Riding the Wave

Obscene. Egregious. Unconscionable.

These are the words used in this election year to lambaste not only the mud-slinging advertisements of politicos but also the pay of corporate executives.

And California certainly has its share of lavishly compensated bosses.

Consider the $9.3-million cash bonus in 1995 for Jim Jannard, the elusive founder and chairman of Oakley Inc., the Irvine-based sunglass maker that went public last August.

And $8-million-plus cash bonuses for discount-stock titan Charles Schwab and Walt Disney Co. CEO Michael Eisner? And a small matter of $981,704 in state income taxes, paid on behalf of CEO Ray R. Irani by Occidental Petroleum Corp.--on top of his $2.8 million in salary and bonus?

Perhaps surprisingly, however, given the high-flying, attention-getting nature of many California companies--not to mention the high cost of living in the Golden State--the pay for corporate brass here is in line with that of their counterparts elsewhere in the nation.

“They’re dead-on, after you account for differences in company size and performance,” said Graef “Bud” Crystal, a compensation expert in San Diego. Of course, he hastened to add, one could argue that most high-ranking corporate types are overpaid.

The Times’ list of the state’s 100 highest-paid public company executives includes seven who guide the fortunes of Orange County businesses.

Jannard, whose bonus and salary totaled nearly $9.7 million, topped the list. Rockwell International Corp. Chairman Donald Beall, whose cash income last year rose a hefty 33% to $2.8 million, was the county’s second-highest-paid executive and ranked 12th statewide.

Others are Oakley Chief Executive Mike Parnell (40th); Fluor Corp. Chairman Leslie McCraw (45th); Rockwell President Don Davis (93rd) and Executive Vice President Kent Black (98th), and, in the 100th slot, Western Digital Corp. Chairman Charles Haggerty.

In each case, the executive’s base pay was relatively modest. Bonuses based on company performance, either in the stock market or in profits, boosted their compensation into lofty seven-figure territory.

Jannard, for example, received only a $27 raise in his base salary, to $380,697. And Beall, who boasts the highest salary among the Orange County executives with $815,000 in base pay, didn’t even get a raise.

But Beall picked up a $2-million bonus as Rockwell’s earnings jumped 17% and its stock price soared 48%. And Jannard’s $9.3-million bonus came after Oakley went public in a sizzling initial offering last August. Jannard’s bonus, though, was a big step down: He received a $20.9-million bonus in 1994 when the company was still privately owned.

Timothy Aitken, former president of Apria Healthcare Group Inc., the Costa Mesa home health-care giant, scored a $3.1-million bonus and $1.8 million in severance pay when he left five months after Apria was formed through the merger of Homedco and Abbey Healthcare. By comparison, his salary for the 11 1/2 months he worked in 1995 was just $316,967.

But the Times’ 100 list excluded executives who weren’t with their companies at the end of the year, so Aitken doesn’t show up. If he did, he would have been among the top 10.

Executives as a breed are being pilloried this spring, as public companies’ annual proxy statements to shareholders reveal the intricate details of pay packages that appear unseemly and excessive in an era of layoffs, job insecurity and stagnant wages.

Among California’s top-paid executives, the median total cash compensation for 1995 came to nearly $1.5 million, according to an analysis prepared for The Times by Compensation Resource Group Inc., a Pasadena firm that consults on pay packages.

That’s about 46 times the pay of a typical California worker last year.

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To compile the three lists that accompany this report, CRG surveyed the top five officials at California’s 300 largest publicly held companies, as ranked by 1995 sales. (Thus, the research doesn’t include executives in California who work for privately held firms or for companies based out of state.)

Using a cash measure alone covering 1995 salary and bonus, the top 100 list encompasses executives from a number of the usual suspects: old-line banks; utilities and other corporations such as Pacific Enterprises, parent of Southern California Gas Co.; Edison International, parent of Southern California Edison, the electric utility; Pacific Telesis Group, parent of Pacific Bell; Safeway Inc.; Walt Disney Co.; and Atlantic Richfield Co. It also includes a dozen Silicon Valley companies.

But salary and bonus tell only a piece of the story. Many executives from bigger, more mature companies drop off the list and others from smaller, more entrepreneurial ventures come aboard when other elements such as stock options are taken into account.

Many forms of executive pay are geared to rewarding future performance and cannot be tapped for many years. Evaluating the way companies compensate their executives entails wading into a morass of statistics and massaging them with formulas to give the components a suitable value.

It becomes a tricky proposition to attempt to arrive at numbers that satisfy all constituents--from a curious public to compensation experts to stockholder activists to executives sensitive to the notion that shareholders might wince at lofty totals.

Plenty of compensation packages these days have been dramatically lifted by stock option grants, which give executives the right to buy company stock at special prices over specified periods.

For example, when CRG took those and other similar long-term stock incentives into account, the median pay for the top 100 executives totaled a much heftier $4.5 million.

Consider the stock incentives granted to Westcott Price III, president of FHP International Inc. in Fountain Valley.

