Exec Pay: More Pain for CEOs

The top 15 chief executive earners netted an average of $35.8 million in 2002. That's down from the $135 million average in 2001

By Louis Lavelle

By now it should be no secret that 2002 was as bad as it gets for chief executives and their much-debated pay packages (see a of the 50 highest paid execs). Compensation consultants say when the final numbers are tallied in coming weeks, average executive pay could be down by as much as 10% to 15% -- the second consecutive double-digit dip. Preliminary data suggest that the situation is considerably worse for the very highest-paid executives.

Among corporations that have filed 2002 proxies to date, the 15 highest-paid chief executives netted an average of $35.8 million, including salary, bonus, long-term compensation, and exercised stock options, according to Standard & Poor's ExecuComp. In 2001, when average CEO pay in BusinessWeek's Executive Pay Scoreboard declined 16%, the 15 highest-paid of the bunch took home a staggering $135 million on average. Even excluding Oracle (ORCL ) CEO Lawrence Ellison's record-shattering $706 million payday, the 2001 average was still $94.2 million, nearly three times the 2002 average. Clearly, the mighty have fallen the farthest.

Overall, compensation consultants say 2002's executive-pay decline is the result of two factors. With performance in the tank, some executives have had their bonuses reduced or eliminated. And with many stock options underwater, others will have minimal gains from option exercises.

"SERIOUSLY FLAWED"?

  With few exceptions, the chief executives who landed at the top of the heap did so by bucking that trend and exercising large numbers of options granted years earlier. In the top slot, Tenet Healthcare's (THC ) Jeffrey C. Barbakow exercised 3 million soon-to-expire options for a gain of $111 million. A Tenet spokesman says BusinessWeek's methodology, which counts option exercises as part of 2002 compensation, was "seriously flawed."

Across the board, pay for performance seemed to be working. A study by compensation consultants Mercer Human Resource Consulting of 100 early proxy filers found that CEO bonuses rose 12.2%, closely tracking those companies' net income, which rose 12.5%. At pharmaceutical-services firm AmerisourceBergen (ABC ), transportation industry supplier Arvinmeritor (ARM ), and tax-services company H&R Block (HRB ), corporate chiefs who boosted earnings were rewarded handsomely. And at specialty-chemical outfit Ashland (ASH ), chemical supplier Cabot (CBT ), and other businesses where earnings fell, cash compensation for the chief executive followed suit.

Among those getting top pay for top performance were the third-highest-paid CEO, Qualcomm's Irwin M. Jacobs, and No. 5-ranked Orin C. Smith at Starbucks (SBUX ). Jacobs hauled in $63.3 million, including $61.4 million from exercising options and an $800,000 bonus, the latter up from $600,000 in 2001. But consider his accomplishment. In a year when tech was hurting more than most, Qualcomm (QCOM ) was no exception, with its stock losing 40% of its value in fiscal 2002. However, Qualcomm did an about-face on profits in 2002, earning $360 million, up from a $578 million loss in 2001.

WINNERS AT LOSERS.

  At Starbucks, Smith took home $38.8 million, including $36.3 million on option exercises and cash compensation of nearly $2.5 million, a 14% increase in total. But few investors are complaining. In fiscal 2002, sales were up 24%, net income gained 18.7%, and Starbucks' shares leaped 40.1%.

Not everyone was as diligent as Jacobs and Smith in toeing the pay-for-performance line. At Walt Disney (DIS ), CEO Michael Eisner won a $5 million stock-unit bonus, even as operating income fell nearly 16% and Disney shares dropped 21%. The board noted "the effectiveness and quality of Mr. Eisner's leadership...in a difficult economic environment."

General Electric's (GE ) Jeffrey R. Immelt saw his 2002 pay more than double after taking the helm, from $6.6 million to $14.4 million -- even though GE stock lost nearly 40% of its value. Nearly half of the pay package, $6.7 million in GE stock, was a long-term incentive payment for meeting operating margin, cash flow, and return on capital goals since 2000. The remainder was based on GE's 7% earnings growth and key strategic accomplishments, including the reorganization of the former GE Capital. "That's what we do at GE," says spokesman Gary Sheffer. "We set aggressive goals, and people are rewarded if they meet them."

"NEW APPROACH" NEEDED.

