Some CEOs Amply Rewarded Last Year Despite Slowdown
The slowing California economy isn’t necessarily putting the brakes on executive salaries at Southland companies.
In fact, executive pay continued to rise at some companies last year in the face of layoffs, declining profits and falling stock prices, according to a survey of chief executive pay at 200 Southern California companies.
The principle of pay for performance--the justification for soaring pay packages in better times--did make some progress, said Don Sagolla, compensation consultant with William M. Mercer Inc., a human resources management consulting firm that conducted the survey for The Times. In many cases, he said, top executives saw their compensation shrink last year in tandem with their companies’ performance.
Although nearly half of the companies in the survey posted either net losses or declines in net income and 84 suffered a slide in total shareholder returns last year, only about a quarter of the chief executives in the survey suffered cuts in their cash compensation--which includes salary and bonus.
In terms of total direct compensation--cash compensation plus restricted stock grants, cash-based long-term incentives and gains from exercised stock options--about a third of the top executives got less than they did the year before. Moreover, there often was little direct correlation between corporate results and the changes in pay.
Among companies that posted net losses, for instance, 15 chief executives got increases in cash pay and eight took pay cuts, according to the survey. Among the companies that reported lower net profits, 21 CEOs took cuts in cash pay and 20 got increases. (Several executives received no raise or their pay was not comparable with that of the previous year because they had recently joined their company.)
And this trend wasn’t limited to Southland companies. In its national survey of executive compensation at 350 companies, Mercer found plenty of mixed messages when it came to pay for performance, Sagolla said. In the end, many companies closely link pay and performance, and some appear to pay for retention and potential rather than for current results, he said.
That’s a systemic problem, said Ken Bertsch, director of corporate governance at TIAA-CREF, a New York-based mutual fund company, which considers the relentless rise in executive pay to be one of the top problems facing individual shareholders.
“Executives are paid for performance when performance is good,” he said. “When performance is bad, they’re paid based on salary comparisons. Unless the executive is fired, they’re generally brought up to the average.”
In some cases, companies in the Mercer survey said their executives got higher pay because the companies’ standards of performance varied from the performance yardsticks used in the study. Mercer’s performance measures included growth in sales, growth in net profit and total shareholder return--which measures stock price appreciation and reinvested dividends.
Most commonly, companies that had both declining net profits and big CEO pay hikes said their executive compensation was based on pro forma results--an increasingly popular measure of profitability that excludes a variety of restructuring, acquisition and one-time charges. Pro forma results often show higher profit figures.
Pay for top executives is generally set by a company’s board of directors, which often is given wide discretion on whether to grant raises and on what criteria to base them. At a growing number of companies, however, the formulas are more rigid.
But once a performance target is met, directors frequently have the ability to set executive pay as high as they like. Raises don’t necessarily have to be tied to the percentage rise in profit or to pay increases given to rank-and-file employees.
At Walt Disney Co., the Burbank-based entertainment giant, CEO Michael Eisner saw his cash compensation increase from $750,000 in fiscal 1999 to $12.3 million last year--$813,462 in salary and an $11.5-million bonus.
Though Eisner led the rankings in both cash compensation and total direct compensation, Disney’s net earnings fell last year. The company’s stock was outperformed by other entertainment company stocks and by the market as a whole from 1995 to 2000, according to the company’s proxy statement.
Why the big pay increase?
Eisner’s base salary hadn’t been increased for several years, so the board decided it was time the CEO got a raise, Disney officials said.
Disney’s pay-for-performance criteria also were altered somewhat in 2000, company spokeswoman Chris Castro said. (In 1999, under the old pay criteria, Eisner didn’t get a bonus.) Last year, the board added a new criterion--growth in adjusted net income--to the other yardsticks it has to choose from, such as return on equity and total shareholder return.
Disney does not disclose its adjusted net income figures or how adjusted net income is calculated, Castro said. However, based on the company’s meeting this new performance target, the board decided to give Eisner the $11.5-million bonus.
(Disney’s net income fell 29% last year compared with 1999, but what the company refers to as “operating income on a pro forma basis,” which excludes certain write-offs, rose 26%.)
Newport Beach technology company Conexant Systems Inc. has adopted a pay-for-performance philosophy, according to the company’s proxy statement. But even though Conexant lost $190 million in fiscal 2000, the company’s chief executive received a 264% increase in cash compensation.
Dwight W. Decker received $669,231 in salary and a $950,000 bonus last year, up from $444,385 in salary and no cash bonus in 1999. Including gains from stock grants, Decker’s total pay package was worth $25.6 million--up 3,182% from 1999.
A company spokeswoman said this was based on pro forma results--both in revenue growth and operating profit--which exclude accounting write-offs for a string of acquisitions Conexant made during fiscal 2000.
