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OUT OF BALANCE?

Times Staff Writer

COMPARED with the pay of celebrity chief executives such as Oracle Corp.'s Larry Ellison, the $7.3 million in total compensation pulled down last year by Synnex Corp. CEO Robert Huang is practically paltry.

But set against the tech-product distributor’s fiscal 2006 profit of $51.8 million, Huang’s pay looks a lot bigger. In fact, his compensation amounted to 14% of the company’s earnings, the highest pay relative to earnings at California’s 100 largest public companies.

Anger among investors has intensified in recent years as executive pay has escalated. One reason for the growing fury, according to corporate governance advocates: Compensation increasingly is taking a noticeable slice out of corporate profits.

Last year, among the state’s top 100 companies, the typical CEO’s pay amounted to 2% of net income, The Times found in its annual report on executive compensation in California.

Put another way, the share price of that typical company would theoretically be 2% higher if it didn’t have the CEO’s pay eating up earnings, based on the notion that a firm’s stock price amounts to a multiple of its earnings. And how many investors would ignore a 2% change in the value of their stock portfolios?

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At 14 companies, including Synnex, the chief’s pay amounted to 5% or more of net income.

Critics say no one deserves such a big piece of the pie.

“It does raise the question about whether shareholders are getting adequate bang for their buck,” said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises shareholders and campaigns for good corporate governance. “These numbers are often material, at least to near-term earnings.”

This year, for the first time, our compensation listings include a column showing the CEO’s pay as a percentage of earnings, plus a column showing the theoretical hit to the company’s stock price (calculated by multiplying the percentage of profit by the stock price on May 31). For example, at Synnex, Huang’s pay theoretically reduces the value of each share by $2.90. (The stock finished last month at $20.48 a share.)

To be sure, these yardsticks have flaws.

For one thing, at 15 companies, the two figures couldn’t be calculated because the company lost money or earned less than the person in charge.

In addition, these calculations ignore extraordinary items. So if a company takes a big charge against earnings, such as a write-off for restructuring costs, the CEO will appear to be comparatively higher paid than he or she would have otherwise.

Also, a certain share of CEO pay is tax-deductible, which means for many companies, their profits and stock prices are hurt somewhat less than the calculations suggest. (A substantial share of CEO compensation, however, may not be deductible because of tax laws written to reduce incentives to give executives big pay packages.)

And a CEO who is so successful that his company sells at an extraordinarily high multiple of earnings also will appear relatively expensive on a per-share basis, even though his shareholders are likely to feel that the CEO is worth every penny.

But as benchmarks measuring CEO pay go, McGurn said, this is as reasonable as any.

“We get companies regularly reducing CEO compensation to a ratio of the market capitalization of the company, and saying this is their commission on growth,” McGurn said. “Turnabout is fair play. If you claim that you are entitled to a percentage of the growth, shareholders can certainly fairly ask, ‘How much is your pay costing me?’ ”

The answer, at many of California’s biggest companies, is a lot.

By far, the most expensive California CEO relative to net income was Huang at Synnex. Company spokeswoman Laura Crowley declined to comment on whether it was appropriate to give an executive 14% of earnings, but she said the company’s board felt his pay was justified.

“We do have an executive compensation committee, built of independent directors, who have a wealth of experience formulating the compensation packages that they deem appropriate,” she said. “Bob Huang is the president, CEO and founder of a company that has been around for 27 years. We have done well as far a being a consistently profitable organization.”

Gateway Inc.'s Ed Coleman ranked second, pocketing the equivalent of 9.6% of the Irvine-based computer maker’s profit. Coleman was hired in September to turn the struggling company around.

In absolute terms, he earns a relative pittance, taking home just $927,122 in cash and stock. Unfortunately, Gateway’s shareholders can say the same. The company earned $9.6 million last year on nearly $4 billion in sales. Before Coleman’s arrival, Gateway had a profit of $6.1 million in 2005 after losses of $568 million in 2004 and $515 million in 2003.

Gateway declined to comment about Coleman’s pay, except to emphasize that he was new to the job.

Ranked No. 3 in percentage of pay was Chad Dreier at Ryland Group Inc. His total pay of $31.4 million amounted to 8.7% of net income.

The home builder says Dreier is worth every penny.

“Ryland’s performance over the 14-year tenure of Mr. Dreier has dramatically exceeded peer companies in and out of the home-building industry, with a 900% increase in shareholder value since 1993,” the company said in a statement.

Richard Ferlauto, director of pension and investment policy at the American Federation of State, County and Municipal Employees, says his pension fund will systematically take on companies whose directors have allowed CEOs to walk away with an appreciable portion of profits.

“It doesn’t make sense to limit CEO pay to a raw number,” he said. “But pay should be aligned to profits. If it accounts for too large a percentage of profits, it is an inefficient use of capital that will affect the growth of the company over the long term.”

