By Ben White Washington Post Staff Writer Thursday, June 19, 2003; Page E01
NEW YORK, June 18
After dipping in 2001, take-home pay for chief executives at some of the largest U.S. companies swelled last year, driven by fatter bonuses and bigger payouts from long-term incentive plans, a new study shows.
According to the study of 1,019 public companies, the median bonus for U.S. chief executives in their posts for both 2001 and 2002 grew about 9 percent, to $451,000. Long-term incentive payouts, meanwhile, nearly doubled, from a median value of around $500,000 in 2001 to over $900,000 in 2002, according to the study, conducted by the Corporate Library, an independent research group, for release today.
Overall, total cash compensation in 2002, including salary, bonus and other direct payments, rose nearly 17 percent, to a median of about $1.2 million, in 2002. The median figure represents the point at which there are an equal number of chief executives above and below.
The bigger salary and bonuses in 2002 came in a year when corporate profits continued to stagnate and the Standard & Poor's 500-stock index, a broad indicator of the market, dropped 23 percent.
To some extent, a revival in cash-based pay was to be expected. The economy, and with it corporate America, did a little better in 2002 than in terror-scarred 2001. And stock options, the biggest component of executive pay in the go-go 1990s, have become less attractive because of the stock market doldrums since 2001.
But the new study also concludes that many measures of executive pay were higher in 2002 than in 2000, the last year of the great technology and telecommunications-driven market boom.
"There was real long-term growth in all areas of compensation, including value realized from long-term incentive pay as well as increases in salaries and bonuses," said Paul Hodgson, senior research associate at the Corporate Library and principal author of the study. "You can't just say it was a recovery year."
The Corporate Library study authors said they did not take into account stock options awarded in 2002 because the potential value is difficult to measure and the real value may not be known for years. Using some widely accepted measures of stock option-award values shows that for many executives they remain an important part of total compensation. A list of highest-paid executives from New York City-based Aon Consulting's eComp Database of all publicly held companies registered with the Securities and Exchange Commission, for example, shows that two former Tyco International executives, L. Dennis Kozlowski and Mark H. Swartz, received options in early 2002 that, at the time, were potentially worth tens of millions of dollars. [For a list of top executive pay packages, with option values included, see the accompanying chart.]
Another form of incentive pay, long-term incentive plan payouts, made a big difference in the 2002 take-home pay for many chief executives, according to the Corporate Library.
Critics of executive pay levels say in some cases such big long-term payouts represent an effort by companies to reward CEOs at a time when a rocky market has made traditional stock option awards, which only have value if a company's stock rises, less attractive.
Long-term incentive plans reward an executive if the company meets strategic or business-performance goals over several years, typically three. They typically are not based solely on stock performance. Defenders say the payouts are a better way to reward executives based on a company's long-term business performance rather than short-term stock gains.
Among companies in the S&P 500, the biggest long-term incentive payment in 2002, worth $14,977,500, went to J.J. Mulva, CEO of energy company ConocoPhillips Co.
According to the company's 2003 proxy statement filed with the SEC, the big payday was the result of the merger of Conoco and Phillips that automatically accelerated long-term incentive payments that would have been awarded in 2003, 2004 and 2005.
The second-biggest long-term incentive payout went to Robert A. Eckert, CEO of toymaker Mattel Inc., who received $8 million for a plan covering Aug. 15, 2000, to Dec. 31, 2002. Mattel's proxy said Eckert received the maximum because the company met "performance targets relating to its long-range financial goals." The proxy also said the company planned to increase the maximum payout under the incentive plan to $12 million.
Mattel spokeswoman Lisa Marie Bongiovanni said the performance target was based on Mattel's net operating income after taxes and not including a capital charge, a figure she said is historically linked with the company's stock price. "When shareholders do well, management does well. Everyone does well together," she said.
Judith Fischer, managing director of Executive Compensation Advisory Services, a research company in Alexandria, called the increase in long-term payouts a positive trend as long as the awards are based on objective criteria, such as return on invested capital.
"I think it's an excellent turn of events. For the last few years too much corporate effort has been spent focusing on the share price rather than on the company's overall well-being," Fischer said.
Problems arise, critics say, when compensation committees institute vague criteria or find ways to award big payments even if certain targets are not met.
