News: Analysis & Commentary: EXECUTIVE PAY
CEO PAY: GROSS COMPENSATION?
New pay figures make top brass look positively piggy
Business bashers on the campaign trail are about to get a generous gift from Corporate America: news of stratospheric pay increases for top brass, even as many are slashing their workforces at a furious pace.
Even business-friendly pols may have trouble reading the latest mind-numbing numbers without blanching: Aetna Life & Casualty Chairman Ronald E. Compton's compensation skyrocketed 485% last year, to $6.6 million. Morgan Stanley CEO Richard B. Fisher's total pay jumped 318%, to $11.9 million. At Texas Instruments Inc., CEO Jerry R. Junkins got a package totaling $10.7 million, 148% more than the year before.
Behind nearly all the triple-digit CEO pay hikes is a roaring stock market that has led to huge exercises of options--some of which were granted over years. Some $10.8 million of the $14.1 million Oracle Corp. Chairman Lawrence J. Ellison made in 1995 came from a stock option exercise that lifted his total pay an awesome 387%. At Citicorp, nearly $3.8 million of CEO John S. Reed's $8.1 million package, a 57% rise, was from stock options. All told, according to a survey by consultants Pearl Meyer & Partners Inc., average CEO pay at large companies jumped by 23% last year, to $4.37 million. Base salaries rose only 4%, but stock option grants jumped by an average of 45% and CEO bonuses by 39%.
Given the magnitude of their pay hikes, CEOs look like easy game for pols on the stump. That goes double if they come off as insensitive to the travails of average wage earners during an era of downsizing and employee disenchantment. Just ask AT&T Chief Robert E. Allen. His basic salary remained flat last year at $5.85 million. But he came under heavy attack by Pat Buchanan and others for pocketing a supplementary stock option grant worth nearly $11 million, even as he announced plans to lay off 40,000 employees. "At a time of massive layoffs, it's rubbing salt into the wound," says David N. Swinford, a pay expert at William M. Mercer Inc. "Politicians could start talking about raising tax rates for high-income individuals." Even fellow CEO Sanford I. Weill of Travelers Corp. says Allen handled the situation "horribly."
PINK SLIPS. Allen, though, isn't the only CEO to receive a handsome pay package while simultaneously sending out thousands of pink slips. At Pacific Telesis, which announced layoffs of 19,000 people during the past four years, Chief Executive Philip J. Quigley bagged $2.4 million in total pay last year, a 23% rise. Ronald W. Allen, the chief of Delta Air Lines Inc., which has announced the elimination of 18,800 jobs since 1991, got a mammoth 187% increase in total pay in 1995, pulling down $1.4 million. And that doesn't include a stock option grant exercisable in the future currently worth $1.9 million. Then there's BellSouth Corp., which has announced job cuts in the past four years totaling 21,200. The compensation of CEO John L. Clendenin climbed 137% to $4.8 million last year, not including an option grant worth $2.3 million more.
Ironically, many of the gains can be attributed to shareholder pressure to shift compensation to stock-based pay, as well as to government rules on executive pay. New proxy rules--set three years ago--forced boards to spell out specific goals that would unleash incentive pay. To preserve their flexibility, many simply increased payouts and often lowered targets. "These changes are driving compensation to ever-increasing heights," says Pearl Meyer, head of the New York-based pay consultancy. "Absent government meddling and institutional shareholder pressure, pay levels would be far lower."
COLA BREAK. Although most companies have yet to release their proxy statements, which contain reports of CEO pay for last year, the early returns show some remarkable comp packages. So far, the single biggest reward has gone to Coca-Cola Co. Chairman Roberto C. Goizueta. He pulled down $13.1 million last year--and, more important, a stock option grant of 1 million shares already worth more than $25 million.
Still, Goizueta did perform for his lavish recompense. Even the most vocal of pay critics, Graef S. Crystal, doesn't criticize him too harshly. The reason: Since Goizueta became CEO in 1981, the company's market value has risen to more than $100 billion from $4 billion. "He's the Babe Ruth of corporate CEOs," says Crystal. "It's hard to think of a major-company chief executive who has had as high and as consistent a level of performance."
Many of the other top-paying companies also performed well--although CEO pay hikes far outstripped the gains in their stocks. For instance, Texas Instruments' stock zoomed up 50.4% last year, so few investors are likely to gripe about CEO Junkins' $10.7 million paycheck. And Aetna's shares rose 46.9%. Allen looked bad partly because AT&T's shares were up only 28.9% last year--less than the 34% increase in the Standard & Poor's 500-stock index.
As is often the case, smaller, lesser-known companies made some of the biggest CEO payouts. Howard Solomon, CEO of Forest Laboratories Inc., a New York pharmaceutical company, made more than $17 million last year. Melburn G. Whitmire, vice-chairman of Cardinal Health Inc. in Dublin, Ohio, a distributor of health and beauty aids, made nearly $15.4 million. The gains, however, came from the exercise of stock options granted years earlier. Solomon's cash salary and bonus amounted to a relatively modest $610,644. Whitmire's was just $617,359.
Even when CEOs decided not to take advantage of stock market gains, though, they often received sizable hikes in cash pay. After leading Caterpillar Inc. through a bitter strike to record profits, Chairman Donald V. Fites gained a 75% rise in his pay last year, to $3.1 million. The board of directors raised his base salary 25%, to $1 million, and gave him a long-term incentive plan payout of $900,000. Thanks to improved results on Wall Street, Lehman Brothers Inc. more than doubled the cash bonus of Chairman Richard S. Fuld Jr., to $1.5 million. That brought his total take to about $5 million last year.
There's plenty more to come. Morgan Stanley, for one, is asking shareholders to approve an incentive plan that would set aside an extraordinary 86 million shares--some 55% of total outstanding shares--for the investment bank's stock option plan. "I find this breathtaking," says Crystal. "They seem to be doing a creeping leveraged buyout." Morgan says the latest bennies are not only for the senior executive team but also for more than 10,000 of its employees over a 10-year period. "The place works better when people have a sizable interest in the business," says Philip N. Duff, Morgan's CFO.
And so another provocative pay season begins--just as the Presidential election campaign is shiftng into high gear. Not exactly the best time for the nation's CEOs to take the money and run.By John A. Byrne in New YorkReturn to top