Scaling New Heights : Stock Options Boost Income of O.C. Officers
When economic pundits said early last year that 1993 would be a rebuilding year for recession-battered Orange County, the people who make executive compensation decisions apparently were listening.
Though the overall economy barely held its own with no job growth, many corporate officers at Orange County’s publicly traded companies saw their pay packages grow to new heights.
The yeast in their dough wasn’t always cash, however.
Instead, the corporate directors who determine compensation increasingly linked pay with business performance and awarded their key executives large blocks of stock options that have value only if the companies’ profits and revenue--and stock price--continue growing.
“At AST, we reward people in a variety of ways. Base salary is a key element, of course, as are bonuses tied to the company’s performance. But we also believe strongly in stock options tied to the company’s ability to deliver value to the shareholders,” said James T. Schraith, senior vice president for sales at AST Research in Irvine.
“I’m constantly looking at decisions I make with an eye toward enhancing shareholder value because I am a shareholder,” said Schraith--who received AST options worth an estimated $235,875 in 1993.
A Times Orange County Edition review of the 1993 compensation of top officers at 95 public companies headquartered in the county shows that annual and long-term compensation made 36 of the 100 highest-paid executives millionaires last year; 13 of them had multimillion-dollar pay packages.
A year earlier, only 26 of the Top 100 had total compensation of $1 million or more and only five of those had packages exceeding $2 million. But among last year’s millionaire executives, only five reached seven figures from their cash compensation--annual salaries and bonuses--compared with eight people in 1992.
The rest, like Clothestime Chairman John Ortega II, are millionaires on paper. Ortega received options valued at $2.2 million as part of his compensation last year, but he must wait several years to cash them all in.
Excluded from the Orange County 100 are such highly visible executives as Irvine Co. Chairman Donald Bren, who is a billionaire, and wealthy developer William Lyon. Their companies are private, and they are not required to disclose their compensation.
For the public companies, the growing reliance on stock instead of cash to reward executives is part of a nationwide shift to performance-based compensation, said Elliot Gordon, managing vice president at the Newport Beach office of corporate consultants Korn/Ferry International.
Because most option packages can’t be exercised for three to five years, they become the ideal corporate carrot dangled before executives. If the company’s stock doesn’t do well in ensuing years, the value of the options on the open market dwindles and what was once worth $1 million or more becomes something less.
Of course, the opposite also can be true.
Leslie G. McCraw, chairman of Fluor Corp., counted $736,997 worth of options in his $2.9 million total compensation. But Fluor and its stock have done well in recent years and McCraw cashed in numerous options he had received in earlier years. That netted him an additional $2.75 million, for combined take-home pay of $5.65 million.
Options granted in previous years can especially make a big difference in take-home pay when things aren’t going well--as long as they’re used in a timely manner.
Milan Panic, chairman of ICN Pharmaceuticals and its several subsidiaries, is near the end of the Top 100 list this year with a pay package of just $634,862, which is 91% less than he received the previous year.
His Costa Mesa-based company lost $11 million in 1993 and Panic received no raise, no bonus and just $60,600 worth of options.
But before the company’s stock price started falling, Panic cashed in a batch of options that he had been awarded over the previous 10 years--options that let him buy stock as prices far below the 1993 market values of the shares he acquired in ICN, SPI Pharmaceuticals, Viratek and ICN Biomedicals.
As a result, Panic made a $9.5-million profit when he sold the shares and his total take-home pay last year swelled to $10.1 million.
However, those who monitor executives’ pay consider it unfair to suggest that Panic, McCraw or anyone else who cashed in options got paid that much in 1993.
In adding up executive pay, The Times counts 1993 salary and bonus; the value of other annual compensation, including life insurance premiums and automobile allowances; long-term compensation paid during the year including the stated value of stock options granted in 1993, and the value of restricted stock awards made during the year.
Profits from stock options awarded in prior years but exercised by executives during 1993 are not included in their annual compensation.
Exercising long-held options is like making withdrawals from a savings account--it represents compensation deposited in earlier years and already was counted as part of the pay received for those years.
Because Orange County’s business community is made up largely of entrepreneurial companies and those once privately held, there are a numerous methods of compensation that rarely show up in the financial reports of Fortune 500 companies.
The president of Carl Karcher Enterprises in Anaheim was living in Kentucky when he was recruited to head the hamburger chain at the end of 1992. Houses in Orange County cost a lot more than in Louisville, however, so Donald E. Doyle was promised some help.