Price received total compensation of $5.3 million last year. But most of it came in the form of stock options that he can’t cash in for several years. Even then, it will be worth something only if the price of the health maintenance organization’s stock rises.

Still, companies are required to account for the options, and FHP determined that Price’s were worth about $4.8 million under a complex but widely used formula that puts a present-day value on potential future income.

The options granted to Price and the $2.3 million in options given to Rockwell Chairman Beall weren’t enough to put them, or any other Orange County executive, onto the Times’ list of the 25 top option recipients.

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“We’re seeing more and more organizations shifting into ‘variable pay’--pay tied in to performance that varies with the results of the organization,” said David Leach, who heads CRG’s compensation consulting practice. “Stock is making up more and more of the pay package. The advantage is linkage to shareholders.”

Shareholders have certainly been a happy lot as the market has headed into ever more rarefied air. But the long-running bull market has also been a rising tide that lifted a lot of compensation boats for those whose pay is joined to stock options.

That left many critics of executive pay crying foul over the unfortunate concurrence of soaring option grant values--even at mediocre companies--and massive layoffs. “The timing,” said Leach of CRG, “isn’t the best.”

Tying so much of an executive’s compensation to sales, profits, the whims of the stock market and the successful implementation of cost-cutting measures is called “pay for performance.”

And this year it seems to be the dominant trend in Orange County as it is among California companies in general, said George B. Paulin, president of Frederic W. Cook & Co., a compensation consulting firm in Los Angeles.

In other words, executives here tend to earn their handsome packages by creating strong returns for shareholders.

The benefit of receiving stock, of course, is that if the company is successful and the market is in a good mood, the value of the shares granted at little or no cost can be tremendous.

That’s especially true at young, private companies, which often use stock awards to make up for a lack of cash in return for the sweat equity founders invest through their typically long hours.

But while not directly comparable to the options that public company executives get as part of their pay packages, the shares in private companies still represent compensation.

Such pay, though, usually is realized when the private company becomes public, said management compensation specialist Neal Stoughton, an associate professor of finance at UC Irvine’s Graduate School of Management.

That point was driven home twice in the past year as two hot Orange County companies went public and turned their founders into multimillionaires.

At sunglass maker Oakley, founder Jannard sold 6 million of his own shares as part of an August public offering at $23 per share. He grossed $139 million from the sale and kept 21.8 million shares.

Today, with Oakley trading near the $50 mark, the company is preparing a secondary stock offering and Jannard, whose 65% share of the business is now worth more than $1 billion, is including 4.5 million of his shares in the sale.

At Mossimo Inc., founder Mossimo Giannulli grossed $18 million in cash in February when he took his Irvine active wear business public and sold 1 million of his own shares.

That improved mightily on his $180,000 salary for 1995 and more than doubled the $8 million he received in a profit distribution. Giannulli still has 11 million shares, a 73% stake in the company. With the stock trading around $42 a share these days, that’s worth $460 million.

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Much of the emphasis on stock-as-pay has to do with the growth-oriented, technology-based economy in California. Many companies here are less mature than those in the East and Midwest. Pay packages reflect a keen interest in growth, with emphasis on the executives’ having equity stakes and therefore a strong motivation to build their franchises. (That contrasts sharply with utilities, oil companies and other cash-rich corporations that continue to reward executives the old-fashioned way--in cash.)

Some of the cash-rich companies are moving into the performance-pay arena, though. Rockwell International, for example, installed a rule in 1993 requiring senior executives to own company stock. Market values of the holdings must meet certain minimums, ranging from 1 1/2 times annual base salaries for senior executives to eight times base annual salary for the chief executive officer.

Such companies are taking a lesson from the smaller, entrepreneurial businesses that predominate in Orange County, said Fred Whittlesey, principal of Compensation and Performance Management Inc. in Newport Beach.

“For the entrepreneurial company, the formula is less in cash, less in salary, less in benefits and more in stock,” he said.

A few California corporations--in particular, insurance companies Transamerica Corp. and SunAmerica Inc., and cellular company AirTouch Communications Inc.--are beginning to demand even more of their leaders in return for higher pay.

This might seem small consolation for a typical California worker, who last year pulled in a relatively unprincely $32,500, according to the California Department of Finance. And even that fair-to-middling pay is skewed upward, given that the pay of top corporate officers was stirred into the brew.

Below are some of the highlights that emerged from Compensation Resource Group’s research:

* The man with the highest cash pay was Jannard, whose salary of $380,697 and whopping bonus pushed him to the top with nearly $9.7 million.

* At No. 2 on the cash list was Charles R. Schwab, who makes his living off the stock market. His pay rose 187% on the strength of the bullish investment climate. Right-hand man David S. Pottruck, a former college wrestler, came in third with a muscular $6.6 million in cash, up 400% from the previous year.

* W.J. “Jerry” Sanders III of Advanced Micro Devices Inc., who in the early 1990s came under fire from shareholder activists for extravagant pay (and for having a Rolls-Royce for a company car), ranked 10th on the cash list, despite taking a nearly 34% cut from the previous year. That cut, by the way, was in line with his company’s drop in shareholder return for the year. (Shareholder return is stock-price appreciation plus dividends.)

