Reality Bites : O.C. executives’ pay increasingly tied to their performance

The condos in Cabo have disappeared, as have the corporate jets, country club dues and other former perks of the executive suite.

Tracking executive pay at public companies today--thanks to years of discontented shareholders and IRS scrutiny--boils down to a pretty simple idea: Look for the money, because that’s just about all that’s left.

“It’s certainly not as much fun as it used to be,” laughed Lawrence A. Wangler, managing partner in the Orange County office of Towers Perrin, a New York-based personnel issues consulting firm. “The unusual compensation transactions are pretty much gone.”

These days the trend is to tie compensation to performance, effectively subjecting a portion of each executive’s pay to the same risks investors take when they provide operating capital by purchasing stock.

The wild West has been tamed.

“The more conservative pay practices of big Eastern corporations have been adopted by most businesses on the West Coast,” said Matt Ward, executive compensation specialist for corporate financial consulting firm Wilson Wyatt Worldwide.

The entrepreneurial companies that are a hallmark of Orange County’s business world and once were leaders in so-called creative compensation have calmed down when it comes to pay, Ward said. The compensation sections of their proxy reports to shareholders are pretty cut-and-dried these days.

During 1994, executive compensation packages in Orange County ranged from a high of $7.5 million to a low of $97,500, according to a Times examination of the pay plans of 83 companies and the compensation they reported for 373 of their top managers.

Executive pay continued growing during the year. There were 53 “millionaire managers” whose total compensation topped seven figures in 1994, compared to 36 the year before and just 26 in 1992.

But as in past years, much of the money was on paper.

Only five of last year’s top earners saw as much as $1 million in cash. The rest came largely from stock options, a way of linking managers’ pay to the ongoing performance of the company because the options usually cannot be cashed in for several years after they are granted.

Options are big in Orange County because smaller, still-growing companies are the norm and usually have far less cash to spare than established giants like Fluor Corp. and Rockwell International.

In smaller, entrepreneurial companies such as Tustin telecommunications products maker PairGain Technologies Inc., the value of options granted to executives can easily outstrip actual pay: Charles S. Strauch, chief executive of the 7-year-old company, received options valued at $418,170 last year. His cash pay was $253,269.

But even at the big companies, stock is a considerable part of compensation. Leslie G. McCraw, Fluor’s chairman, got $1.4 million in cash from his salary and bonus last year. And he received an estimated $1.38 million in options and a grant of stock that vests slowly over a 10-year period. The ultimate value could be more or less than estimated by the company in its compensation report because it depends on Fluor’s financial performance and the resulting performance of its stock on the open market over the coming decade.

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A few companies in the county continue to offer such perks as car allowances and interest-free home loans to some of their high-ranking managers. Michael W. Rayden, chairman of Pacific Sunwear of California, an Anaheim sportswear retailer, gets $800 a month to cover car expenses.

And at Abbey Healthcare Group Inc. in Costa Mesa, part of Chairman Timothy M. Aitken’s annual compensation has been partial forgiveness of principal and interest on a $1.25-million home loan the company provided him in 1992. The entire loan will be paid off by the company later this month if a proposed merger of Abbey and Homedco is approved by the two companies’ shareholders.

William P. Foley II, chairman of Fidelity National Financial Inc., the Irvine title insurance company, got $108,134 to pay for private financial planning help for himself and his separately owned development company.

Compensation specialists say that tax and money management help is an increasingly important fringe benefit because companies are putting greater portions of their executive’s compensation at risk. Foley, for example, got nearly $2.6 million of his $3.6 million compensation last year in the form of options.

For most companies, however, the executive pay formula is simple: a modest salary, a cash bonus linked to individual or corporate performance and a potentially big payoff in the form of stock options tied to ongoing profitability.

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There were a few executives in Orange County who were well remunerated even as their investors’ profits evaporated.

A 1993 investment of $1,000 in the common stock of CareLine Inc., a Santa Ana-based provider of ambulance and emergency medical care services, was worth 20% less--$800--at the end of 1994. But all five of the company’s top managers got raises, ranging from 12%, a $13,484 increase, for the chief financial officer to 32%, a $48,328 hike, for the chairman.

CareLine’s directors, who establish compensation policies, said the raises were needed to bring the managers’ base salaries up to par with what the competition pays.

With the smaller companies that abound in Orange County, however, it is difficult to link salaries directly to a given year’s performance because the businesses are growing and profits--and stock value--can suffer momentary drops because of strategic decisions that ultimately will boost performance.

“So it’s not unusual” to see salaries or bonuses increase even in years when a company loses money, said consultant Ward. “Shareholders should go to the annual meeting ready to ask questions,” he said, “but it could have been a deserved reward for helping to correct a problem.”

Pay can also rise as profits or stock value falls because that’s what it takes to keep a competitive executive on board, said Elliot Gordon, managing director of executive recruiter Korn/Ferry International’s Newport Beach office.

“Growing companies can easily outgrow their executives’ abilities,” he said. “So smart companies hire ahead of curve. The skills for a vice president of marketing in a firm with $20 million in annual sales are much different from the skills needed in a $250-million firm, and you have to pay for the difference. And there are a lot of those growth companies in Orange County now.”