The company disclosed in its report to shareholders earlier this year that the assistance comes in the form of a $4,375 monthly housing differential payment. Doyle gets the stipend, which totals $52,500 a year, through December, 1997.
Help with housing appears in several other executive pay packages around Orange County, which is one of the nation’s most expensive residential real estate markets.
Emulex Corp., for example, paid President Paul F. Folino $88,000 to help relocate his household from Texas when he was hired last year. And in 1992, Abbey Healthcare Group loaned Chairman Timothy M. Aitken $1.25 million to buy a new house. The company also promised to forgive up to 25% of the accrued principal and interest each year for four years, and to pay the state and federal taxes on the loan forgiveness, if Aitken helped Abbey meet certain performance goals. In 1993, Aitken received a $1.1-million bonus from Abbey that included forgiveness of $675,000 of the loan’s principal and interest.
Deals like this, which may seem a bit too lucrative to some shareholders, are good business, said Matt Ward, a executive compensation consultant for Wyatt Co., a San Francisco-based benefit consulting company.
“Companies are starting to put the oomph in their pay packages just where shareholders want it: in performance-related items that give the executives incentive to make it all work,” he said. “That’s the great news that’s starting to trickle back after several years of controversy” about accelerating executive pay that often had little to do with how well or poorly a company was doing.
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Salaries, bonuses and options are not the only way executives are paid.
At Pacific Sunwear, an Anaheim surf wear retailer that went public last year, President and Chief Executive Michael W. Rayden gets an $800-a-month car lease allowance.
AST Research co-founder Safi U. Qureshey received total compensation of $2 million last year that included almost $180,000 paid in premiums on a $24-million life insurance policy for him.
Qureshey’s employment contract also calls for him to receive his base pay for five years after he quits or retires or if he is ousted without cause. That’s a gilded parachute worth $2.75 million.
The five-year term of Qureshey’s termination package is longer than most, which range from one to three years, but the practice of compensating top officers long after they fade away is not uncommon.
When Downey Savings & Loan Assn. co-founder Maurice L. McAlister retired in June, it triggered a clause in his employment contract that ensures his financial security: McAlister or his heirs get $32,167 a month for 10 years, with cost of living raises every three years. The guaranteed $3.8 million is in addition to the value of McAlister’s stock in the company--he owns 3.2 million shares, worth almost $60 million at current prices.
Sometimes the retirement plan is modified when a founder wants to stay active.
At FHP International Corp., the Fountain Valley-based health maintenance organization, founder Robert Gumbiner retired in 1990, so he doesn’t show up in the executive pay reports. But the 70-year-old physician continues to serve as chairman of the board and has a consulting contract that lasts until June 30, 1995. Under that pact, Gumbiner drew $536,565 in consulting fees during FHP’s fiscal 1993--just $10,000 less than the combined salary and bonus of chief executive Westcott W. Price III, who had total take-home pay of nearly $1.9 million.
Carl N. Karcher, founder of the Carl’s Jr. chain, fought a bitter and well-publicized battle to keep his job with the company last year after a split with Doyle and the board led to his ouster.
The agreement reinstating the 77-year-old Karcher calls for him to receive $400,000 a year as chairman emeritus until January, 1999, and then to receive $200,000 a year for life as retirement pay. Like Gumbiner, Karcher doesn’t show up in the executive compensation charts because he is not considered an active, decision-making officer of the company.
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Such deals with former top executives are valid and valuable, says Fred E. Whittlesey, a principal of Compensation Performance Management Inc. in Newport Beach.
Knowing that the corporation will help take care of their finances at the end of their careers provides necessary incentive for executives to stay involved with company, he said.
“And when you are considering compensation you have to look at all the roles some of these people play. Many are employees and directors and shareholders, and each hat they wear has a value,” Whittlesey said. “One thing shouldn’t cancel out the other. You can’t underpay an executive just because he also got rich as a shareholder. That’s not what this country is all about.”
