Their Cup Runneth Over Again

Are you sitting down? Forget all you've heard about the real and threatened restraints on executive pay, imposed by investor gadflies or Washington regulators. This year's batch of proxy statements, which are beginning to tumble out of companies, is likely to bring tidings of record paychecks for many of the nation's top chief executives.

From Wall Street CEOs to Detroit auto chieftains to Texas corporate oil barons, executive pay is soaring again. The reasons are simple: Corporate profits are way up, and so are stocks. The economic upturn is helping trigger sizable bonus payouts and prompting executives to cash in their stock options. "We're going to see some big numbers, not in salary increases but in bonuses tied to performance and stock-option exercises," says Peter T. Chingos, head of the compensation practice at KPMG Peat Marwick.

The lofty numbers--in the face of massive downsizing by major U.S. corporations--could kick up yet another fuss over executive pay. This year, too, there may be more to complain about: Many companies continue to hand out generous grants of stock options that are exercisable within 12 months. That means executives can get to their payout faster, in large part defeating the intent of those who saw stock options as a means of rewarding loyalty and long-term performance.

MICKEY MIGHTY. Instead, top executives are receiving some very juicy short-term prizes. No one is expected to beat out Walt Disney Chairman Michael D. Eisner's record $197 million stock-option gain in the company's fiscal 1993 year. But Citicorp's John S. Reed got $6.4 million in cash and restricted stock, nearly triple his pay of 1992--without counting his 450,000 new stock options. Daniel P. Tully, CEO of Merrill Lynch, took down $8.3 million in cash and restricted stock, up 28% from 1992. At Exxon, Chairman Lee R. Raymond's pay package soared 75%, to $4.5 million.

Although Detroit's Big Three have yet to report 1993 pay, Chrysler President Robert A. Lutz cashed in stock options worth at least $5.1 million last year, according to filings with the Securities & Exchange Commission. Other executives exercising stock options: Coca-Cola Chairman Roberto C. Goizueta, whose total pay last year was $14.5 million, $9.5 million of it from the exercise of 300,000 stock options.

Not everyone is sharing in the goodies. Michael A. Miles, CEO of slumping Philip Morris, saw his total pay plummet 63% last year, to $1.5 million. Miles's bonus fell to $345,000, from $900,000 a year earlier, and he didn't get a cent from the long-term program that awarded him $2.2 million in 1992.

But some other troubled companies paid big money last year for top-tier talent: An exceptionally large number of CEOs were wooed to new jobs with big cash carrots. Consider George M.C. Fisher, who left Motorola to be Eastman Kodak's CEO, with one of the largest sign-on bonuses ever: $5 million. That check alone was larger than the total annual pay ever received by any of Kodak's previous 13 chief executives in its 114-year history. Louis V. Gerstner Jr. also got a $5 million bonus last year when he left RJR Nabisco for IBM.

What about that new law limiting a company's tax deductability of executive pay to $1 million? There was plenty of hoopla, but in the end, as one compensation critic puts it, "a dull child can get around that rule." True, the new cap will prod more companies to tie more executive pay to performance targets. But compensation consultants say companies are likely to keep CEO salaries at or under the $1 million mark and load up on performance-related bennies--especially stock options.

What is surprising some analysts, however, is that many companies--among them AT&T, Exxon, Honeywell, Rockwell International, and Philip Morris--are continuing to dish out what might be called "quickie options"--those that vest within 12 months. Traditionally, corporations hand out option grants that don't fully vest for four years and can be cashed in over a 10-year period.

Rockwell Chairman Donald R. Beall, for instance, got options on 240,000 shares last year: He can exercise them by the end of 1994. Exxon's Raymond was handed options on 200,000 shares in 1993 that he, too, can cash in within a year. Towers Perrin, the compensation consulting firm, says 22% of 276 major companies boast stock option plans with 12-month or less vesting terms--roughly the same percentage in the past five years--even though pay experts say there has been a greater emphasis recently in building more long-term perspective in pay plans.

Is the quickie option constructive? It certainly doesn't encourage managers to stick around. Shorter vesting periods also let them take advantage of short-term runups in the company's stock price. "These companies are turning options into short-term incentive programs, especially if the company's stock is volatile," says Graef "Bud" Crystal, a prominent executive-pay critic. "If executives are serious about long-term incentives, they shouldn't be able to get their hands on stock options for eight years."

As a practical matter, though, few executives would exercise an option and unload their stock in one year--unless they believed the company's future looked dim. Moreover, more and more companies are requiring their executives to become significant stockholders. For example, American Express and R.R. Donnelley & Sons just joined such companies as Chrysler and Kodak in making their top executives own stock. Now, Donnelley Chairman John R. Walter has to hold stock worth five times his salary, which was $800,000 last year. "There's a lot more activity going on discouraging senior management from selling stock," says Chingos. "The unwritten rule at some companies is that you might not be eligible to participate in later option grants if you quickly exercise and sell your stock."

FIASCO. Look around, though, and you can still find evidence of sheer, unbridled excess. How else to explain the fiasco at Lewis Galoob Toys, whose strangely generous stock option program for top executives forced a $4 million charge against earnings last year?

Galoob's plan allowed the exercise price for 800,000 options to decline--from an average of $5.33 to $3.98 a share--as the market price of its stock rose in the fourth quarter. The upshot: The company, already in the red, accrued an additional $4 million loss, the difference between the market price of the stock and the lower strike price of the options. It has now ditched the plan for its top seven execs, giving them 450,000 shares in return for their old options. Maintains William G. Catron, general counsel: "Management actually gets less out of this revised plan."

But they're still getting quite a bit. In fact, the executive gravy train is unlikely to be reined in soon. For all the furor over an effort by the Federal Accounting Standards Board to charge stock options against corporate earnings, the earliest such a change might occur is 1997. Even advocates of that rule, however, believe opposition is becoming so strong that it's unlikely to ever go into effect. And many consultants say the system is working just fine: When profits go up, so does executive pay.