Las Vegas, April 4 (Bloomberg) -- Breaking news from the 2002 pay front: Stock option grants falling in size for the first time in 53 years. Free shares and cash incentives taking up the slack. Total pay hardly moving at all.

Well, I'll be knocked over with a feather. A goodly number of chief executive officers seem finally to have received the message that poor performance ought to be accompanied by pay decreases.

In a review of 209 U.S. CEOs, the median pay raise in 2002 compared with 2001 was a mere 2.8 percent. In earlier and more flush times, the equivalent raise would have been some 20 percentage points higher.

The 209 CEOs run companies with 2002 revenue of at least $1.5 billion and have held their jobs for at least the two full fiscal years that ended with the 2002 fiscal year.

Of course, a 2.8 percent median pay raise during a year when the median shareholder return for the same companies was negative 4.2 percent still suggests companies need to work a bit harder to align their CEO's pay with the fortunes of their shareholders.

Within the pay package, there have been some significant changes. Stock option grants actually declined in favor of more free shares and more payouts from long-term incentive plans based on non-market performance measures. In addition, annual bonuses took up a lot of the slack in other parts of the pay package.

A Move to Cash

In short, we are seeing a move away from stock options and even somewhat of a move away from stock altogether and into the safety of cash.

The last time I witnessed this phenomenon was when I was a pay consultant in the early 1970s. The Dow Jones Industrial Average peaked at 1051.69 on Jan. 11, 1973, and didn't cross that line again until Dec. 27, 1982, almost 10 years later.

I will never forget the time when a CEO called me to say: ``Get over here fast. Something's gone wrong with our long-term incentive plan.'' To my counter question as to what could have gone wrong, he replied: ``The plan isn't paying off!''

That, sadly, is the way most CEOs measure the success or failure of a long-term incentive. That a plan has properly equated non-performance with non-reward seems to get lost.

The 1970s saw a large upsurge in free share grants and an even greater rise in compensation based on internal performance measurements under more control by the CEO.

The Dow Jones Average last peaked at 11,722.98 on Jan 14, 2000, and once again, we are seeing a replay of the same CEO behavior. Options, once the darling of the executive suite, are now looked on with considerable jaundice.

Free shares are more appealing, because unless the stock price inconveniently sinks to zero, there will always be a reward. But many companies are once again dusting off plans that pay for such things as growth in diluted EPS -- or, if that series of numbers doesn't look good, how about growth in operating profits.

Compensation Highlights

Here are some highlights from my review of 209 companies:

-- The median base salary rose by a mere 3.3 percent. Why that's down there on a level with your ordinary worker.

-- The median combination of base salary and annual bonus, however, rose by a much richer 9.9 percent. Obviously, it was the annual bonuses that took up the slack here.

-- The median total pay package, excluding the present value of option grants, rose 11.8 percent.

-- The decline in the size of option grants caused the median total pay package, including the present value of option grants, to rise only 2.8 percent.

-- In the meantime, the average grant of free shares, measured by its value on the granting date, rose 9.9 percent, while payouts under long-term incentive plans other than stock options or free shares rose 12.1 percent.

-- As another means of assuaging the wounds from the stock market, the median increase in miscellaneous compensation, which includes the value of perquisites, rose 59.6 percent for items attributable to 2002, and 10.9 percent for items earned in 2002 but attributable to more than a single year.

-- Average gains from exercising stock options in 2002 and the year-end paper profit remaining in unexercised stock options fell, respectively, 40 percent and 35.9 percent from 2001 levels.

The Outliers

Although there are several heartening trends in the data, we still have the outliers out there -- a few CEOs who insist on getting good-sized raises in poor times.

I identified a group of 26 such cases. To make my list, the shareholder return for fiscal 2002 had to round to a negative 5 percent or worse; the CEO had to receive a raise in total pay of 10 percent or higher; and the pay increase percentage had to exceed the total return percentage by at least 20 percentage points.

Information for the table that follows was furnished, in part, by Equilar Inc., an independent provider of executive compensation information.

                                         Total        Total Pay
                                         Return        Increase
Company                CEO               in FY02        in FY02
Walt Disney            Michael Eisner      -18%            498%
Ryland Group           Chad Dreier          -9%            247%
Manpower               Jeffrey Joerres      -5%            176%
Cardinal Health        Robert Walter       -11%            148%
Navistar International John Horne          -25%            146%
Schering-Plough        Richard Kogan       -36%             99%
Teco Energy            Robert Fagan        -37%             92%
Schlumberger           Euan Baird          -22%             65%
Convergys              James Orr           -60%             62%
Solutia                John Hunter         -74%             62%
Jack In The Box        Robert Nugent       -19%             53%
Abbott Laboratories    Miles White         -27%             51%
Delphi                 J.T. Battenberg     -39%             41%
KLA Tencor             Kenneth Schroeder   -25%             38%
Analog Devices         Jerald Fishman      -29%             24%
CIGNA                  Edward Hanway       -55%             23%
State Street           David Spina         -25%             20%
Sonoco Products        Harris DeLoach      -11%             20%
Winn-Dixie Stores      Allen Rowland       -39%             19%
Goodrich               David Burner        -26%             19%
R R Donnelley & Sons   William Davis       -24%             18%
PG&E                   Robert Glynn        -28%             17%
Becton Dickinson       Edward Ludwig       -22%             15%
Auto. Data Proc.       Arthur Weinbach     -12%             14%
Mellon Financial       Martin McGuinn      -30%             14%
BellSouth              Duane Ackerman      -30%             10%

                       Low                 -74%             10%
                       Median              -26%             39%
                       High                 -5%            498%

It has been 15 years since I switched sides and started to write critical articles on executive pay. Along the way, I was joined by a number of other fellow-laborers in the salt mines of corporate governance.

Several names come immediately to mind: Bob Monks, who I think was the very first person to raise the cudgels in the name of the shareholders. His tart-tongued colleague, Nell Minow. Sarah Teslik, the plainspoken and equally outspoken executive director of the Council of Institutional Investors. Dale Hanson and Rich Koppes, both formerly associated with Calpers, the California Public Employees' Retirement System, and Ralph Whitworth, the former head of the United Shareholders Association.

For years, I'm sure it seemed to all of us as if we were shouting into a well of bottomless depth. But what do you know, maybe our message of pay-for-performance has begun to sink in. It's about time.

Last Updated: April 4, 2003 04:10 EST