Even CEOs Get the Blues--Sort of

Head honchos felt the downturn. But not like the rest of us

For months, compensation experts have been predicting bad news for chief executives: Like everyone else, their pay would suffer in 2001. Now the preliminary data suggest those forecasts were on the money. For the first time in seven years, the nation's CEOs are likely to suffer double-digit declines in pay.

At least that's what the early indications show. Of the more than 400 proxies filed so far, the 15 highest-paid chiefs earned an average of $108.8 million, according to Standard & Poor's ExecuComp. That number--which includes salary, bonus, and options exercised last year--is off nearly 18% from the $132.5 million the top 15 pulled in for 2000. Still, there were some who didn't stint. Leading the pack were three CEOs whose cashed-in options made up most of their 2001 pay. Tops was Oracle's (ORCL ) Lawrence J. Ellison, who exercised 23 million options for a gain of $706 million. JDS Uniphase's (JDSU ) Jozef Straus and Forest Laboratories' (FRX ) Howard Solomon saw options gains of $150.3 million and $147.3 million, respectively.

Several reasons combined to account for the--relatively--stingy CEO salaries. Because of a drop in performance-based bonuses, average cash compensation plummeted 79%, to $2.4 million. But the lousy stock market played a far bigger role. With many executive stock options under water, proceeds from exercised options, which make up the bulk of CEO pay, fell nearly 12%, to $106.6 million.

So is pay for performance working? Look solely at bonuses, and the answer seems to be yes. A study by compensation consultancy William M. Mercer of 100 early proxy filers found that median net income and CEO bonuses for the group were each down 13% last year.

But take a look at options grants and the way companies are redefining pay for performance, and there's another story. In a year in which many companies' earnings got clobbered, and many shareholders took a bath, many CEOs took only the tiniest of nicks in their still sky-high pay. Indeed, many boards went out of their way to reset prices on underwater options, pile on big new grants, or otherwise rejigger pay for performance to ensure their CEOs didn't feel too much of shareholders' pain.

Take Coca-Cola Co. (KO ) Its board won plaudits in 2000 for the tough goals it set for CEO Douglas N. Daft to receive 1 million performance-based shares. But in May, it dropped the bar considerably to reflect lowered earnings growth targets. The board also increased his salary 18% to $1.5 million, his bonus by 16% to $3.5 million, and his options grant to 1 million from 650,000 shares. In a year when net operating revenues were essentially flat and shares fell 23%, he was the ninth-highest-paid CEO, with a total compensation package of $55 million. In upping his package, the board cited Daft's "highly effective leadership and vision in a uniquely complex marketplace."

Other boards also found ways to reward execs in a bad year. Thomas J. Engibous, CEO at Texas Instruments Inc. (TXN ), lost his $1.3 million bonus after TI posted a $201 million loss on revenues of $8.2 billion in 2001. Shares were off 39% for the year. Even so, the board boosted his salary by 5%, to $836,700, and increased his options grant to 842,000 shares from 700,000 shares. The board's compensation committee noted Engibous' "continuing contribution to execution of the strategic plan for the company."

With many CEOs seeing the downside of tying their compensation to the market this year, however, pay consultants say many are scrambling to delink some pay from the stock price. Future CEO contracts are likely to rely more on share grants that would be awarded for meeting operating targets like earnings growth. Alcoa Inc., Dean Foods Co., and others have made the switch.

Of course, some CEOs were richly rewarded for all the right reasons. Richard H. Brown at Electronic Data Systems Corp. (EDS ), a Plano (Tex.) tech services outfit, had his bonus more than doubled, to $7 million, and was granted 750,000 options plus restricted shares valued at $27.7 million. Revenues were up 12%, to $21.5 billion, and net income jumped 19%, to $1.4 billion. "Most of these people get paid too much," says Terry McLaughlin, chief investment officer for Ashland Management Inc., which holds a million EDS shares. "But I can't complain with success."

Perhaps. But if two bad years of executive pay prompt new-fangled pay packages, investors may continue to find themselves suffering losses while executives escape largely unscathed.

By Louis Lavelle in New York

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