  At National Semiconductor (NSM ), where shares gained 14% despite a $121.9 million loss for fiscal 2002, CEO Brian L. Halla nevertheless took home $1.6 million in cash, up from $832,666 in 2001. The board cited "incremental improvement" in National Semiconductor's financials throughout the year, including a fourth-quarter profit of $17.1 million.

Pay for performance took perhaps its biggest hit at Tyco (TYC ), where former CEO L. Dennis Kozlowski -- who stands accused of looting millions of dollars from the company -- netted $71 million in 2002 and ranks as the second highest-paid executive in the BusinessWeek survey, at least for now. Tyco's new management has taken Kozlowski to court to get that money back and plans to implement "a whole new approach" to pay, a spokesman says.

While the highest-paid executives of 2002 earned considerably less than the highest-paid of 2001, it's worth noting that two thirds of last year's 50 highest-paid executives enjoyed significantly bigger pay packages. Since few top executives make it a habit to exercise huge batches of options year after year, the winners one year are frequently losers the next. As a result, many individual high paid executives earn more from year to year by virtue of option exercises alone. But as a group -- the members of which change from year to year -- the highest paid have pay packages that fluctuate, up and down, depending on financial performance, stock prices, and the generosity of their compensation committees.

Setting executive pay is an inexact science at best. Many executives suffered or benefited last year right along with their corporations' shareholders. Yet, many others still continued to reap the benefits of a system that allows them to profit while investors watch their portfolios dwindle. With 2003 shaping up to be another dismal year for shareholders, many top executives are counting on that system to keep them ahead of the pack.

The 50 Highest Paid Executives

RANK EXEC/TITLE COMPANY TKR

2002

SALARY

& BONUS

$000

STOCK

OPTIONS

VALUE

REALIZED

$000

LONG

TERM

COMP.

$000

TOTAL PAY

2002

$000

TOTAL PAY

2001

$000

% CHG.
1

Jeffrey C. Barbakow

Chmn; CEO

Tenet Healthcare (THC ) 5530 111050 0 116580 4588 2441
2

Mark S. Swartz

Exec VP, CFO

Tyco Intl. (TYC ) 2243 0 72872 75115 33903 122
3

L. Dennis Kozlowski

Chmn; CEO

Tyco Intl. (TYC ) 4047 0 66991 71038 39510 80
4

Irwin M. Jacobs

Chmn; CEO

Qualcomm (QCOM ) 1750 61440 134 63324 1551 3982
5

Brian G. Kelly

Co-chmn

Activision (ATVI ) 500 46317 0 46817 5753 714
6

Robert A. Kotick

Chmn; CEO

Activision (ATVI ) 500 42793 0 43293 2915 1385
7

Orin C. Smith

Pres.; CEO

Starbucks (SBUX ) 2451 36322 0 38772 2145 1707
8

August A. Busch III

Chmn

Anheuser-Busch (BUD ) 3641 31010 11 34662 9600 261
9

Jeffrey Vanderbeek

Exec. VP; office of the Chmn

Lehman Bros. Holdings (LEH ) 1500 24149 3572 29221 30018 -3
10

Richard S. Fuld

Chmn; CEO

Lehman Bros. Holdings (LEH ) 1800 21125 5771 28696 105183 -73
11

Joseph M. Gregory

COO

Lehman Bros. Holdings (LEH ) 1500 23531 3572 28603 44843 -36
12

Kenneth E. Goodman

Pres; COO

Forest Labs (FRX ) 863 24661 0 25524 32626 -22
13

Ray R. Irani

Chmn; CEO

Occidental Petroleum (OXY ) 5389 1697 16600 23686 10180 133
14

Philip J. Purcell

Chmn; CEO

Morgan Stanley (MWD) 6388 14215 3064 23666 20440 16
15

Louis V. Gerstner Jr.

