What, Me Overpaid? Ce Os Fight Back

For years, the nation's corporate chieftains adopted the ostrich approach to complaints about their ever-escalating pay. They only begrudgingly and briefly answered shareholders' questions about their paychecks. With few exceptions, they evaded reporters who asked them for comment on their compensation.

No more. Driven out of the sand by shareholders, politicians, and an increasingly frustrated public, some chief executives are beginning to mount vocal defenses of what many consider offensive pay. At one company after another, including Grumman, Ralston Purina, and PPG Industries, CEOs are sounding off at annual meetings, vigorously justifying their pay packages to stockholders. "Companies obviously know that pay is a hot issue," explains Robert Salwen, a principal of William M. Mercer Inc., a compensation consultant. "They're trying to deflect criticism and take the wind out of the sails of the critics."

MEET THE PRESS. At Coca-Cola Co.'s recent annual meeting, for example, Chairman Roberto C. Goizueta chose to head off any embarrassing queries by devoting much of his prepared remarks to the subject of pay. After the barrage of publicity that greeted his restricted-stock award, worth $81 million, he said he felt "compelled, both intellectually and emotionally," to take on the topic. Leon C. Hirsch, chairman of U.S. Surgical Corp., even penned a defensive column for U.S. News & World Report on his compensation, which came to $23 million in 1991. And two weeks before disclosing the paychecks of its top executives, General Motors Corp. invited the media in for a briefing from its director of compensation--even though Chairman Robert C. Stempel's $1 million salary and bonus last year was so low that he failed to rank among the 100 highest-paid executives in the nation.

For an increasing number of CEOs, there's just no ducking the issue anymore. The Securities & Exchange Commission made it an unavoidable topic in February, when it agreed to allow nonbinding shareholder votes on executive pay at such companies as Bell Atlantic Corp. and Eastman Kodak Co. Executive pay hasn't cropped up in proxy resolutions since the 1960s, when the Gilberts, those perennial corporate gadflies, unsuccessfully sought to limit the pay of General Motors executives to $350,000 a year. These days, of course, the numbers are much bigger--and so are the protests.

Now, as the issue of CEO pay moves onto the regulatory and political agenda, a growing number of companies have decided that polemics and public relations alone won't make it go away. At some companies, such as Avon and IBM, the boss has taken a cut in pay--aggressively publicized, of course. At others, chief executives have even declined bonuses that were owed to them. UAL Corp. CEO Stephen M. Wolf, widely criticized for his $18.3 million pay package in 1990, declined to accept an incentive award last year. And some directors are beginning to scrutinize entire packages more closely. They are raising performance targets, assigning premium prices to stock-option grants, and changing the way they report compensation to shareholders.

All these actions represent Corporate America's collective shudder at the prospect that Washington may ultimately intervene in the donnybrook over runaway executive pay. "I don't think I'd like to see the government come in and try to regulate it," says Detroit Edison Co. CEO John E. Lobbia. "But we in industry have to regulate it, and I say that as a CEO and as a director who sits on other companies' boards."

SALARY SLUMP. Those jitters are now beginning to show up in the numbers. For what may well be the first time in the 42 years BUSINESS WEEK has kept tabs on executive pay, the CEO's average salary and bonus went south, falling 7%, to $1,124,770 in 1991. Of course, the decline occurred in a recession-plagued year in which corporate profits slid by 18% and tens of thousands of managers lost their jobs. But last year marked one of those rare occasions when the average boss's compensation failed to outstrip the paychecks of white-collar professionals, whose pay rose by 5.1%, and inflation, which nudged up 3.1% in 1991.

A rather different picture emerges when you add in long-term compensation, such as stock options. Counting these goodies, the chief executive's total pay jumped by 26%, to a record $2,466,292. But much of that increase can be attributed to unusually large option gains by a minority of CEOs. Even including long-term compensation, 6 out of 10 chief executives saw their totalpay fall from 1990 levels, according to BUSINESS WEEK's Executive Pay Scoreboard, compiled with Standard & Poor's Compustat Services Inc.

