In The Pay Tourney, It's Advantage, OutsidersBy
In The Pay Tourney, It's Advantage, OutsidersBy
When software maker Novell Inc. hired Robert J. Frankenberg as its new chief, it almost certainly upped its CEO salary costs dramatically. Although Novell hasn't yet disclosed the size of the pay package it used to recruit the Hewlett-Packard executive, the company is certain to pay him vastly more than it laid out for predecessor Raymond J.
Noorda, who refused cash bonuses and stock options and drew a miserly salary of $285,585 last year.
Novell is part of a trend in executive compensation, and the lesson is clear: It pays--hugely--to be an outsider CEO coming in. In the last year, companies from IBM and Eastman Kodak to St. Jude Medical and Alza have used some of the biggest pay packages ever written to nab outsider CEOs. Moreover, says Graef S. Crystal, an executive pay critic: "The size of these packages substantially exceeds the pay of insiders."
SIGN-ON CASH. What kind of bennies can a new chief executive expect? The median increase in cash pay is about 35%, according to a survey by SpencerStuart, an executive search firm. Roughly one-third of the 50 CEOs tracked, however, got raises of 50% or more. The packages often heap on the perks, too, including relocation allowances and low-interest loans--to say nothing of sign-on bonuses that even some baseball free agents would envy.
Why such hefty premiums? Companies often have little leverage over successful executives who are perfectly happy where they are. "When you recruit a CEO from the outside, you have to compensate people for the risk and uncertainty of changing jobs," says Dayton Ogden, managing director of SpencerStuart.
Judging by some of last year's contracts, uncertainty demands a near king's ransom. To evaluate the packages of several leading recruits, BUSINESS WEEK asked Crystal to use an option pricing model to value stock-option grants and determine the overall worth of the offers--yielding the most precise and detailed picture yet of big compensaton packages. The upshot: Compensation carrots dangled before CEO candidates last year ranged as high as $39.6 million.
The grand-prize winner is no surprise: George M.C. Fisher, for the pay package he coaxed out of Eastman Kodak Co. last year. The former Motorola Inc. chief received what many observers regard as the most lucrative "golden hello" ever. BUSINESS WEEK estimates the value of his package at $39.6 million--not including the apartment Kodak provided Fisher before he bought his new home, or the cost of taking his Barrington Hills (Ill.) residence off his hands.
On top of a sign-on bonus of $5 million, Fisher received an $8.3 million loan that will be forgiven if he stays with Kodak for five years. Fisher's base salary is $2 million, with a guaranteed minimum bonus of $1 million for this year and next, and a restricted stock grant worth $1.3 million. The biggest single chunk is an option on 1.3 million shares, or 25% of all the options handed out to employees last year. That option grant alone is worth $21 million, Crystal figures.
Of course, Louis V. Gerstner Jr. didn't do badly either when he agreed last year to leave RJR Nabisco Inc. for IBM. The value of Gerstner's entire package: $21.9 million, a sum that includes options on 500,000 shares of IBM stock worth $10.8 million and what amounts to a hiring bonus of nearly $5 million. An IBM spokesman says the bonus compensated Gerstner for benefits he "left on the table" at his old job. IBM even paid Gerstner $25,000 for financial and tax-planning services provided by RJR and his first-quarter RJR bonus of $500,000 that he forfeited upon joining the computer company.
INSIDER TRADING? By comparison, the package given to Jerry E. Dempsey to join PPG Industries Inc. is downright skimpy. Dempsey, who left waste-treatment company WMX Technologies Inc. last August, was handed 5,000 shares of PPG stock worth $346,350 and given options on a mere 25,000 shares. The total value of Dempsey's package: $1.8 million, including a modest base salary of $600,000 and a minimum bonus of $400,000.
Like many companies these days, PPG is now worried about keeping its own insiders. It has just named two of its top executives who were passed over in favor of Dempsey to a new office of chief executive. The reason: to keep them from leaving the company by giving them another shot at the top job.
Still, you don't have to job hop to a big-name company these days to land a big contract. Even lesser-known companies such as St. Jude Medical Inc., a St. Paul-based medical-products concern, offer new bosses dream deals. To attract Ronald A. Matricaria, an Eli Lilly & Co. executive vice-president, to its top job last year, St. Jude gave him an option grant worth $6.3 million along with a guaranteed bonus of $358,250. St. Jude even set up a $2.5 million trust fund to offset the pension he gave up.
Two months after Matricaria joined his new company, his old employer had to hire an outsider for the CEO post. Lilly turned to Randall L. Tobias, a former AT&T executive who had been a director on Lilly's board since 1986. Tobias' package: $4.3 million, less than half the value of Matricaria's new deal at St. Jude, a company with only 4% of Lilly's $6.4 billion in annual revenues. Indeed, the size of today's pay packages may vary, but one fact remains: It's a lot cheaper to develop talent internally.
TABLE: BONUS BABIES Executive Company Sign-on Stock bonus package* LOUIS V. GERSTNER JR. IBM $4,924,596 10,820,880 GEORGE M.C. FISHER EASTMAN KODAK 5,000,000 22,310,279 HERBERT M. BAUM QUAKER STATE 850,000 2,140,791 RONALD A. MATRICARIA ST. JUDE MEDICAL 358,250 6,623,700 MICHAEL H. JORDAN WESTINGHOUSE 400,000 6,496,380 RANDALL L. TOBIAS ELI LILLY ----- 2,060,074 *Includes restricted stock and estimated value of option package DATA: COMPANY REPORTS