(art) Options and Executive compensation;
chicagotribune.com
Stock grants, competition elevate pay
Packages at top swell 17% even as many share
prices languish
By Stephen Franklin
and Kathy Bergen
Tribune Staff Writers
April 23, 2000
Calculating how
Christopher B. Galvin
earned his reward last
year, as Motorola Inc.
officials explain it, sounds
like keeping a checklist.
The company's stock
soared in value by 142
percent. Its total market
value doubled. It pulled off
a sizable merger, sailed
through a restructuring and seems to have recovered
from 1998, one of its worst years ever.
Check. Check. Check.
To show its appreciation, Motorola's board handed the
chief executive $58.9 million in cash compensation,
stock awards and stock options, making him not only
the highest-paid CEO among Chicago's biggest
companies last year, but also the highest-paid in
Motorola's history.
But Galvin's pay matters far beyond the bounds of his
Schaumburg-based electronics giant, because it offers
an insight into two developing trends.
One is the unending explosion of CEO pay, largely
triggered by bigger and bigger stock option grants and
more recently by the awarding of restricted stocks- a
device usually viewed as a golden handcuff to keep
CEOs from jumping ship.
In the case of Galvin- the grandson of Motorola's
founder and son of a former CEO- he received $42.6
million in stock options and $13.1 million in restricted
stock. The board of directors' rationale is that it not only
wanted to tie his financial rewards more closely to the
performance of the company's stock, but also wanted to
show that if the company does well, so will its CEO.
That seems to be Corporate America's mantra today.
The other trend is how the dot-coms, high-tech start-ups
and other stalwarts of the new economy have shaken up
the landscape by luring executives from old-economy
companies with multimillion-dollar packages and the
promise of even bigger rewards after initial public
offerings.
Fearful of losing their executives, more and more
companies are boosting CEO pay packages, even if
their stocks are declining and the hot CEO candidates
are younger, second-tier executives. The result is a wage
inflation sweeping through the CEO ranks.
These issues were very much on the minds of
Motorola's directors as they set salaries last year, said
Samuel Scott, the outside director who heads the
compensation committee. "Motorola has been a good
company for others to take talent from," explained
Scott, who also is chief operating officer of Bedford
Park-based Corn Products International Inc.
Many Chicago-area companies seem convinced that
they can overcome the dangers of a volatile stock
market and hang onto their CEOs by giving more perks,
more benefits, more salary, more bonuses and more
restricted stocks. Like everywhere else in Corporate
America, more is the theme.
"It looks like companies will pay about anything" to land
or keep a sought-after executive, said George Paulin,
president of Frederic W. Cook & Co., a New
York-based pay consultant.
Among the CEOs of the 100 biggest publicly traded
firms in the Chicago area, the median cash compensation
package- salaries, bonuses and other payments- was
nearly $1.1 million last year. Tacking on the estimated
value of stock options awarded, restricted stock and
other long-term payments, the median compensation for
the CEOs jumped to $2.5 million, according to figures
compiled for the Tribune by William M. Mercer Inc.
In salaries alone, the median was 6 percent higher than
in 1998; the median overall cash payment rose 8.5
percent.
But salaries and bonuses play a small role in many
CEOs' compensation: Stocks and other forms of
long-term payments made last year accounted for about
60 percent of their total annual compensation.
And stocks clearly helped swell the compensation
packages of CEOs last year. In 1998, 10 Chicago-area
CEOs had cash and stock packages totaling $10 million
or more. Last year, the number rose to 15.
Heeding a 1994 law that requires companies to pay
taxes on CEO salaries over $1 million, only eight
Chicago-area firms went over that cap, up from six in
1998. The law was intended to force companies to
make their CEOs' salaries more performance-based, but
it left a loophole. A CEOs salary above $1 million can
be tax-deductible if a company shows that it is
performance-based, and most companies did that.
What is striking about the overall surge in CEOs'
compensation is that it took place in a year when nearly
half of the companies that had a full year of stock trading
saw their shares decline in value, even though major
market indexes were up. Depressed stock values may
also explain why less than a third of the CEOs cashed in
options last year.
Stock options give executives the right to buy shares at a
set price at a certain future time. If the stock rises, the
difference between the grant price and the stock price
when the option is exercised is profit. If the stock price
falls below the grant price, it is virtually worthless. A
restricted stock is stock given to executives that can be
kept after a set period- regardless of whether the price
went up or down.
Nationwide, a study of 362 of the nation's top
companies by Business Week showed that the CEOs'
cash compensation and stock grants climbed by an
average of 17 percent, reaching $12.4 million last year.
This occurred in a year when the average pay increase
for all workers, adjusted for inflation, was 2.6 percent
and the median salary for all workers was $28,550,
according to the U.S. Bureau of Labor Statistics.
While companies lavish stock options on their
executives, the trend is slowly spreading through the
workforce-just less than 20 percent of employees at
the nation's publicly held companies were eligible last
year for options, up from 12 percent in 1996, according
to Watson Wyatt & Co.
"We know why American CEOs love the
economy- because it has constrained everyone's wages
but one group: executives," said Richard Trumka,
secretary-treasurer of the AFL-CIO in Washington,
which took up the battle against skyrocketing CEO pay
several years ago.
By the labor group's calculations, the average earnings
of CEOs at major corporations last year were 476 times
that of the average blue-collar worker. In 1990, CEO
pay was 85 times that of the average blue-collar worker,
according to the AFL-CIO.
The wage gap seems likely to grow, and a major reason
is the surging new economy.