Chmn

Intl. Business Machines (IBM) 3570 4713 14417 22701 127404 -82
16

Robert G. Scott

Pres.; COO

Morgan Stanley (MWD ) 6025 12565 2972 21563 11914 81
17

Bradley H. Jack

COO

Lehman Bros. Holdings (LEH ) 1500 15847 3572 20919 27743 -25
18

Howard D. Schultz

Chmn; chief global strategist

Starbucks (SBUX ) 2451 17478 0.000 19923 24703 -19
19

David D. Halbert

Chmn; CEO

AdvancePCS (ADVP ) 2264 17136 0 19401 6707 190
20

Jon S. Halbert

Vice Chmn

AdvancePCS (ADVP ) 935 17348 0 18282 10797 69
21

Kenneth I. Chenault

Chmn; CEO

American Express (AXP ) 3988 7920 6325 18233 23728 -23
22

James E. Cayne

Chmn; CEO

Bear Stearns Cos. (BSC ) 10207 0 7983 18189 7173 154
23

Gary W. Loveman

Pres; CEO

Harrahs Entertainment (HET ) 4371 8654 5120 18145 3598 404
24

Richard J. Kogan

Chmn; Pres; CEO

Schering-Plough (SP ) 1430 0 16559 17989 5511 226
25

Robert K. Burgess

Chmn; CEO

Macromedia (MACR ) 797 17145 0 17943 18030 -0.5
26

Patrick T. Stokes

Pres; CEO

Anheuser-Busch (BUD ) 4441 13471 0 17912 9725 84
27

Warren J. Spector

Pres; Co-COO

Bear Stearns Cos. (BSC ) 9694 0 7520 17213 6849 151
28

Alan D. Schwartz

Pres; Co-COO

Bear Stearns Cos. (BSC ) 9738 0 7476 17213.333 6853 151
29

Bruce Karatz

Chmn; CEO

KB Home (KBH ) 8677 0 7828 16505 44376 -63
30

Arthur D. Collins

Pres; CEO

Medtronic (MDT ) 1842 14345 305 16492 1683 880
31

Howard B. Bernick

Pres; CEO

Alberto-Culver (ACV ) 3297 11155 2025 16477 5311 210
32

Robert E. Rubin

Chmn, Exec committee;

Member, Chmn's office

Citigroup (C ) 11465 0.000 5000 16465 16410 0.3
33

David W. Quinn

Vice Chmn

Centex (CXP ) 6548 9861 0 16409 8333 97
34

Thomas J. Matthews

COO

Intl. Game Technology (IGT ) 1229 15133 0 16362 NA NA
35

Euan Baird

Chmn; CEO

Schlumberger (SLB ) 1950 13681 0 15631 3500 347
36

Edward D. Breen

Chmn; CEO

Tyco Intl. (TYC ) 4076 0 11428 15503 NA NA
37

Robert C. Wright

Vice Chmn; Exec officer

General Electric (GE ) 4641 0 10672 15313 5784 165
37

Philip .G. Satre

Chmn

Harrahs Entertainment (HET ) 5238 9991 0 15228 7320 108
39

Jeffrey R. Immelt

Chmn; CEO

General Electric (GE ) 6950 950 7219 15118 6364 138
40

Thomas B. Mackey

COO

Tenet Healthcare (THC ) 3126 11910 0 15036 2587 481
41

Deryck C. Maughan

Vice Chmn; Chmn; CEO

Citigroup Intl.

Citigroup (C ) 2934 9085 2967 14986 4369 243
42

Laurence E. Hirsch

Chmn; CEO

Centex (CXP ) 4950 0 10000 14950 4184 257
43

Miles D. White

Chmn; CEO

Abbott Labs (ABT ) 2813 33 11468 14314 10563 36
44

Larry A. Mizel

Chmn; CEO

MDC Holdings (MDC ) 9513 4391 0 13904 15025 -8
45

John W. Thompson

Chmn; CEO

Symantec (SYMC ) 1181 12623 0 13804 1948 609
46

Wade R. Fenn

Pres, entertainment

& strategic bus dev

Best Buy (BBY ) 1016 12783 0 13799 2176 534
47

Nolan D. Archibald

Chmn; Pres; CEO

Black & Decker (BDK ) 4226 9482 0 13708 23553 -42
48

David D. Mandarich

Pres; COO

MDC Holdings (MDC ) 9343 4231 0 13574 16682 -19
49

Steven H. Temares

Pres; COO

Bed, Bath & Beyond (BBBY ) 773 12766 0 135340 8084 67
50

Sanford I. Weill

Chmn; CEO

Citigroup (C ) 1557 11808 0 13364 42613 -69

Lavelle covers executive pay issues for BusinessWeek in New York

Edited by Patricia O'Connell

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