In several instances in 2002, companies lowered performance targets for incentive payments or awarded the payments even if existing targets weren't met. According to the report, for instance, Continental Airlines Inc. altered its long-term incentive pay program in 2002.
"Clearly when it comes to performance-based awards, there needs to be some very direct and measurable quantitative criteria," said Ann Yerger, director of research at the Council of Institutional Investors, which represents large pensions and other funds. "And even that can be risky. What's the appropriate amount to pay based on the return? There is no magic formula or strategy. Our members have no problem with large payments if they are really based on sustainable long-term performance."
Yerger and other corporate-governance advocates also criticize stock grants restricted only by an executive's promise to remain with a company for a set period of time. The critics say these restricted stock grants, derisively referred to as "pay for pulse," allow executives to capitalize on a long-term market upswing rather than any especially deft management.
Compensation consultants say restricted stock grants are increasingly popular but that boards are feeling public pressure to add more specific performance criteria.
Daniel P. Moynihan, a consultant at Compensation Resources Inc. in New Jersey, said he had just been retained by a big company negotiating a contract with a CEO who had been promised a grant of 3 million restricted shares with the caveat that there would be strict performance criteria attached. "Now we are trying to get our arms around exactly how to do that," Moynihan said. "How do we not just hand out stock for the executive being there but for strong short and long-term performance?"
Among companies in the S&P 500, the biggest 2002 cash bonus, $16.5 million, went to Viacom Inc. chief executive Sumner M. Redstone, who also received the biggest base salary, $3.6 million. Redstone's bonus was up 38 percent over 2001. Viacom's share price dropped about 8 percent in 2002 but beat an industry peer group that includes Walt Disney Co., AOL Time Warner Inc., Tribune Co. and Gaylord Entertainment Co.
Members of the compensation committee at Viacom declined requests for interviews on the size of the Redstone's salary and bonus. A corporate spokesman pointed to the company's proxy statement. The proxy said Redstone was rewarded for "achieving record operating results in an extraordinarily difficult environment." The company reported earnings growth of 9.5 percent for the year not including nonrecurring charges.
Similar language crediting CEOs with navigating rocky economic waters appears over and over in 2003 proxy statements.
Henry R. Silverman, chief executive at diversified services company Cendant Corp., parent of Coldwell Banker and Century 21 realty companies, scooped up $11.4 million in salary, bonus and other payments for steering the company through a "difficult economic environment." Cendant's share price dropped 47 percent in 2002
Home Depot Inc. chief executive Robert L. Nardelli picked up $11.2 million in salary, bonus and other payments for his continued "superior leadership and vision" during "very difficult economic times." Home Depot's stock dropped 53 percent in 2002. Nardelli's compensation included $2.5 million for forgiveness of a corporate loan and $2 million more for related tax payments.
The Corporate Library report also looked at the significant number of executives who declined salaries, bonuses and other payments in 2002 because their companies performed poorly.
At Rational Software, for instance, CEO Michael T. Devlin's compensation was cut by nearly 50 percent and his bonus was eliminated. At Comverse Technology, CEO Kobi Alexander "voluntarily waived his right to approximately $1,955,000, which is 90 percent of his salary and bonus, in support of cost-reduction steps taken by the Company," according to the company's proxy statement. Other companies where CEO's salaries and bonus were cut or eliminated in 2002 include BroadVision Inc., Molex, Alcoa Inc. and Agere Systems Inc.
The study also looked at profits earned through the exercise of stock options in 2002. Critics of measuring this figure as a component of annual pay say it reflects options awarded in earlier years. Supporters of its inclusion say it represents money that went into an executive's pocket in a given year. According to the study, 381 executives exercised options generating a median profit of $1.4 million, down from $1.6 million in 2001.
Topping this year's list was Jeffrey C. Barbakow, former chief executive of Tenet Healthcare Corp., who sold shares worth $111 million. Barbakow resigned in May amid questions about how Tenet billed Medicare patients. Those questions have punished the company's stock price. Tenet compensation committee board members did not return calls for comment.
Harry Anderson, vice president for corporate communications at Tenet, noted that Barbakow exercised the options 10 months before the questions came to light. Anderson said that at the time Barbakow exercised the options, which were granted in previous years, he was not aware of the extent of the billing problems. He also noted that Barbakow continues to have a large equity stake in the company and that the options he exercised were close to expiring.