For many of the nation's chief executive officers, 2000 will likely be a year to forget. After nearly five years of double-digit growth in CEO compensation, early indications are that their pay actually fell last year. Of the 130 corporate proxies so far available for the biggest U.S. companies, the compensation of the 15 best-paid CEOs shows the slowing economy has taken a toll on earnings. When salary, bonus, and options exercised last year were taken into account, compensation for those CEOs fell nearly 5% from 1999. The reason: The market's nosedive made it a bad time for many corporate kingpins to exercise their options, often the largest part of remuneration.
According to a proxy analysis by Standard & Poor's Institutional Market Services, a division of The McGraw-Hill Companies, total compensation for the 15 highest earners averaged $88.7 million, a $4.4 million drop. (That figure does not include the compensation package of former Citigroup co-CEO John S. Reed, who left the company last April. While salaries and cash bonuses increased more than 10%, they typically make up just 6% of a CEO's compensation package. The remainder consists largely of exercised stock options, which declined 5.5% in dollar terms.
Of course, some executives managed to come out on top thanks to still-surging share prices, or because they exercised options received years earlier. At the top of the heap: Citigroup's (C ) Reed, who pocketed a staggering $287.5 million from options exercised. Including his cash salary and bonus, his total compensation was $292.9 million. John Chambers of Cisco Systems Inc. (CSCO ) came in a distant second, with total pay of $157.3 million.
Elsewhere, though, much of the compensation decline can be pinned on the stock market crash. Particularly at tech companies, share prices often ended up far below the exercise price listed on executive options. According to a study of 200 of the largest U.S. companies done by Pearl Meyer & Partners, a New York-based compensation consultant, the 15 CEOs who lost the most paper wealth saw the value of their stock and options crash by more than $62 billion through the end of 2000. Microsoft Corp.'s (MSFT ) William H. Gates III alone lost more than $36 billion.
GENEROUS GRANTS. Admittedly, no one should start weeping for the underpaid chieftains of the land. Many companies continued to be generous in handing out new options packages. Several CEOs got extraordinary new grants last year even after turning in corporate profits that were less than extraordinary. CMGI Inc. (CMGI ), an Andover (Mass.) company that invests in Internet businesses, and Adaptive Broadband Corp. (ADAP ), a Sunnyvale (Calif.)-based Internet company, are good examples. Both recorded losses last year, yet they gave their CEOs bigger bonuses and bigger stock option grants than in 1999. Says Patrick McGurn, corporate programs director at proxy adviser Institutional Shareholder Services: "Now that risk seems to have returned to at-risk pay, that's the sort of reaction that's going to stick in shareholders' craws."
CMGI, for example, had a $1.3 billion loss in fiscal 2000. But CEO David S. Wetherell came away with $1 million in salary and bonus, a more than 50% increase, and 3.5 million options originally valued at $53 million. Company spokesman Deidre W. Moore says Wetherell was underpaid compared to his peers, and that when his package was being decided, CMGI was coming off a "remarkably successful" period of sales and earnings growth in 1999.
Adaptive Broadband was also generous. Despite three consecutive years of widening losses, CEO Frederick D. Lawrence got a bigger bonus and a stock option grant twice the size of 1999's. Says Stephanie M. Day, vice-president of investor relations: "Strategically, he did everything he said he was going to do."
Perhaps. But investors find it far easier to accept rich rewards tied to aggressive earnings growth targets, such as those imposed on Coca-Cola Co.'s (KO ) Douglas N. Daft and Tyco International Ltd.'s (TYC ) Dennis Kozlowski. In a slowing economy, it's one way for shareholders to ensure they're not taken for a ride.
By Louis Lavelle in New York