But Corporate America's newfound and loudly proclaimed restraint may not be all it appears to be. For one thing, the gap between the executive suite and the shop floor is still widening. Last year, the average chief executive of a large corporation pulled in roughly 104 times what a factory employee got. Back in 1980, when the chief executive's average paycheck was only $624,996, his salary was a mere 42 times the pay of the ordinary factory worker.

SITTING PRETTY. Then there's the pay you don't see. Many chief executives reap windfalls when they leave or retire from their corporations. They typically exercise piles of stock options and other bonuses from long-term performance plans. In many cases, these multimillion-dollar payouts go unreported because the company may not be required to disclose the pay of a top executive it no longer employs. Some companies give a retiring CEO a grace period of three months to three years in which to exercise his options, a circumstance that would allow the executive to claim his earnings outside the year in which he retires. Since such payoffs don't appear in proxy statements, they aren't reflected in BUSINESS WEEK's estimates for the average chief executive's compensation.

The pay package would probably get quite a boost if this invisible compensation were counted. Besides the $4.1 million in pay he got last year, Coca-Cola's Goizueta received a million shares of restricted stock, currently worth $81 million. To cash them in, Goizueta must merely stick around until 1996, when he is expected to retire. Add that sum to a cache of other grants of restricted stock, stock options, and bonus plans that Goizueta has already received, and he's sitting on nearly $400 million in future payouts--a sum that does not include $2.7 million in cash dividends Coca-Cola currently pays him on the 2.4 million shares of restricted stock he now holds. Depending on when Goizueta retires and how Coca-Cola interprets the SEC's disclosure rules, it's possible that many of these awards will never be publicly reported when the Coke chief takes possession of them.

The BUSINESS WEEK survey examines the pay of the two highest-paid executives at 363 of the largest corporations. A total of 394 of these 726 executives earned more than $1 million in pay last year. Winner of the pay derby among CEOs: H.J. Heinz Co.'s Anthony J. F. O'Reilly, with a record $75.1 million. The winner among non-CEOs was Turi Josefsen, an executive vice-president at U.S. Surgical, who pulled down the highest pay ever recorded for a female executive. She made $23.6 million, thanks largely to a gargantuan exercise of stock options in 1991.

POT OF GOLD. Josefsen had plenty of colleagues who shared the honors. The biggest moneymakers last year tended to be leaders of companies that have staked out strong claims in the health care business, including Humana, Bristol-Myers Squibb, and National Medical Enterprises. Food-industry honchos from such brand-name corporations as Heinz, Philip Morris, Ralston Purina, RJR Nabisco, and General Mills are also heavily represented on the best-paid list. And the upsurge in business on Wall Street helped fuel the pay of bosses at such financial powerhouses as Primerica, Merrill Lynch, and Morgan Stanley.

The second-place finisher in the 1991 CEO pay race was a newcomer, Martin J. Wygod, founder and chairman of Medco Containment Services Inc. in Montvale, N.J. Wygod's annual base salary is $459,000, but he collected $33.7 million in total pay for the fiscal year ended June 30, thanks to stock options. Wygod stoutly defends his pay, noting that the market value of the nation's largest mail-order pharmacy has jumped to nearly $5 billion from $150 million when he took the company public in 1984. "I put the pieces together and grew the business," he says. "I took a low salary for years because I wanted to make it when everybody else made it." Indeed, Wygod volunteers that he made about $45 million in all last year--if you count options he exercised during the final six months of the calendar year, and there's plenty more to come. He currently holds options on 750,000 shares and owns outright nearly 3 million more--a pot of gold worth about $90 million.

MICKEY MOUSE. Noticeably absent from the top pay roster are longtime big winners Paul Fireman of Reebok International Ltd. and Michael D. Eisner of Walt Disney Co. A new compensation contract slashed Fireman's pay last year to $2 million from $14.8 million in 1990. Fireman can't complain, however. His new contract came with 2.5 million stock options that already show a paper gain of about $36 million. A 23% drop in net income at Disney last year shrank Eisner's cash bonus to a measly $4.7 million, from $10.5 million in 1990. His total take fell by 52%, to $5.4 million last year--not enough to put him among the 20 highest-paid.

