Study Ties Biggest CEO Raises to Largest Layoffs

Chief executives of companies that had the largest layoffs and most underfunded pensions and that moved operations offshore to avoid U.S. taxes were rewarded with the biggest pay hikes in 2002, on average, a new report has found.

The study, released Monday by United for a Fair Economy in Boston and the Institute for Policy Studies in Washington, used methodology that some companies criticized as misleading. Still, the report may add to the furor over executive pay.

Carol Bowie, director of governance research at the Investor Responsibility Research Center in Washington, said the study “demonstrates the flaws in how some incentive pay plans are constructed.”

Many plans “are fairly short-term in nature and all of these things -- layoffs, underfunded pensions and going offshore to avoid taxes -- can pump up short-term results,” Bowie said.

While the median CEO pay increase was 6% in 2002, median pay rocketed 44% for chiefs of the 50 companies that announced the biggest layoffs in 2001, according to the study.

At the 30 companies with the greatest shortfall in their employees’ pension funds in 2002, CEOs that year made 59% more than the CEO median reported in BusinessWeek’s annual executive compensation report, the study said.

Among the 24 companies with the most offshore subsidiaries in tax-haven countries, CEOs earned 87% more than the median pay for the last three years, the study concluded.

In the case of tax havens, CEO pay was measured over a longer time frame because the decision to use tax havens is considered a long-term move rather than a short-term step, said Chris Hartman, research director for United for a Fair Economy.

The group, founded in 1994, says its mission is to “focus public attention on economic inequality.” The Institute for Policy Studies, founded in 1963, calls itself “an independent center for progressive research and education.”

At the top of the study’s list of companies that announced large layoffs in 2001 was Palo Alto-based Hewlett-Packard Co., which set plans to shave nearly 26,000 jobs that year.

In 2002, HP’s CEO, Carly Fiorina, saw her pay rise 231% from 2001, to $4.1 million, the study said.

An HP spokeswoman “strongly disputed” the implied correlation, saying that Fiorina’s base pay has remained constant. All employees, including the CEO, received a bonus in 2002 because the company met certain performance goals, the spokeswoman added. Fiorina turned down a merger-related bonus, she said.

Some experts noted that CEO pay would be expected to reflect the leader’s ability to make a company more efficient and boost shareholder value, even if that required layoffs.

“The key question is did the executive get a bonus for doing layoffs, or did he or she get a bonus for cutting costs and riding through the tough times,” said Matt Ward, president of Westward Pay Strategies in San Francisco. “Obviously, it is uncomfortable for the executives on this list, but to determine whether the link is a fair one, you’d have to look at these companies on a case-by-case basis.”

HP’s stock price fell 15% in 2002 while the Standard & Poor’s 500 index sank 23%.

The study also cited AOL Time Warner Inc.’s former CEO, Gerald Levin, as the executive taking home the biggest 2002 percentage pay increase -- a 1,612% hike -- in the wake of 4,380 layoffs in 2001.

An AOL Time Warner spokeswoman said the data were misleading. Levin’s cash compensation remained level in 2002, but he exercised stock options worth more than $19 million, boosting his total pay to nearly $21 million, the company said. Those stock options, which accounted for the bulk of his pay, would have expired if not exercised in 2002.

According to the study, CEOs at 22 of the companies with big layoffs in 2001 saw their compensation drop in 2002. Those included the top executives at Motorola Inc., Solectron Corp. and Cisco Systems Inc.

The study looked at layoffs in absolute numbers, not as a percentage of a company’s total staff. That was likely to result in a big-company bias, and big companies tend to pay their executives more than smaller companies simply because of scale, pay experts said.

Similarly, the companies with the largest pension shortfalls, in total dollar terms, also are some of the biggest U.S. companies, which would be expected to pay their CEOs more than smaller companies that may have larger pension shortfalls as a percentage of total liabilities.

United for a Fair Economy chose to use raw numbers rather than percentages because the group also wanted to look at how the layoffs and pension shortfalls affected the economy as a whole, said Scott Klinger, co-director of the group’s “responsible-wealth” project.

While a small firm’s layoffs of 100 people may be huge as a percentage of its workforce, the total of 465,000 individuals who were jettisoned by the major companies in the study shows the effect of layoffs nationwide, Klinger said.

Thirty firms with a collective pension deficit of $131 billion at year-end in 2002 paid their chief executives a total of $352 million that year, according to the study. The authors also pointed at a growing trend of securing executive pension plans with special trusts, even as pensions for rank-and-file workers were sinking.

“This study picked up on a number of important themes that are emerging in the post-Enron environment,” said Brandon Rees, research analyst at the AFL-CIO’s office of investment. “One of the most important ones is that executives are sheltering their retirement plans from the risks that everyone else is expected to shoulder.”

The study’s authors said the data argued for more action to rein in executive compensation. The report listed a number of recommendations, including formal corporate expensing of stock options, requiring “more realistic” pension accounting and requiring shareholder approval of large severance plans.

Many of those recommendations already are focal points of pension-fund activists, accounting regulators and some members of Congress.

“This study is a useful guide for employees, investors and the general public to understand what’s wrong with executive compensation,” Rees said. “We believe excessive executive compensation is the primary corporate governance abuse that needs to be addressed.”