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Sometimes, leaving seems to be more financially rewarding than staying. A number of Orange County’s best-paid executives in 1994 are noteworthy because they got that way by being terminated.

At Abbey Healthcare, Chairman Aitken will benefit from the proposed merger with Homedco because it triggers a so-called golden parachute that pops open when the company’s ownership structure changes.

Abbey has agreed to buy out Aitken’s remaining contract for $2.5 million, and then to execute a new agreement that will employ him for three more years as the No. 2 manager of the merged companies for a minimum of $370,000 a year--$20,000 more than he now gets--plus bonuses and other benefits.

And former Abbey President Jerilyn P. Asher, who was with the company for just eight months during 1994, will be paid her full $220,000 salary for 1995 even though she no longer works for the company. She also will get a $66,000 bonus and Abbey will forgive a $597,264 loan and up to $150,000 of her legal fees.

Finally, Asher gets to cash in 100,000 stock options a year earlier than if she’d stayed with the company.

Abbey’s stock has been soaring, and at a modest 5% annual appreciation the shares could net her $1 million or more by 1998. The company estimated her profit at $2.1 million if she keeps the options for 10 years before cashing out.

“Sometimes you see what someone got and you think, ‘Hey! Fire me! I want a deal like that,’ ” said pay specialist Wangler. “But the person ends up paying about half the money in taxes, and for a chief executive or company president it typically can take a year to three years to find a new, comparable job. So those big bucks have to stretch quite a way.”

And not everybody gets them. T. Patrick Smith, former president of Irvine Apartment Communities, forfeited $1.75 million worth of stock when he left the company in March. If he received any sort of severance package, the company won’t disclose it until next year when it files its compensation report for 1995.

The fact that most high-ranking executives will be out of work for a few years if they part company with their present employers becomes a key factor in the compensation game, Wangler said.

It enables the corporate boards’ compensation committees to stiffen their collective spines and “hold the executives’ feet to the fire,” he said.

For the most part “they are taking their responsibilities very seriously these days,” Wangler said. “It is no longer an old boys club where the operative word is ‘you give me a raise and I’ll give you a raise.’ ”

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Division for Labor

Here’s how the media executive compensation package in 1994 was divided:

Total median value:

$314,001

Salary: 60% Stock options: 27% Bonus: 10% Other*: 3%

* Includes insurance premiums and retirement contributions

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Options Exercised

Almost 70 Orange County executives picked up extra income in 1994 by cashing in options they had been granted in previous years. The money isn’t included in their official 1994 compensation totals, but it often added quite a bit to their pay. Here are the top 10 incomes from options exercised:

Rank Name Company 1 Westcott W. Price III FHP International Inc. 2 Bennie S. Hamlin CorVel Corp. 3 Daniel H. Davis CorVel Corp. 4 Wayne Lowell Pacificare Health Systems 5 Charles S. Strauch PairGain Technologies 6 Richard Lipeles Pacificare Health Systems 7 Michael W. Rayden Pacific Sunwear of California $816,904 8 Kathryn A. Braun Western Digital Corp. 9 Jerry M. Brooks Wonderware Corp. 10 Steven J. Baileys Safeguard Health Enterprises $448,250

Rank 94 Options exercised 1 $2,212,250 2 $1,985,869 3 $1,769,860 4 $1,682,075 5 $1,194,663 6 $887,000 7 8 $479,731 9 $462,926 10

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How the Survey Was Conducted

To compute compensation, The Times counts the executive’s salary and bonus, the stated value of stock options granted during the year, the value of stock awards, and any long-term or annual compensation--usually listed as “other” compensation in corporate reports but including car allowances, insurance premiums, retirement plan contributions, special consulting or director fees and loan forgiveness and other special arrangements that benefit the executive.

Not included is the profit from options exercised during the year, because the estimated value of those options was included in the executive’s pay in the year they were granted.

Only the pay plans of publicly traded companies were examined, so some familiar Orange County executives, including billionaire developer Donald Bren, are missing because their companies are private and are not required to file reports on executive pay.

Some key points of the study:

* The median pay package among the 373 examined by The Times in an analysis of executive compensation practices at 83 Orange County companies had $210,138 cash in it.

* When salary, bonuses, options, stock awards, car allowances, life insurance payments, company contributions to retirement plans and other odds and ends of compensation are added together, the median rises to $314,001.

* The biggest pay package was $7.5 million for George A. Lopez--founder, chairman, president and chief executive of ICU Medical Inc., a San Clemente biomedical firm. He got an estimated $7.25 million of that, however, in options--the right to purchase 660,000 shares of his company’s stock at prices ranging from $11.25 to $16.25 a share. The stock must appreciate by 5% a year over the next decade for Lopez to realize the $7.25-million profit.

* The smallest full-year pay package of those reviewed was $97,500. It was all in cash, a $95,000 salary and a $2,500 bonus, and it went to Wayne K. Butts, senior vice president and director of client services at Safeguard Health Enterprises Inc., the Anaheim operator of a nationwide dental health maintenance organization.