Largest Changes in Pay
Bonuses and raises--the cash that executives get in their pay packages--usually are based on predetermined goals and can swing wildly from year to year. The changes in 1993 ranged from a near-tripling of one officer’s bonus to elimination of several others’. The top 10 increases and declines, by percentage change from 1992:
WINNERS
1993 Rank: 1. 1992-93 % change: 182% Executive & Title: Peter S. Anderson; P, CEO Company: MAI Systems Corp. 1993 Salary: $337,500 1993 Bonus: $1,035,000 1993 Total: $1,372,500
1993 Rank: 2. 1992-93 % change: 172% Executive & Title: John D. Murray; CFO Company: Alpha Microsystems 1993 Salary: 141,440 1993 Bonus: 50,000 1993 Total: 191,440
1993 Rank: 3. 1992-93 % change: 170% Executive & Title: Ralph E. Lautmann; SVP Company: Unionfed Financial Corp. 1993 Salary: 166,002 1993 Bonus: 39,328 1993 Total: 205,330
1993 Rank: 4. 1992-93 % change: 153% Executive & Title: Richard A. Demmer; VP, SEC Company: Trimedyne Inc. 1993 Salary: 131,111 1993 Bonus: 500 1993 Total: 131,611
1993 Rank: 5. 1992-93 % change: 149% Executive & Title: William S. Ashmore; EVP Company: Imperial Credit Industries Inc. 1993 Salary: 174,144 1993 Bonus: 0 1993 Total: 174,144
1993 Rank: 6. 1992-93 % change: 141% Executive & Title: Paul M. Lucking; SO Company: Systemed 1993 Salary: 118,980 1993 Bonus: 1,396 1993 Total: 120,376
1993 Rank: 7. 1992-93 % change: 140% Executive & Title: Alvin Katz; Director Company: Helionetics Inc. 1993 Salary: 120,000 1993 Bonus: 0 1993 Total: 120,000
1993 Rank: 8. 1992-93 % change: 124% Executive & Title: Richard M. Ono; VP Company: Gateway Communications 1993 Salary: 100,045 1993 Bonus: 0 1993 Total: 100,045
1993 Rank: 9. 1992-93 % change: 150% Executive & Title: Gerard N. Altieri; SO Company: SysteMed Inc. 1993 Salary: $180,777 1993 Bonus: 20,000 1993 Total: 200,777
1993 Rank: 10. 1992-93 % change: 149% Executive & Title: Ronald J. Rieth; VP Company: SysteMed Inc. 1993 Salary: 177,059 1993 Bonus: 6,000 1993 Total: 183,059
LOSERS
1993 Rank: 1. 1992-93 % change: -91% Executive & Title: Milan Panic; COB,CEO,SO Company: ICN Pharmaceuticals 1993 Salary: $535,000 1993 Bonus: $0 1993 Total: $535,000
1993 Rank: 2. 1992-93 % change: -88% Executive & Title: Michael D. Dingman; COB,CEO,COO Company: Koll Real Estate Group Inc. 1993 Salary: 20,833 1993 Bonus: 0 1993 Total: 20,833
1993 Rank: 3. 1992-93 % change: -74% Executive & Title: Ronald M. Griffith; SVP, LC, SEC Company: Unionfed Financial Corp. 1993 Salary: 125,000 1993 Bonus: 0 1993 Total: 125,000
1993 Rank: 4. 1992-93 % change: -68% Executive & Title: Sher Moeller; VP Company: Wet Seal 1993 Salary: 49,926 1993 Bonus: 0 1993 Total: 49,926
1993 Rank: 5. 1992-93 % change: -57% Executive & Title: Grant S. Kesler; P Company: Metalclad Corp. 1993 Salary: 66,670 1993 Bonus: 0 1993 Total: 66,670
1993 Rank: 6. 1992-93 % change: -48% Executive & Title: Brenda Lynn; EVP Company: Plaza Home Mortgage Corp. 1993 Salary: 360,000 1993 Bonus: 175,000 1993 Total: 535,000
1993 Rank: 7. 1992-93 % change: -47% Executive & Title: William E. Moffat; EVP Company: Plaza Home Mortgage Corp. 1993 Salary: 360,000 1993 Bonus: 175,000 1993 Total: 535,000
1993 Rank: 8. 1992-93 % change: -46% Executive & Title: Louis T. Rosso; COB, CEO Company: Beckman 1993 Salary: 449,167 1993 Bonus: 0 1993 Total: 449,167
1993 Rank: 9. 1992-93 % change: -44% Executive & Title: Wade H. Cable; P, CEO Company: Presley Cos. 1993 Salary: 399,500 1993 Bonus: 340,492 1993 Total: 739,992
1993 Rank: 10. 1992-93 % change: -43% Executive & Title: Michael T. O’Neil; VP Company: Beckman 1993 Salary: 246,008 1993 Bonus: 0 1993 Total: 246,008
Source: Individual companies; Researched by JOHN O’DELL / Los Angeles Times
