SPECIAL REPORT: EXECUTIVE PAY : Scaling New Heights : The Corporation: Pay for top California executives continues to climb, although links to performance have made compensation packages more complex.

Despite a historic legislative effort to hold down towering salaries, the pay of top executives at California’s biggest public companies thrust upward with tremendous force in 1993.

This isn’t to say executive pay hasn’t changed. It has, in major ways. Pay is now much more related to a company’s performance. And the elements that make up an executive’s compensation package are far more complex. But in terms of overall magnitude, the numbers just keep getting larger.

Consider:

* Michael D. Eisner, chief executive of Walt Disney Co. in Burbank, weighed in with a record $203 million in salary and stock gains.

* The top five officers at toy maker Mattel Inc. together earned $27.8 million--averaging roughly $5.5 million each.

* The new chief executive of Carter Hawley Hale Stores got $8.67 million--including a $1-million signing bonus.

* Of the 25 most highly compensated executives at California’s 100 largest public companies, none earned less than $4 million. The lowliest pay package in the top 100 totaled $1.8 million--about 33 times the income of the average American household.

* Even the ousted had their day. Richard K. Eamer and Leonard Cohen, pushed out of National Medical Enterprises amid government investigations of the company’s psychiatric care units, earned $9.8 million and $3.4 million, respectively.

The largess was piled high even though Congress made its first effort to limit executive pay--through a law that says companies paying more than $1 million in “non-performance-related” salary cannot deduct the excess as a business expense on tax returns.

Why the continued bounty?

The simplest explanation is that the new limits, popularly mislabeled “the $1-million pay cap,” did not go into effect until Jan. 1, 1994, after the earnings chronicled in The Times’ pay survey had been allotted.

However, some analysts maintain that 1993 pay levels are just the first sign that the new law is going to backfire.

Instead of putting a ceiling on executive salaries, Congress may have placed a floor under them, says Richard Semler, principal in the Los Angeles office of Sibson & Co., a nationwide executive compensation consulting firm. Where executives earned less than the magic $1 million in salary and bonus in 1993, boards may be encouraged to match that figure in 1994, he adds. The logic: If Congress says $1 million is a reasonable salary, what corporate director is going to argue?

Other aspects of the law encourage boards to use formulas that will produce salaries higher than the already staggering amounts directors have been willing to pay in the past, says Graef S. Crystal, a Nevada-based compensation expert.

“You ain’t seen nothing yet,” he says. “Pay is going to get higher than ever.”

Why would a pay cap law boost salaries? Because the law limits only pay that is not tied to performance. If an executive’s salary is based on a mathematical formula linked to clearing some performance hurdle--no matter how low--his or her pay is deductible for the employer.

Moreover, the measure, part of the Omnibus Reconciliation Act of 1993, lets boards cut salaries set under a formula, but not raise them. Ultimately, notes Crystal, that means directors--who long have argued that they need flexibility in wage scales to attract and retain the best managers--may be inclined to use formulas that result in too much pay rather than too little. That way, new law or not, they can maintain the discretion they have always enjoyed.

Finally, putting more pay “at risk,” as the law requires, also argues for boosting incentives, experts note. It’s the old risk-reward theory in action: When you take greater risks, you expect greater returns.

“Where you have good performance, you are going to see very big pay packages” says Barbara Elter, executive compensation consultant with Hewitt Associates in Newport Beach.

Still, because most consultants believe shareholders are less interested in the size of an executive’s paycheck than in whether the pay relates to the company’s accomplishments, the whopping salaries of tomorrow may not draw as much ire as the non-performance-related pay of yesterday.

In other words, while lofty pay scales have not come down, the nature of pay has.

As the annual Times survey shows, stock is an increasingly important element in executive compensation. The vast majority of the executives on the best-paid list would not have made the grade without counting their stock options and awards. Indeed, most of the top wage earners got more than half their pay in the form of shares.

Assigning a dollar value to the stock portion of compensation packages is tricky and controversial. If a company’s stock price does not appreciate over the next 10 years, most executives will let their options expire as worthless. Also, companies can choose between two methods in valuing such benefits, with widely varying results.

The Times tables give the figures as reported by the companies. Both methods arrive at values that are likely to be low. If stocks appreciate at roughly the same rate as they have since the end of World War II, most executives will reap stock gains that are two to four times the numbers that companies project.

In general, executive pay has become more complex. Now, instead of a simple salary and bonus, companies are offering “performance units,” restricted stock, premium-priced stock options and shares that “vest”--that is, become available to the executive--only under certain conditions.