* Based on cash pay alone, all top five officers of BankAmerica Corp. made the list. BankAmerica handed out a lavish farewell package worth nearly $14 million--including option grants, a long-term incentive payout and a $3.7-million bonus--to retiring CEO Richard M. Rosenberg, under whose leadership the bank grew and prospered. He placed seventh on the cash list. Lewis W. Coleman (18th), who resigned as vice chairman and chief financial officer after being passed over for Rosenberg’s post, received, among other payments, $6.5 million related to his departure. Semiconductor giant Intel Corp. also had all top five executives on the roster.

* The case of Wilfred J. Corrigan demonstrates how a big year for option grants can inflate a pay package. The son of a dockworker from Liverpool, England, the chief executive of LSI Logic Corp. has been a Silicon Valley pioneer in the production of high-performance, custom semiconductors. All but a relatively modest $1.33 million of Corrigan’s $23.5-million package consisted of stock options. Corrigan placed 75th on the straight-cash list but No. 2 on the list showing current value of option grants.

(Corrigan’s 1.4 million options will vest over a period of four years. At present, he can exercise only 350,000 of them. LSI has been a stellar financial performer, with exceptional earnings and stock price gains. A $100 investment in the company in 1990 would have been worth $1,048 in 1995, versus $323 for the Standard & Poor’s 500 index, according to the company’s proxy.)

* Some individuals who made the cut have left (or been booted from) their companies--and in at least one case the whole company disappeared. Apple Computer’s Michael H. Spindler (66th) lost out during the recent changing of the guard at the troubled company. William E. B. Siart (24th), CEO of First Interstate Bancorp, was squeezed out when his Los Angeles bank was bought earlier this year by Wells Fargo & Co.

* Depending on who does the analysis, Disney’s Eisner (third) is either a saving grace who deserves every penny or an overpaid guy who doesn’t give shareholders much for their investment. For 1995, he got a 130% premium over typical big-company-CEO pay, according to Crystal. But Eisner’s package includes a fair element of risk and volatility. His bonus can and sometimes does drop to zero, as it did in 1993.

Eisner has not had a salary increase since 1984, and he makes less in straight salary ($750,000) than his new company president, Michael Ovitz ($1 million). (Then again, there is that $8-million bonus.)

* Then there’s Hewlett-Packard Co. The venerable computer giant’s CEO, Lewis E. Platt (48th on the cash-only list), by all rights should be paid millions more, given his company’s sensational performance. Yet his total (including a modest $1.5 million in cash compensation plus long-term incentives) was $4.9 million.

* Every proxy tells a story, and some of the most enlightening reading lies in footnotes detailing compensation lumped into the nondescript category of “other.” At Occidental Petroleum, the big Los Angeles-based oil company, CEO Irani (14th) has that noteworthy “other” perquisite: The company pays his California state income tax every year. The bill totaled nearly $1 million for 1995. In 1994, it came to $647,136, and in 1993 it was $907,615. In another interesting quirk, Oxy pays Irani and other officials director’s fees to serve on the boards of companies that Oxy owns or controls. For Irani in 1995, that piece came to nearly $94,000. His total package, including stock options, came to $6.3 million.

* Rockwell President Don Davis (98th) is credited with cash and bonus income of $1.19 million. But the former head of Rockwell’s Wisconsin-based factory automation unit received a little help relocating to California to take on his new assignment last year: $398,196 to cover the loss he took on his Milwaukee residence and the taxes he incurred on other moving expenses.

* Jill E. Barad (56th), Mattel Inc.’s president and chief operating officer and the likely successor to Chief Executive John Amerman, weighed in as the only female entry on the salary-and-bonus list, with pay of $1.48 million. If stock options and other long-term incentives were added in, Linda Wachner would join her. Wachner hauled in a total 1995 package worth $3.3 million as head of Authentic Fitness Corp., a Van Nuys maker of swimwear under such labels as Speedo and Catalina. That’s pin money compared to her total pay of $17.6 million from her other job as chair, president and CEO of Warnaco, a New York apparel company that makes Calvin Klein underwear, among other brands.

* Another note about stock option grants: More than half of the executives who made the grade for the list of top 25 option grant values did not make the top 100 salary-and-bonus list. Many of those are from high-tech companies, which make liberal use of option grants to attract, reward and retain key people.

* When it comes to value of option grants, the Gap’s Millard S. “Mickey” Drexler really takes the compensation cake. In 1995, the executive was promoted to chief executive and was awarded more than 4-million shares--a huge number. Under the Black-Scholes pricing model, they were valued at $34 million. They will become exercisable in increments starting in 1998.

In recent years, Drexler (30th on the cash list) managed to keep the retailer of jeans and other casual clothing clipping along at a fine pace even as other retailers were flagging. The options appear to be designed to keep Drexler in place--possibly longer than he might have been inclined to stay.

Interestingly, Drexler’s actual salary and bonus fell last year to $1.9 million, from $2.16 million the year before.