Semiconductor maker Applied Micro Circuits Corp. of San Diego posted a $436-million net loss last year, but Chief Executive David M. Rickey took home a 31% raise in cash pay--$415,000 in salary and a $500,000 bonus. Exercising stock options made him the Southland’s second-highest-paid executive in terms of total direct compensation, with a total pay package worth $59.5 million.
A company spokeswoman said Rickey’s pay hike was based on Applied Micro’s revenue growth and pro forma net earnings, both of which were up by triple digits last year compared with 1999. Certain costs related to several acquisitions that the company made during the year were excluded from the pro forma results.
Paul R. Dupee of L.A.-based Maxicare Health Plans Inc. got a 333% raise in cash compensation even though the company lost $64.9 million. A Maxicare spokesman said the comparison was misleading in this case: Dupee’s pay in 1999 was only director’s fees. In 2000, he ranked 173rd among the Southland’s top-paid executives, with a total package of $433,000.
Other examples in which pay and net profit appeared to be out of sync: Gregory L. Williams of Intersil Corp. of Irvine got a 155% increase in cash pay despite the company’s $45.7-million net loss; Louis R. Tomasetta of Camarillo-based Vitesse Semiconductor Corp. got a 42% increase in cash pay though the company’s net earnings fell 54%; and John C. Diebel of Irvine-based Meade Instruments Corp. got a 35% pay hike though his company’s net profit fell 89%.
Mark Peterson, Meade’s vice president and general counsel, said Diebel’s pay reflects bonuses that were earned in the previous year but paid this year. Next year, when this year’s bonuses are paid, compensation figures will look far less generous based on Meade’s fiscal 2001, which was “less than stellar,” Peterson said. A Vitesse spokeswoman declined to comment. Calls to Intersil were not returned.
Some pay hikes--even big ones--were more in line with company performance.
For instance, Stephen F. Bollenbach, chief executive of Hilton Hotels Corp., got a 173% raise in cash compensation. His salary jumped 50% to $928,141, and his bonus nearly quadrupled to $1.8 million from $380,000. Bollenbach also was given $4.6 million in restricted stock, for total direct compensation worth $7.4 million and a total pay increase of 637%.
Beverly Hills-based Hilton, which acquired another hotel chain in 1999, posted a 56% increase in net profit in 2000, and its stock returned almost 11% in a year that the Standard & Poor’s 500 index was down 9%.
“The company had a particularly good year and executed very, very well on an acquisition we had made in late 1999,” said Hilton Senior Vice President Marc Grossman.
At Costa Mesa software maker Emulex Corp., CEO Paul F. Folino received a 148% increase in cash compensation during the fiscal year ended June 2000. His total pay--including gains from exercising stock options--soared 6,533% to $28.6 million.
Emulex revenue jumped 104% in fiscal 2000, while net profit jumped more than fivefold from 1999 to $32.8 million and the company’s stock price rose 136%. However, it’s worth noting that Folino earned almost as much as did the company itself.
Pay for performance was in evidence on the downside as well. John E. Bryson, chief executive of beleaguered Edison International, took a 56% pay cut, receiving $950,000 total cash compensation in 2000 versus $2.2 million in 1999. Rosemead-based Edison, parent of Southern California Edison, lost $1.9 billion last year and has been teetering on the verge of bankruptcy.
Top officers at El Segundo-based Bell Industries Inc., Bridgford Foods Corp. of Anaheim, L.A.-based Guess Inc. and Jacobs Engineering Group Inc. of Pasadena--companies that suffered earnings declines--also took hits to cash compensation. That provided evidence that though executive pay levels remain high, pay-for-performance standards are causing some executives to share a bit of the pain, Sagolla said.
“Boards are beginning to ask some very tough questions,” Sagolla added. “There’s some hardball being played now.”
Overall, the Mercer study found, the median annual cash compensation for executives in the survey was $766,717, up 10.8% from 1999. (The median represents the midpoint, meaning half of the executives were paid more and half less.)
The median total direct compensation in 2000--which includes cash compensation and the value of exercised stock options and stock grants--was $1.1 million, up 9.4%.
Though stock compensation was again a notable part of executive pay packages, the swoon in the stock market has prompted directors to search for other ways to compensate executives. One solution: Giving away stock in the form of restricted stock grants.
With stock options, executives generally must pay to purchase shares. However, the purchase price is set when the options are granted, and they usually aren’t exercised--that is, used to purchase the underlying stock--until years later.
By that time, if the stock price has risen over the years, the holder of the option will reap the difference between the current market price of the stock and the cost of exercising the options.
Stock options were a route to riches for many executives--and quite a few rank-and-file workers as well--during the bull market of the late 1990s. But options have lost some of their luster as falling stock prices have rendered many of them worthless.
Restricted stock, on the other hand, is simply given to executives.
