Executive Pay: More in Line with Performance

2001 a Year of Moderation, with Exceptions

NEW YORK, APRIL 20, 2002 (Zenit.org).- In 2001, many business executives shared their companies´ pain. But not all of them.

Chief executive officers with at least two years´ tenure saw their salary and bonuses incur a 2.8% median decrease, to $1,603,125. So says a study of 350 major U.S. companies by New York-based Mercer Human Resource Consulting, the Wall Street Journal reported April 11.

The drop in cash levels was the first since the Journal began tracking CEO data in 1989. Bonuses also suffered: 186 of those covered by the study receiving reduced or no bonuses, a jump from 122 in 2000.

The decline comes as company profits fell by a median of 17.8% in 2001. Stock prices as measured by Standard & Poor´s 500 index fell 13%, the biggest one-year decrease since 1974.

The Journal also noted that CEOs have resorted to less-public means to maintain, and even increase, remuneration. Multimillion-dollar retirement packages, lucrative deferred-compensation plans, and low-interest loans are the favorite ploys. Observed the Journal: “People steering the largest enterprises are sharing some — but not all — of the nation´s economic pain.”

One welcome sign was a greater correlation between company performance and remuneration. Heads of the 10 best-performing businesses experienced an 8.6% increase in total direct compensation. But the leaders of the 10 with the poorest returns saw their pay sag 52.3%.

The annual Business Week pay survey, in the April 15 issue, highlighted Lawrence J. Ellison, Oracle´s CEO. Ellison made history with a $706 million gain from exercising long-held stock options. At the same time Ellison was also a big loser, with the 57% drop in Oracle´s stock price costing him more than $2 billion in the value of his option holdings.

Business Week data showed a decline in average CEO pay by 16%, to $11 million. This ends a decade of increases that saw remuneration packages grow by more than 550%. If Ellison´s bonanza is eliminated from the averages, the drop in total pay was nearly 31%, to $9.1 million.

The New York Times reported April 7 that last year´s data showed average compensation for chief executives declined 8%, to $15.5 million. Many boards, however, also made up for declining bonuses, which are often directly linked to results. The boards compensated by awarding more valuable packages of stock options and more shares of stock, the Times said.

One of the articles in the survey questioned the rewards given to some CEOs for mergers that have not created gains for shareholders. An example was the case of William B. Harrison, chairman of Chase Manhattan Corporation, who signed a deal to buy J.P. Morgan & Company for $30.9 billion in September 2000.

The stock has lost more than one-third of its value in 18 months. Yet, for overseeing the acquisition Harrison received a $20 million bonus. The bonus, which is spread over 2001 and 2002, came on top of his $1 million salary and $5 million regular bonuses last year and whatever else he receives for this year.

The New York Times also singled out Coca-Cola. In late 2000, six months after Douglas N. Daft had become chief executive, the company set aside for him a million shares of stock, worth almost $60 million at the time. The quantity of the shares Daft would receive was related to a series of growth targets in their price.

But last April, Coke announced that the targets would not be met. The following month, company directors made sure that Daft would not suffer financially because of the shortfall; they lowered the benchmarks.

With help from a new stock grant and a large pile of options that last for 15 years (five years longer than at nearly every other company) Daft´s compensation surged to $74.2 million, up 47% from 2000.

Another example is what happened at Ford, where CEO Jacques Nasser was forced out last October. He received $17.8 million in compensation for 2001, a year the company reported a staggering $5.45 billion loss. The compensation, a 32% increase over 2000, was in line with what he would have received if he had kept his job and met 100% of last year´s performance goals, Reuters reported April 9.

These incongruities are not limited to the United States. In Britain, a survey by the Trades Union Congress Labor Research Department found that many top executives who have been sacked, or simply retired, often get “phenomenally generous payoffs that can amount to six or even seven figures,” the Guardian newspaper reported Jan. 3.

The Guardian noted the case of Jim Mueller, who presided over 14,000 job cuts when a merger created Invensys, the troubled automation group, and then left his post with a 3.2 million pound ($4.6 million) handshake.

Newsweek in its Dec. 3 issue noted other examples. Peter Bonfield, who amassed 30 billion pounds ($43 billion) in debt over six years at British Telecom, left in November with a reward of 1.5 million pounds ($2.1 million). And Lord George Simpson, who last September left Marconi in poor condition, took a going-away present of 2.8 million pounds ($4 million).

Salaries of European executives have traditionally been well below U.S. levels. But the situation is changing — and causing not a few protests, the Financial Times reported Feb. 16. This year it was disclosed that ABB, the Swiss engineering group, had paid out lavish pension benefits to its former chairman Percy Barnevik and his successor, Goren Lindahl.

News of the payouts sparked wide criticism. Barnevik and Lindahl then announced they would repay a good part of their benefits, the Wall Street Journal reported March 11. The two former chief executives agreed to return a total of 137 million Swiss francs ($82 million) to ABB.

The Financial Times reported on similar protests over payments made to Roberto Colaninno, former chairman of Telecom Italia. And a controversy over a 112 million euro ($99 million) compensation package for Antonio Perez to lure the former Hewlett-Packard executive to Gemplus, French manufacturer of smart cards, led not only to his resignation but also to the ousting of Marc Lassus, the company´s founder, as chairman.

Other companies, however, have cut pay for poor results. Most of the top executives at Boeing saw their compensation drop by more than 75% in 2001, the Wall Street Journal reported March 25. The Boeing incentive plan, which paid out almost $31.5 million for the top five executives during 2000, paid out nothing last year because the aviation crisis following Sept. 11 kept the stock prices below target levels set by the board.

Insurance company CEO Maurice Greenberg, head of American International Group Inc., froze pay for all 81,000 of the firm´s employees last year, Reuters reported April 6. He also gave up his own bonus, worth $5 million the year before, as the insurer reeled from heavy Sept. 11 losses.

Executives at chip manufacturer Intel also suffered. Intel cut the 2001 bonuses of its top executives by an average of 61% and did not raise their salaries, as profits plunged 88% amid the worst downturn ever for the chip industry, Reuters reported April 11.

A positive point of the pay record for last year is a greater recognition of the need to link pay and performance. Setting a just level for executive pay is no easy task. But growing protests over compensation levels indicate that many rank-and-file workers, and shareholders, aren´t satisfied with business as usual.

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