`You Don't Necessarily Get What You Pay For'

Biomet Inc. Chief Executive Dane A. Miller and H. J. Heinz Co. Chairman Anthony J. F. O'Reilly have a lot in common. Both are held in high esteem by their industries. Both are major shareholders of their companies. And both are known to readily speak their minds. But when it comes to their views on pay, the similarities end abruptly.

World-class compensation, contends the globe-trotting O'Reilly, provides the incentive to assure world-class performance. Counters a skeptical Miller: "When it comes to executive compensation, you don't necessarily get what you pay for."

A wide gulf of opinion, to be sure--but no wider than the chasm between their respective positions in BUSINESS WEEK's annual pay-for-performance analysis. In an unusual repeat appearance, Miller tops the list as the CEO who gave shareholders the highest returns relative to his pay. He was paid a total of $712,000 from 1989 to 1991, but shareholders of Miller's fast-growing orthopedic products company scored a staggering 661% return for those three years. O'Reilly's $81.1 million in compensation, including stock options, dwarfed the 78% return to his shareholders during the period, ranking him dead last.

`GREED COMPLEX.' Surprisingly, Miller doesn't believe he's underpaid. The 46-year-old biomedical engineer was one of four friends who founded Biomet in 1977 with a Small Business Administration loan. Since then, such products as Biomet's replacement hips and knees have profited from the graying of America. Sales and earnings have set records in each of the past 34 quarters.

That has been good news for Biomet stockholders--including Miller, whose 2.8 million shares are now worth $50 million. So good, in fact, that Miller happily takes a smaller salary than he might and accepts no stock options. "The best way to compensate an executive is through equity, so he can share the rewards of success just like his shareholders," he says.

The entrepreneur concedes that Biomet's low-salary philosophy may work best with fast-growing companies with surging stock prices. Still, he blasts board compensation committees at big, mature companies that try to offset slow growth by simply giving their CEOs mounting numbers of options or shares. "When you're already holding stock worth $100 million, what incremental value does an extra 100,000 shares have?" asks Miller. "At some point, you're just satisfying an uncontrollable greed complex."

Heinz's O'Reilly begs to differ. By exercising part of his hoard of options, he made $75.1 million last year, though his base salary was only $514,000. But since many of those options were up to 10 years old, O'Reilly calls BUSINESS WEEK's methodology "fallacious."

"We're not talking about a three-year performance," he says, "we're talking about a 10-year performance. If I had been given three-year options, I wouldn't have gotten $75 million. I'd have earned very little money." In the 10-year period, Heinz stock jumped 733%, compared with a 240% rise in Standard & Poor's 500-stock index. Besides, adds an O'Reilly aide, his boss would fare better in the latest ranking if Heinz were simply rebounding from a low base.

That was the case with Detroit Edison Co. CEO John E. Lobbia, who edged mut Miller as the executive whose company had the best return on equity relative to its level of CEO pay from 1989 to 1991. The utility's stock price had been depressed by a dispute over cost overruns at a nuclear plant that kept it from raising rates. But in December, 1988, the company reached a settlement with Michigan regulators, boosting rates and sending its stock soaring. The good times won't last forever: By Jan. 1, Detroit Edison is required to pass along a rate cut. Yet even if Lobbia's hot streak cools, shareholders can't grouse about profligate spending on his pay. Lobbia was paid a total of only $1.3 million from 1989 to 1991.

STAR SYNDROME. A moderate salary didn't prevent Texas Instruments Inc. CEO Jerry R. Junkins from gaining the dubious honor of providing the lowest corporate performance relative to his pay. Junkins earned just over $2 million in the past three years, but TI has been hammered by several years of lackluster demand and brutal pricing for semiconductors. Last year, it posted its biggest net loss ever, $409 million, thanks in part to heavy investment in R&D and plants. "Because of these investments, TI today is a stronger, more competitive company," argues Junkins. For that matter, Wang Laboratories and Unisys, whose performance has been much worse than TI's and whose CEOs have gotten more pay, dropped out of the sample because their market capitalizations have fallen below the cutoff point for thesurvey.

Biomet's Miller says the link between pay and performance seems tenuous because some corporate boards have allowed salaries to mirror those of star athletes. "The difference is that in professional sports you're buying the entity," explains Miller. "People buy Celtics tickets because they want to see Larry Bird, but no one buys a Coke because of its CEO."

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