With the stock market rewarding technology stocks so
handsomely last year, the value of stock option grants
awarded to new-economy CEOs far outstripped those
of their old-economy counterparts, according to
Executive Compensation Advisory Services in
Alexandria, Va.
But hefty option grants are not the rule of thumb among
the new Chicago-area high-tech firms that are competing
with other new-economy rivals. The median
compensation packages for these CEOs markedly
trailed those of other Top 100 companies.
But some of the CEOs were well-compensated in other
ways: Many owned large amounts of their companies'
stock, worth millions on paper. Philip S. Bligh, the CEO
of Chicago-based technology consultant Inforte Corp.,
owns about one-fourth of the company's outstanding
shares.
Theoretically, the goal of most stock option grants is to
link CEOs' pay to performance. But several
Chicago-area companies took steps that seemed to skirt
pay experts' advice about making compensation as
performance-based as possible.
Neither the stock options nor the restricted stock that
Motorola gave Galvin were linked to any specific
performance goals. But board member Scott said that
the CEO's performance is judged annually when stocks
are handed out.
At Sears, Roebuck and Co., top executives have
performance-based stock options- they cannot
exercise their options unless the company's stock hits a
certain level. But Sears' board last year gave CEO
Arthur C. Martinez and other top executives another
year for them to exercise the options. The reason,
spokeswoman Peggy Palter explained, is that goals
needed to be "more realistic."
Sears' stock has tumbled in the past three years and
trades well below its levels of two years ago.
That kind of switching around by boards infuriates Nell
Minow, an official of the Corporate Library, a Web site
that tracks and researches Corporate America. "It's
heads I win, tails I still win," she said. "People will
always say I didn't anticipate blah, blah, blah."
She is equally upset by the generous good-byes handed
to CEOs when they have been bounced from their jobs.
"My view is that your departure package should be
zero," she said.
At Bank One Corp., where the company's stock fell 35
percent last year, former CEO John B. McCoy took a
$10.3 million severance when he left his job under
pressure in December. That was in addition to $2 million
worth of restricted stock and $15 million worth of stock
options that were granted to him earlier in the year.
In 1998, the bank did not give McCoy any restricted
stock because of shortfalls in the company's earnings
and stock performance, but it did give him $3.5 million
in deferred compensation for his leadership.
Bank officials said that two consulting firms helped
determine the size of McCoy's severance, and both felt
it was typical for such packages.
As the flow of stock options to executives has swelled,
shareholder-rights groups have become increasingly
alarmed. They object to excessive use of option grants,
because they can dilute the value of outstanding shares
by broadening the base over which profits will be
spread.
And there is no question that dilution is on the rise.
Stock options set aside for employee compensation
packages accounted for 13.7 percent of outstanding
shares in 1999, up from 6.9 percent a decade earlier,
according to the survey by New York-based pay
consultants Pearl Meyer & Partners Inc. And the lion's
share of those packages go to top executives.
Indeed, some CEOs have been very rich in terms of the
stocks they have amassed over time. Among
Chicago-area CEOs, Motorola's Galvin is the leader
with in-the-money options worth $75 million. Next
comes Jack Greenberg, CEO of McDonald's Corp.,
who cashed in options worth $5.8 million last year,
leaving him in-the-money options valued at $64.6
million.
For all of the talk about the two different realms of CEO
pay- those of the old and the new economies- experts
say it seems likely that the two will come together.
"There's basically a convergence between old- and
new-economy companies," said James Hatch, executive
vice president at Los Angeles-based Compensation
Resource Group Inc.
Internet start-ups, in their early days, tend to offer
relatively low salaries and heaps of stock options. As
their stocks skyrocketed, many top honchos became
very, very rich- at least on paper.
But now that the days of easy money seem to be ending
with the Nasdaq stock market's volatility and diminished
value of shares of several IPOs, many of these
companies are finding they have to offer higher base
salaries, larger cash bonuses and long-term cash-based
incentive plans to lure top executives from established
firms, Hatch said.
To keep their CEOs from wandering to greener
pastures, some boards are using a stick, in the form of
so-called claw-back provisions, noted Paulin of
Frederic W. Cook. Top executives who jump to a
competing firm not only have to leave unvested options
on the table, but also often have to repay any profits
they may have reaped from exercising options for some
period before their exit, usually six to 18 months.
Still, "retention devices are not too effective right now,"
Paulin said, noting that firms seeking top talent are willing
pay whatever it takes to lure stars.
The only retention strategy that looks promising, he said,
is to make changes in the financial structure of a
company, spinning off the high-growth aspects of a
business and giving top executives stock options in the
newly established entities.
"You're giving them the same upside they would have if
they went to a stand-alone new-economy company," he
said, noting that Skokie-based information services firm
Bell & Howell Co. has taken steps in this direction.
The firm last year started a new venture with its on-line
periodical database for schoolchildren, an operation
called bigchalk.com that is expected to go public later
this year. All employees at the new venture will receive
stock options, as will top execs at Bell & Howell.
The goal is twofold, "to unleash shareholder value and
to retain executives," said Bob Rook, vice president of
human resources operations.
With all of the tinkering, the basic question in today's
world of turbocharged CEO pay remains the same:
How much money will get the job done?
"I tend to accept it that high pay is the norm, and there's
not much you can do about it," said James Heard,
president of Proxy Monitor, a New York firm that
advises institutional investors. "Even people doing a
lousy job will get paid money that people 10 or 15 years
ago would have considered astounding." |
