Upfront CEO Pay Growing, Study Says

Times Staff Writer

Executives don’t need golden parachutes when they arrive with golden hellos.

One reason executive pay has soared in recent years is that compensation deals are getting more lucrative at the front end, with fat signing bonuses and initial grants of stock, according to a study released Friday by Corporate Library, a pro-investor research firm.

That allows some chief executives to bank large sums of money before they’ve proved themselves on the job, the firm said. And if things don’t work out, companies must still pay failed executives a millionaire’s ransom to go away.

The Corporate Library study identified “front-loaded” compensation plans as one of the practices that is undermining efforts to tie executive pay to corporate performance.


Over a five-year period, 11 companies listed as worst offenders paid their CEOs a combined $865 million -- while they presided over a $640-billion decline in shareholder value, the report said.

Palo Alto-based Hewlett-Packard Co., for example, paid former CEO Carly Fiorina nearly $180 million during her five-year tenure, including $21.6 million in cash as severance pay. But these rich rewards were paid for what HP’s board of directors ultimately determined was an uninspired performance.

After Fiorina was booted last year, the HP board gave new CEO Mark Hurd “exactly the same kind of front-loaded, non-performance-related package,” the report said.

Hurd got a $2-million signing bonus, $8.7 million in stock and $5 million in “price protection” payments to make sure he didn’t lose money on the stock of former employer NCR Corp., the report said. In addition to paying for his moving costs to Palo Alto, the report said, HP gave Hurd a $2.75-million relocation bonus.


“Despite being responsible for both Fiorina’s pay and her failure, the board and the compensation committee [have] not learned from [their] mistakes,” said Paul Hodgson, author of the report.

“The focus of the report is not the CEOs themselves but the bad decisions of the compensation committees that are not paying CEOs for performance.”

Hewlett-Packard executives said they couldn’t comment because they had not seen the study.

The 10 other companies criticized in the report were Safeway Inc., AT&T; Inc., Time Warner Inc., Home Depot Inc., Lucent Technologies Inc., Merck & Co., Pfizer Inc., Verizon Communications Inc., BellSouth Corp. and Wal-Mart Stores Inc.


Brian Dowling, a spokesman for Pleasanton, Calif.-based Safeway, said the company’s inclusion was based on the exercise of stock options by CEO Steven Burd, who Dowling said generated significant long-term value to the company’s shareholders. The company’s short-term performance was hurt in part by the 2003-04 Southern and Central California supermarket strike, Dowling said.

“Clearly, there was a period between 2002 and 2004 where we lagged the sector, but we were coming off a period where our valuation was very high compared to the others,” Dowling said.

Since then, Dowling said, Burd’s team has implemented a strategy that’s showing results. Safeway shares have risen 36% in the last year, gaining 19 cents Friday to $25.12.

The Corporate Library study looked at executive pay and shareholder returns for the 250 largest public companies for a five-year period, reflecting the most recent data available Feb. 16. The companies that made the worst-pay list had negative shareholder returns over the last five years, underperformed their peers and the Standard & Poor’s market index and still paid their CEOs more than $15 million a year.


The 11 companies cited in the report “are indicative of a general misunderstanding of how incentive pay should work, particularly in the long term,” Hodgson said.

Alan Johnson, a corporate compensation consultant in New York, disagreed, saying that companies were doing a better job to link pay to results.

“Pay for performance is working better than it has in the past,” Johnson said. “Most of our clients work at it very hard -- they’d be crazy not to.

“But one of our fundamental problems is that, as a society, we value CEOs enormously and it’s a competitive market,” he added. “So, it’s like saying apartments in Manhattan cost too much. That’s undeniably true. But if you want one, that’s what you have to pay.”