $ 1,415,501 Chg. from prev. yr.: 540% *Rank: 18. Executive: James M. Weld Title: P, COO Company: Plaza Home Mortgage Corp. Stock options exercised: $ 757,750 All other compensation: $ 475,000 Total income: $ 1,242,750 Chg. from prev. yr.: 192% *Rank: 19. Executive: Pat Vitacolonna* Title: EVP, COO Company: FHP International Corp. Stock options exercised: $ 285,487 All other compensation: $ 804,602 Total income: $ 1,090,089 Chg. from prev. yr.: 38% *Rank: 20. Executive: Richard Lipeles Title: SVP Company: Pacificare Health Systems Inc. Stock options exercised: $ 473,750 All other compensation: $ 592,015 Total income: $ 1,065,765 Chg. from prev. yr.: 140% *Rank: 21. Executive: J. Michael Hagan Title: COB, CEO Company: Furon Co. Stock options exercised: $ 79,341 All other compensation: $ 968,411 Total income: $ 1,047,752 Chg. from prev. yr.: 403% *Rank: 22. Executive: Alan Hoops Title: EVP, COO Company: Pacificare Health Systems Inc. Stock options exercised: $ 178,750 All other compensation: $ 848,997 Total income: $ 1,027,747 Chg. from prev. yr.: 1,282% *Rank: 23. Executive: Lawrence H. Smallen Title: VP, CFO, TRES Company: Homedco Group Inc. Stock options exercised: $ 148,500 All other compensation: $ 848,067 Total income: $ 996,567 Chg. from prev. yr.: 446% *Rank: 24. Executive: Richard M. Haugen Title: EVP, CEO Company: Allergan Inc. Stock options exercised: $ 43,306 All other compensation: $ 942,186 Total income: $ 985,492 Chg. from prev. yr.: 110% *Rank: 25. Executive: Christopher F. Koch Title: SVP Company: Homedco Group Inc. Stock options exercised: $ 113,750 All other compensation: $ 846,096 Total income: $ 959,846 Chg. from prev. yr.: 478% * Left company in 1992

Sources: Individual companies, Times files; Researched by JOHN O’DELL / Los Angeles Times

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