“Restricted stock--free shares--are making a resurgence,” said Graef Crystal, a compensation expert and columnist with Bloomberg News. “That solves the problem if the stock price drops.”
The restricted-stock trend was in evidence among Southern California’s top-paid chief executives too.
For example, Robert A. Eckert, CEO of El Segundo-based Mattel Inc., received $7.7 million in restricted stock last year. Hilton’s Bollenbach got $4.6 million worth of restricted stock; L.A.-based Occidental Petroleum Corp.’s Ray R. Irani received $596,000 in restricted stock; and Greg H. Weaver of Anaheim-based Pacific Sunwear of California received $1.9 million in restricted stock during fiscal 2000, which helped take the sting out of his 51% pay cut.
Mercer’s study excludes “other” pay, a wide-ranging category that includes company contributions to executive pension plans, the value of life insurance provided by the company, use of company cars and planes, tax and financial counseling and low-interest loans.
Mercer did not include this category because the value of “other” compensation doesn’t have to be reported in company proxy statements unless it exceeds $50,000 annually. At times, however, “other” can add up to quite a bit.
How much? Edison’s Bryson received $579,000 in other compensation--primarily preferential interest payments on his deferred compensation, according to a company spokesman. Oxy’s Irani received $534,825 in cumulative other pay; Leonard D. Schaeffer, CEO of WellPoint Health Networks Inc. of Thousand Oaks, took home $333,993 in total other com pensation; and Mattel’s Eckert received $191,984.
“We are paying some of our executives in corporate America enormous sums of money,” said Alan Johnson, managing director of Johnson Associates, a compensation consulting firm based in New York. “It’s like the light bill in Southern California. These guys are getting very expensive.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Southern California Executive Pay
The executive pay rankings are based on a study performed for The Times by the Los Angeles office of William M. Mercer Inc., a global consulting firm that assists organizations in human resources management. The information was collected from proxy statements and annual reports that publicly traded companies are required to file each year with the Securities and Exchange Commission. The study covers 200 public companies with headquarters in Southern California, and the data are for the most recent fiscal year for which filings were available.
The total cash compensation figure is the sum of a chief executive’s annualized base salary and actual cash bonus. Deferred payments are also included in the figure. However, the figure excludes signing bonuses, moving allowances, benefits and perquisites.
Total direct compensation includes the total cash compensation figure plus any gains realized from the exercise of stock options during the respective fiscal year. It also includes the total value of restricted stock awards and long-term incentive plan payouts made within the year.
If a company has co-chief executive officers, the compensation figures for the two individuals were combined to reflect the total compensation provided for the position. The executives are ranked by total direct compensation received during the 2000 fiscal year. When more than one person served as CEO during the year, the study includes the executive in office for the greater part of the year.
*
NA=not available
*No longer CEO
Source: William M. Mercer Inc.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Top Pay Increases
Among the top executives of 200 Southern California public companies, these got the biggest pay increases last year, according to a compensation study conducted for The Times by consulting firm William M. Mercer Inc.
Biggest percentage increase in cash compensation:
*--*
Cash compensation, % change, Executive Company in thousands from prev. year 1. Michael D. Eisner Walt Disney $12,313 1,541.8% 2. Paul R. Dupee Maxicare Health Plans 433 333.0 3. Dwight W. Decker Conexant Systems 1,619 264.4 4. Bruce D. McMaster DDI 1,709 245.8 5. William P. Foley II Fidelity Nat. Financial 3,139 213.1 6. Stephen F. Bollenbach Hilton Hotels 2,728 172.8 7. Gregory L. Williams Intersil 977 155.1 8. Paul F. Folino Emulex 1,069 148.2 9. Muoi Van Tran Optical Comm. Prod. 1,225 146.9 10. Robert G. Deuster Newport 906 129.8
*--*
Biggest percentage increase in total direct compensation:
*--*
Total direct compensation, % change, Executive Company in thousands from prev. year 1. Paul F. Folino Emulex $28,562 6,532.9% 2. Dwight W. Decker Conexant Systems 25,629 3,181.9 3. Noam Lotan MRV Comm. 2,734 2,634.0 4. Terry M. Flanagan* JNI 8,968 2,383.9 5. Robert G. Deuster Newport 7,348 1,762.8 6. Ronald E. Ragland Remec 6,663 1,687.6 7. John D. Poe Semtech 8,162 1,656.4 8. David M. Rickey Applied Micro Circuits 59,502 1,554.5 9. Michael L. Margolis Tekelec 5,735 1,358.3 10. David Overton Cheesecake Factory 6,589 1,076.6
*--*
* No longer CEO
Note: Cash compensation includes salary and bonus. Total direct compensation includes cash compensation plus restricted stock grants, cash-based long-term incentives and gains realized from the exercise of stock options during the respective fiscal year.
Source: William M. Mercer Inc.