In adding up executive pay, The Times counts 1993 salary and bonus, long-term compensation paid during the year, the stated value of stock options granted in 1993 and the value of restricted stock awards made during the year. The charts also include “other” wages--generally the value of severance or relocation payments, sign-on bonuses, and company-paid extras such as executive use of company planes, automobiles and vacation lodgings.

On the latter score, Ray Irani, chief executive of Occidental Petroleum Corp., remains the perk king at California’s biggest public companies, thanks to an employment contract that requires Occidental to pay nearly $1 million in personal income taxes for the 47-year-old executive.

The listings of total compensation do not include the value of stock options exercised during 1993. Companies have argued in the past that this figure is misleading, because while an executive may have received the money in a certain year, it was earned over a much longer period.

A separate chart lists the 20 executives at California’s 100 biggest publicly held companies who cashed in the biggest stock gains during 1993. This is where you’ll see Disney’s Eisner and his eye-popping $203-million gain.

Despite such fabulous packages, even the biggest critics say some progress has been made in restraining so-called runaway executive pay.

CEOs are no longer competing to be the highest-paid in the land, says Martin L. Katz, principal at the William M. Mercer consulting firm in San Francisco. Corporate boards are looking more closely at pay issues and trying harder to link pay to performance, he adds. And executives themselves no longer consider headline-grabbing pay packages something to boast about.

“It used to be kind of a macho thing,” with executives bragging about sitting atop national salary rankings, notes Nell Minow, principal of Lens Inc., a Washington investment company. “Now nobody wants to be in the top quartile. It’s embarrassing.”

National Medical Enterprises, for instance, points out that only the company’s former officers qualified for listing among the state’s highest paid.

NME has drastically revised its compensation strategies, so it is less likely that the names of its executives will pepper the top echelons of future salary surveys, a company spokeswoman says.

According to the firm’s proxy, NME executive pay will still be better than average. But executives’ wages will be more closely tied to stock price performance--a strategy that NME’s shareholders, who have seen stock values plunge over the last two years, can probably stand behind.

The California 50

This chart lists the 50 highest-paid executives in 1993 among the top-ranking officers of California’s 100 biggest publicly held companies. They are ranked by total pay: salary; bonus; value of 1993 stock option awards; restricted shares; long-term compensation paid dring the year,and “other” pay, such as severance payments, signing bonuses and the value of company-paid perquisites. Most made the list thanks to stock options they were granted during the year. Companies estimate the value of such options, but their true worth can’t be known until they are exercised--usually many years later. Some prove worthless.

Rank Executive Company 1 Martin L. Flanagan Franklin Resources Inc. 2 Richard K. Eamer National Medical Enterprises Inc. 3 David L. Dworkin Carter Hawley Hale Stores Inc. 4 Frank C. Herringer Transamerica Corp. 5 Joseph C. Gandolfo Mattel Inc. 6 John W. Amerman Mattel Inc. 7 Donald R. Beall Rockwell International Corp. 8 Ray R. Irani Occidental Petroleum Corp. 9 Daniel D. Crowley Foundation Health Corp. 10 Jill E. Barad Mattel Inc. 11 Kenneth T. Derr Chevron Corp. 12 Thomas L. Hansberger Franklin Resources Inc. 13 Raymond J. Lane Oracle Systems Corp. 14 Paul E. Freiman Syntex Corp. 15 Eli Broad SunAmerica Inc. 16 Lawrence J. Ellison Oracle Systems Corp. 17 Edward G. Harshfield California Federal Bank 18 Paul Hazen Wells Fargo & Co. 19 William J. Miller Quantum Corp. 20 Lodwrick M. Cook Atlantic Richfield Co. 21 David C. Carpenter Transamerica Corp. 22 James A. Abrahamson Oracle Systems Corp. 23 Henry Gluck Caesars World 24 James A. Eskridge Mattel Inc. 25 Richard M. Rosenberg BankAmerica Corp. 26 Carl E. Reichardt Wells Fargo & Co. 27 Richard H. Finn Transamerica Corp. 28 Daniel M. Tellep Lockheed Corp. 29 Lindsey F. Williams Mattel Inc. 30 David S. Loeb Countrywide Credit Industries Inc. 31 Angelo R. Mozilo Countrywide Credit Industries Inc. 32 Kent M. Black Rockwell International Corp. 33 Leonard Cohen National Medical Enterprises Inc. 34 Michael C. Ross Safeway Inc. 35 James N. Wilson Syntex Corp. 36 W. J. Sanders III Advanced Micro Devices Inc. 37 Charles R. Schwab Charles Schwab Corp. 38 J. D. Bonney Chevron Corp. 39 Robert P. Saltzman SunAmerica Inc. 40 Sam F. Iacobellis Rockwell International Corp. 41 Richard H. Deihl H.F. Ahmanson & Co. 42 Robert F. Erburu Times Mirror Co. 43 Jay S. Wintrob SunAmerica Inc. 44 Donald B. Rice Teledyne Inc. 45 J. Tracy O’Rourke Varian Associates Inc. 46 J. N. Sullivan Chevron Corp. 47 Edward M. Carson First Interstate Bancorp 48 Ian Diery Apple Computer Inc. 49 Ronald V. Schmidt Synoptics Communications Inc. 50 Andrew K. Ludwick Synoptics Communications Inc.