Such sums are still huge, of course--especially compared with the $308,000 pittance pulled down by Dane A. Miller. The chief executive of orthopedic-device maker Biomet Inc. is a rare repeat winner in BUSINESS WEEK's analysis of pay for performance. The survey measures how pay matches up to performance in two ways: by relating the boss's paychecks to total shareholder return and to the company's profitability over a three-year period. For the second year in a row, Miller delivered the most bang for the buck to shareholders. Detroit Edison's Lobbia also fared well in the study. Who delivered the least? Heinz's O'Reilly and Jerry R. Junkins, head of Texas Instruments Inc.

For O'Reilly and most CEOs drawing the heftiest paychecks, the largess results from exercising stock options, some granted as long as a decade ago. Many executives argue that it's unfair to include such income in one-year compensation. "It is absurd to say the pay of somebody is the same as what they earned in the year they exercised options," protests O'Reilly. "It is financial illiteracy of the highest kind."

Ignoring these lavish gains, however, would be financial idiocy. After all, the profits on exercised options are publicly reported and taxed as annual income. They are also typically the reward of the managerial elite, largely unavailable to either the rank and file or middle managers whose efforts are critical to a company's performance. Indeed, the options granted to CEOs often far eclipse those handed out to the rest of senior management combined. O'Reilly, for instance, was given options on 8.6 million Heinz shares in the past decade--more than twice those granted to the company's four other top executives.

`WINDOW DRESSING.' To solve the problem of a one-year blip in pay, some corporations are changing the way they report option gains in their proxy statements. This year, B. F. Goodrich, IBM, and Bristol-Myers Squibb Co. provide investors with what they call an "annualized" gain from stock-option exercises. The upshot: an option that yielded $9.2 million to Bristol-Myers Chairman Richard L. Gelb is shown as only $1.2 million on an annualized basis. Pay critics, however, contend that such reporting is little more than an attempt to make outsize rewards more palatable.

Indeed, offering more information in proxies is becoming quite a trend--provided, that is, that the additional detail places a company's compensation practices in a better light. For the first time, for example, American Express and many other corporations are reporting pay for both the current and preceding years. That way, investors will know if their chief executives took pay cuts. GM went even further, reporting the cash pay of Chairman Stempel for three full years. The company said Stempel's $1 million paycheck in 1991 was 31% lower than 1990's, and 44% below 1989's.

There's still plenty of clever avoidance, though. Many companies that announced pay cuts for their top executives neglected to mention that these same CEOs received sizable stock-option grants that more than make up for the short-term cut in pay. "A lot of the pay cuts are window dressing," says Alan M. Johnson, managing director of GKR International. "For every dollar executives seem to be giving up, they seem to be getting $2 to $5 in stock options or restricted stock." At Phillips Petroleum Co., for example, Chairman C.J. Silas saw his salary and bonus fall by 36% last year, to $825,000. Read through the minutiae of the proxy, however, and you'll discover that Silas also received 39,552 shares of restricted stock worth over $900,000, and that he exercised options for a gain of $1.3 million.

If anything, critics say, proxies and pay programs are becoming even more opaque. "Increasing attention is being paid to packaging compensation so that it doesn't get the shareholders' attention," complains Sarah A.B. Teslik, executive director of the Council of Institutional Investors. "We're seeing more complicated packages and more finely tuned efforts to obfuscate the actual amount of pay."

SLEIGHT OF PRINT. Coca-Cola, for example, buried its grant of restricted stock worth more than $80 million to Chairman Goizueta in a paragraph of dense prose, rather than highlight the grant in a table as many companies do. Coca-Cola also chose not to report the award in numbers, but instead referred to it as "one million" shares of stock, making it more difficult for an investor to find.

