REVERSAL OF FORTUNE

By Kathy M. Kristof

May 25, 2008 12 AM PT

Times Staff Writer

After years of steady increases in compensation for chief executives -- and steadily growing shareholder dissatisfaction -- something different happened last year: CEO pay actually declined. ¶ The Los Angeles Times’ annual survey of executive compensation found that California’s 100 biggest companies paid 10% less, on average, to their top executives in 2007 than they did the year before. Median pay was also down, but more modestly. Nationwide the trend was similar, with CEO pay declining 5.5%, marking its first decrease in at least a decade, according to Mercer, a consulting firm. ¶ Some of the biggest pay cuts were imposed in the troubled housing and mortgage industries, suggesting that company directors were simply letting their CEOs share some of the pain of poor corporate performance. ¶ For example, Calabasas-based home-loan giant Countrywide Financial Corp., which posted a $704-million loss in 2007 compared with a $2.7-billion profit the year before, slashed Chairman and CEO Angelo Mozilo’s total pay by 77% to $10.8 million from $48.1 million. ¶ And Ryland Group Inc., a home builder also based in Calabasas, recorded a $334-million loss last year versus a $360-million profit in 2006. Its chairman and CEO, R. Chad Dreier, saw his pay plunge 55%.

The idea of linking pay to performance has been around for decades. But before last year, even when performance was down, the compensation paid to top executives still managed to climb -- leading critics to say companies had embraced “pay for failure” and “pay for pulse.”

What’s different now is that growing shareholder activism is having an effect, said Diane Doubleday, global leader of Mercer’s executive remuneration services.

“Shareholders, who are experiencing deteriorating returns, are becoming more activist than ever and want to see compensation outcomes linked” to financial results and stock performance, she said.

Another possible reason for the pay cuts: disclosure rules put in place two years ago that force boards to define the criteria they use to gauge an executive’s performance. If the board grants pay that isn’t warranted by its formula, it has to say why. Moreover, companies must report the estimated value of the stock options they grant to executives.

The increased disclosure has had “a profound effect on how compensation is designed today,” said Derrick Neuhauser, executive compensation consultant at BDO Seidmann.

In addition, state laws and corporate bylaws are being changed to make it easier for disgruntled shareholders to oust directors who are willing to approve outsize pay packages.

As a result, institutional investors have recently organized efforts to oust directors at nearly 100 major U.S. companies.

“Investors have stopped getting mad about executive pay and started getting even,” said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises big shareholders on corporate governance. “They are saying that if you are going to approve these plans, we are going to vote against the heads of the compensation committees.”

Even the government has gotten into the act, with congressional hearings on how out-of-whack pay might have exacerbated the sub-prime mortgage crisis and numerous proposals to restrict executive earnings.

“Executive pay is always a negotiation between directors, management and shareholders,” said Jack Marsteller, head of the compensation practice at consulting firm Towers Perrin in Los Angeles. “In the past, the balance of power had favored management. Now it has shifted.”

That isn’t to say that pay and performance are in perfect lock-step. Indeed, some poorly performing companies gave their CEOs hefty pay hikes.

KB Home Corp., a Los Angeles-based builder that lost $929.4 million in 2007 after earning $482 million in 2006, reported that CEO Jeffrey Mezger didn’t meet the company’s criteria for a 2007 bonus, so the board gave him a $6-million “discretionary” bonus instead.

As a result, his total pay soared to $16.4 million from the $5.9 million reported for 2006. (The exact size of the increase isn’t clear because 2007 was the first year KB used a pay-disclosure methodology required under new government rules.)

Why the big raise? The board’s compensation committee liked the way he handled his first full year on the job, reducing expenses and boosting customer satisfaction, according to KB’s proxy statement, a regulatory filing that must include information on executive pay. How the board arrived at the $6-million figure isn’t clear. The proxy statement doesn’t say, and KB declined to elaborate.

Live Nation Inc., a Beverly Hills-based concert promotion company, has posted annual losses since it was spun off from Clear Channel Communications Inc. in 2005. Last year, Live Nation lost $11.9 million compared with a loss of $31.4 million in 2006, yet Chief Executive Michael Rapino got a 627% raise. Why? Live Nation’s proxy doesn’t say, and the company declined to comment.

At El Segundo-based toy maker Mattel Inc., earnings rose 12% in 2007, but CEO Robert A. Eckert’s pay was up considerably more -- 89%. Why? Mattel’s filing is silent on the matter.

“When you see an increase like that, you naturally want to figure out why. But, instead of articulating why they’ve done that, shareholders get a bunch of boilerplate and legalese,” said McGurn at Institutional Shareholder Services. “I think one of the reasons is they don’t fear any backlash or accountability. They can bump up pay without any repercussions from the company’s owners.”

Mattel spokeswoman Lisa Marie Bongiovanni said the increase in Eckert’s pay was caused by long-term incentive compensation the company pays only once every three years.

Pay can be out of sync with company performance because shareholders still lack the tools to hold directors’ feet to the fire, said Daniel Pedrotty, investment director at labor federation AFL-CIO. In recent years, the Securities and Exchange Commission has considered allowing shareholders to nominate director candidates without an expensive proxy fight.

But the agency has yet to embrace the idea, which business groups say would lead to costly interference in company affairs. Next year may be different, Pedrotty said, partly because the remaining three presidential candidates have all criticized current executive-pay practices.

Sen. Barack Obama (D-Ill.) last year introduced legislation to give shareholders a say on pay. Sen. Hillary Rodham Clinton (D-N.Y.) last month offered a bill that would do the same and also limit some pay practices. Sen. John McCain (R-Ariz.) has recently criticized the size of some CEO paychecks as unwarranted.

But “maybe next year” is a familiar refrain among the activists who have been complaining about CEO compensation since the 1990s.

“We are cautiously optimistic. What we saw this year was generally positive,” McGurn said. But “will boards stick with it? Are they going to continue to cut executive pay or leave it flat, if these companies suffer another bad year? That’s where the rubber meets the road.”

kathy.kristof@latimes.com

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The biggest losers

These chief executives suffered the sharpest cuts in total pay last year among the leaders of California’s 100 largest firms. Pay is the sum of salary and bonus plus the value of stock, options and perks received. Figures are in millions.

Angelo Mozilo

Countrywide Financial

2006 - $48.1

2007 - $10.8

-77.5%

Ronald Havner Jr.

Public Storage

2006 - $7.7

2007 - $2.5

-68.8%

Michael Perry

IndyMac Bancorp