Rank Title 1 SVP, CFO 2 P, CEO 3 CEO 4 P, CEO 5 P 6 COB, CEO 7 COB, CEO 8 P, CEO 9 P, CEO 10 P, COO 11 COB 12 P 13 SVP 14 COB, CEO 15 COB, P, CEO 16 P, CEO 17 P, CEO 18 P 19 COB, CEO 20 COB, CEO 21 EVP 22 COB 23 COB, CEO 24 EVP, CFO 25 COB, CEO 26 COB, CEO 27 EVP 28 COB, CEO 29 P 30 COB, P 31 VCOB, EVP 32 EVP, COO 33 P 34 SVP 35 P, COO 36 COB, CEO 37 COB, CEO 38 VCOB 39 EVP 40 EVP 41 COB, CEO 42 COB, P, CEO 43 VP 44 P, COO 45 COB, CEO 46 VCOB 47 COB, CEO 48 EVP 49 SVP, CTO 50 P, CEO

*

Rank Executive Total compensation 1 Martin L. Flanagan $13,017,842 2 Richard K. Eamer $9,804,078 3 David L. Dworkin $8,761,073 4 Frank C. Herringer $7,432,845 5 Joseph C. Gandolfo $7,293,071 6 John W. Amerman $7,201,062 7 Donald R. Beall $6,960,511 8 Ray R. Irani $6,767,930 9 Daniel D. Crowley $6,017,998 10 Jill E. Barad $5,478,566 11 Kenneth T. Derr $5,357,791 12 Thomas L. Hansberger $5,242,750 13 Raymond J. Lane $5,236,086 14 Paul E. Freiman $5,155,822 15 Eli Broad $4,949,357 16 Lawrence J. Ellison $4,799,651 17 Edward G. Harshfield $4,708,015 18 Paul Hazen $4,515,252 19 William J. Miller $4,486,668 20 Lodwrick M. Cook $4,280,282 21 David C. Carpenter $4,226,598 22 James A. Abrahamson $4,187,145 23 Henry Gluck $4,170,422 24 James A. Eskridge $4,133,470 25 Richard M. Rosenberg $4,126,530 26 Carl E. Reichardt $4,105,341 27 Richard H. Finn $4,050,181 28 Daniel M. Tellep $3,871,964 29 Lindsey F. Williams $3,718,196 30 David S. Loeb $3,554,634 31 Angelo R. Mozilo $3,495,871 32 Kent M. Black $3,484,732 33 Leonard Cohen $3,415,248 34 Michael C. Ross $3,316,200 35 James N. Wilson $3,301,108 36 W. J. Sanders III $3,252,544 37 Charles R. Schwab $3,214,098 38 J. D. Bonney $2,978,999 39 Robert P. Saltzman $2,950,373 40 Sam F. Iacobellis $2,935,185 41 Richard H. Deihl $2,925,942 42 Robert F. Erburu $2,925,598 43 Jay S. Wintrob $2,903,361 44 Donald B. Rice $2,894,137 45 J. Tracy O’Rourke $2,885,178 46 J. N. Sullivan $2,884,279 47 Edward M. Carson $2,869,612 48 Ian Diery $2,790,448 49 Ronald V. Schmidt $2,754,216 50 Andrew K. Ludwick $2,752,327

Source: Star Services

Footnotes and Abbreviations

Calculated by the Black-Scholes method. All other companies calculated stock option values based on the 5% method. NA Not available. CEO Chief executive officer CFO Chief financial officer COB Chairman of the board CO-COB Co-chairman of the board COO Chief operating officer CTO Chief technology officer DIR Director EVP Executive vice president P President P-OPS President of operations SVP Senior vice president VCOB Vice chairman of the board VP Vice president