Westinghouse Electric Corp. gained headlines with its report that the salary and bonus of Chief Executive Paul E. Lego was slashed by $1.5 million in 1991, a year in which Westinghouse posted a loss of $1 billion. At the same time, the company doled out two megagrants of 350,000 stock options to Lego, one at a price of $16 a share and another at $28.56. Westinghouse, however, makes no mention of the two separate grants in its latest proxy statement. Instead, it reports only that Lego got options on 700,000 shares at an average price of $22.28 each. With the Westinghouse stock trading at $18 a share, investors would likely conclude that Lego's grant is worthless--when in fact it's already worth about $700,000. "We're not trying to hide anything," says Edwin F. Goff, a compensation director at Westinghouse. "This is the way we've always done it."

Or consider ITT Corp., harshly attacked last year by shareholders for rewarding CEO Rand V. Araskog with a multimillion-dollar pay package when the company's profits had been sagging. In 1988, the company granted Araskog 120,000 shares of restricted stock that was to vest in 1991. The company moved up the vesting period to 1990 to allow Araskog to avoid a rise in personal income taxes in New Jersey, where he is a resident, and to reduce ITT's corporate taxes. The company, however, failed to disclose either the change in the vesting period or the actual vesting of the award. An ITT spokesman says the company did not disclose the vesting because "it is not considered a significant compensation matter." The result: Araskog's compensation in 1990 was $6.7 million more than the $7 million disclosed in that year's proxy statement.

ROLLBACKS. In a few rare instances, shareholders are seeking to roll back lavish stock awards. At Jefferson-Pilot Corp., the insurance concern based in Greensboro, N.C., a dissident shareholder group won a court ruling early in April that rescinded about $11 million in stock awards to CEO W. Roger Soles. The group had sued the company, charging that management lied to shareholders in its 1990 proxy statement when it inaccurately described a grant of stock to Soles as restricted. "These guys only spent about two to four minutes approving the compensation plan, according to depositions," says Louise Price Parsons, who heads the dissident shareholder group and whose father once managed the insurer. "That's not even time to read the plan, let alone discuss it."

Jefferson-Pilot says that it made a simple error in describing the plan and that it intends to appeal the decision. And in any case, Jefferson-Pilot is asking shareholders to ratify the 1990 stock-option plan at its May 4 annual meeting. Grouses Parsons: "They're asking shareholders to ratify something that the judge found illegal. We are going to give shareholders a unique opportunity to vote on executive compensation."

Unique isn't exactly the way to describe it. Questions about pay are popping up all over. At the Apr. 17 annual meeting of Grumman Corp., the defense contractor, one shareholder complained that bonuses and stock options received by the company's management could have instead been used to reduce the need for 11,000 cutbacks in staff in the past five years.

Investors at several other major corporations, including Aetna Life & Casualty and IBM, are voting on nonbinding resolutions to rein in pay. Most observers say chances are slim that such proposals will garner many votes. At Baltimore Gas & Electric Co., for instance, only 12.7% of shareholders voted on Apr. 15 for a resolution to cap executive pay at 20 times the average worker's salary. But the message that such proposals are delivering to corporate boardrooms is loud and clear: What the boss makes now matters to shareholders.

The outcry over pay has made many boards sensitive to accusations that they are excessively rewarding their chief executives. At both American Telephone & Telegraph Co. and UAL Corp., boards awarded sizable stock-option grants to Robert E. Allen and Wolf, respectively. In both cases, however, the majority of the options were pegged above the market price of the stock. Of the options on 225,000 shares granted UAL's Wolf, for example, 75,000 have an exercise priceof $147.88, the price of UAL stock atthe time the grant was made. The strike prices of the other options rise 15%compounded annually, lifting the exercise price to $170.06 on 50,000 shares in 1994, to $195.57 on another 50,000 shares in 1995, and to $224.90 on the final50,000 in 1996. By pricing the options at a premium, the board has ensured that UAL shareholders benefit before Wolf does when their stock appreciates invalue.

That's a meaningful change in compensation policy at UAL--and surely a step beyond pulling one's head out of the sand only to snap back at the critics of pay. Until more chief executives and board directors exercise greater restraint, however, you can expect the heat to rise further in the ongoing debate over executive pay.

    Before it's here, it's on the Bloomberg Terminal.