No Hair Shirts, But Still...

The uproar over CEO pay hits home as some chiefs take less than they could

Susan Lyne knows the power of a public statement. As chief executive of Martha Stewart Living Omnimedia Inc. (MSO ) since late 2004, she has run the company through Stewart's jail term and much publicized comeback. With ad pages in the flagship magazine up 44% last year and a flurry of new deals sparking optimism for the brand, Lyne got a cash bonus of $625,500 last year. Instead of pocketing it, though, she asked the board to give $200,000 to a bonus pool for employees and convert the rest into restricted shares that won't fully vest until 2009.

Lyne says she wanted to recognize the efforts of employees because her plan to boost the company's long-term health cut into annual bonuses. More important, she felt the gesture would be a potent symbol. "There was a period of time in the 1990s when the bigger your pay package, the more people respected you," says Lyne, who earned a $900,000 salary in 2005. "I think that has changed -- dramatically. There's a very different sense of what makes a good leader of a public company."

At a time when most news on CEO pay spotlights wretched excess, Lyne's move is an example of something far rarer: executive sacrifice. But she's not the only chief trying to earn some goodwill through compensation (table). General Electric Co.'s (GE ) Jeffrey R. Immelt made $3.2 million in base pay in 2005 but converted his $6 million cash bonus into stock grants that materialize only if he meets cash flow and shareholder-return targets over the next two years. As Immelt wrote to shareholders in GE's annual report: "I am totally aligned with you."

Other chiefs feel their recent performance doesn't warrant a raise. David Freeman, CEO of Lydall Inc. (LDL ), a Manchester (Conn.) maker of specialty engineered products, asked that his salary not be raised and his maximum bonus be cut to 60% from 100% of his $420,000 base for 2006. More execs are trying to "flip the equation and turn their pay into an opportunity to make a positive statement," says Steve Harris, a worldwide partner at Mercer Human Resource Consulting LLC.

MORE SCRUTINY

Could it be that a hint of shame is entering the corner office? Let's not be rash. Median CEO compensation at 200 of the country's largest companies rose 10% last year, to $8.4 million, according to pay consultant Pearl Meyer & Partners. But the givebacks may indicate a growing sensitivity surrounding pay. Compensation committees of increasingly independent boards don't want to be embarrassed. And the Securities & Exchange Commission is about to require more pay disclosure. Ira Kay, who heads the compensation practice for benefits consultant Watson Wyatt Worldwide Inc. (WW ), predicts that the SEC's proposed rules will prompt "50%, if not 75%" of companies to make noticeable changes to their pay practices.

Despite skepticism that more disclosure will have any impact on pay, there's growing evidence that CEOs and directors may be embarrassable. Some CEOs forego pay after demanding big sacrifices of their workers. Robert S. Miller Jr. of bankrupt auto parts supplier Delphi Corp. cut his salary to $1 a year after asking for cuts of up to 40% from hourly workers. Doug Parker of US Airways Group Inc. (LCC ) declined a $770,000 bonus to reflect the pain many of his employees have endured.

Shareholder activists such as Brandon Rees, an analyst at the AFL-CIO, argue that seemingly noble gestures may be window dressing: "Too often it's a publicity stunt." And he thinks changes cast as voluntary may in fact be quietly forced by the board. "For once," Rees says, "I want to see a board of directors stand up and say: 'This CEO asked for too much money, and we said no."'

By Diane Brady

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