The highest-paid executives in total dollar terms are a familiar bunch.

Oracle’s Ellison is No. 1 with $60.5 million, followed by Ray R. Irani, CEO of Occidental Petroleum Corp., with total compensation of $55.6 million. Countrywide Financial’s Angelo Mozilo ranked third with total compensation of $48.1 million in 2006.

Proxy Governance, a Vienna, Va.-based shareholder advisory service, is so offended by the pay practices at Occidental and Countrywide that it has advised clients to vote against board members of those companies’ compensation committees and to vote for proposals demanding a say on pay for shareholders. The firm hasn’t reviewed Oracle’s latest filings.

“Even when performance is good, there is a level where you are simply giving away too much pay, period,” said Shirley Westcott, managing director of policy at Proxy Governance.

Although Ellison, Irani and Mozilo took home a lot in absolute terms, their pay packages as a percentage of earnings were below average -- 1.8% for Ellison and Mozilo and 1.3% for Irani.

In addition to now showing percentage-of-pay figures and the related theoretical hits to stock prices, The Times’ compensation rankings this year are different in other ways. That’s because the Securities and Exchange Commission has changed the rules for reporting executive compensation. The new rules mandate the disclosure of more information about perquisites -- such as personal flights on company aircraft, company-paid country club memberships and tax reimbursements.

The required method for reporting long-term incentive payments, such as grants of stock and stock options, also has changed.

Under the old rules, the payments were reported when they were granted, even if some or all of the award would not be received until a later date and would be contingent on one or more conditions, such as hitting specific performance targets. The new rules require companies to account for these awards when they “vest,” or become the unfettered property of the executive.

However, the new reporting rules don’t yet apply to all companies. If a firm’s latest fiscal year ended before Dec. 15 -- which is the case for more than a third of the companies on our list -- the old rules could be used in the current round of reporting.

That means the figures from some companies can’t be compared on an apples-to-apples basis with the data from other companies. As a result, the rankings accompanying this article have been divided into two tables. The pay of Ellison at Oracle tops the list of companies reporting under the old rules, and Irani of Occidental is No. 1 on the new-rule list.

It is important to note that the figures in the tables don’t necessarily include all the pay that the executives took home. With Irani, for example, in addition to his $55.6 million in total 2006 compensation, during the year he cashed in $94 million in deferred compensation that had been earned before 2006 and reaped a $270-million profit on previously granted stock options. If that compensation, which was technically earned in previous years, is included, his unofficial haul for the year exceeded $400 million.

Another difference from previous years is that, with most companies using the new method for the first time, the pay of their CEOs in 2006 can’t be compared with their 2005 compensation. Therefore, the tables do not include a column showing percentage change in total pay from the previous year.

Next year all companies will have to use the new rules. By then, if the recent trend continues, the furor over executive pay may be greater than ever.

This year, that anger has reached such a pitch that Congress has gotten into the act.

The House of Representatives overwhelmingly passed a bill that would allow shareholders to put executive pay packages up for an advisory vote.

In the Senate, the bill has won the support of presidential contenders Hillary Rodham Clinton and Barack Obama.

“This issue is gaining critical mass,” said Daniel Pedrotty, director of investment at the AFL-CIO, which has become an activist investor through its pension plan. “It’s not just activists. It’s mutual funds and legislators too.”

kathy.kristof@latimes.com

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Times researcher Scott Wilson contributed to this report.

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(BEGIN TEXT OF INFOBOX)

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Making top dollar

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The Times this year looks at CEO pay as a percentage of company earnings and shows the theoretical hit it takes on company stock prices.

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Highest pay in absolute terms

LARRY ELLISON

Oracle

$60.51 million

RAY R. IRANI

Occidental Petroleum

$55.63 million

ANGELO R. MOZILO

Countrywide Financial

$48.13 million

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Highest pay as percentage of profit

ROBERT HUANG Synnex

14.1%

J. EDWARD COLEMAN Gateway

9.6%

R. CHAD DREIER

Ryland Group

8.7%

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Profit taking

Here are the chief executives of California’s largest companies who earned the most by exercising stock options last year.

*--* Gain on options Company CEO (in millions) Occidental Petroleum Ray R. Irani $270.2 Autodesk Carol A. Bartz $80.5 Countrywide Financial Angelo R. Mozilo $72.2 Cisco Systems John T. Chambers $69.7 Oracle Larry Ellison $63.2 Wells Fargo Richard M. Kovacevich $62.0 Robert Half Int. Harold M. Messmer Jr. $58.4 Lam Research Stephen G. Newberry $37.5 Sandisk Eli Harari $37.0 Gilead Sciences John C. Martin $30.1

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Source: Salary.com


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