Buffalo, N.Y.-Area Executives Get Sweet Severance Packages.

Jun. 24-Parting truly can be sweet sorrow - especially if you're the boss.

Whether they leave because of retirement, a merger or even if they're fired, chief executives can expect to ease their transition with severance or retirement packages that can be worth hundreds of thousands of dollars - if not millions.

That's on top of pay packages that typically exceeded $400,000 last year, even though shrinking bonuses and falling stock prices caused the median total pay of the 45 top executives included in The Buffalo News' annual compensation survey to slide by 3.8 percent.

Overall, the median pay of those Buffalo Niagara region executives fell for the second straight year to $428,567 during 2001 as the slumping economy and weak stock market eroded the pay-for-performance features included in many pay packages.

But a handful of local executives also showed that most CEOs enjoy safety blankets and retirement benefits that are far more lucrative than anything available to a typical worker.

Consider these examples:

- Bernard J. Kennedy retired last September as National Fuel Gas Co.'s chief executive officer with a pension that pays him $2.33 million a year, sweetened by a parting grant of the Buffalo-based energy company's stock that was worth nearly $2.3 million at the time.

- Darrell L. Jennings spent just 8 1/2 months as Computer Task Group's chief executive, but he could be collecting a paycheck from the Buffalo-based information technology company for more than twice that long after leaving his job.

If Jennings still hasn't found a job by the middle of January, CTG could end up paying him almost 50 percent more for not working for the company than it paid him to run the business from October 2000 through July 2001. In all, Jennings could end up collecting more than $800,000 in severance pay from CTG.

- David G. Messinger left his $330,000-a-year job as Bush Industries' top marketing executive last July, but the sting of his departure was tempered by a consulting agreement that paid him more than $152,600 during the next 5 1/2 months.

- Even John Rigas, the founder of the crumbling Adelphia Communications Corp. who gave up control of the company last month amid allegations of rampant self-dealing and accounting improprieties, left with a severance package that will pay him $4.2 million over three years plus lifetime health insurance for himself and his wife. Rigas will forfeit that severance package if he's convicted of a felony.

Those are just the prominent local executives who cashed in on an increasingly common feature in most CEO pay packages to provide big severance packages to top executives who retire, quit or even get fired. Those agreements often entitle executives to payments equal to as much as three times their annual salary and bonus when they leave their jobs.

"That's so common," said Jerry M. Newman, the interim dean of School of Management at the University at Buffalo. "And the higher you go up, the more lucrative the packages become."

In Kennedy's case, his retirement package reflects the national trend of providing high-ranking executives with lucrative benefits from supplemental pension plans. It also reflects his career-long ties to National Fuel, which he joined as a lawyer in 1958, and his lengthy tenure as one of the company's top managers.

"It's reflective of his tenure and the growth and success of the company while he was at the helm," said Julie Coppola Cox, a National Fuel spokeswoman. "He's put us in a position to be successful and in a position for continued growth."

Newman said executives are making sure their employment contracts include provisions that will provide them with a soft landing if they lose their jobs because turnover in the executive ranks has increased as the pressure to perform has intensified.

"They'd make the argument that they need that type of soft landing because it's more likely that they will be terminated," Newman said.

Even so, the exit packages that Rigas received as Adelphia headed toward bankruptcy, as well as severance payments to departing CEOs at underperforming companies like WorldCom and Lucent Technologies, have raised eyebrows.

"I don't recall that anyone gave a bonus to the captain of the Titanic, so why should outgoing CEOs of failing companies receive anything?" asked Frank Glassner , the chief executive officer of Compensation Design Group in New York City.

"What message does Corporate America send with exit packages like these? That if you do a good job, we'll pay you. But if you do a lousy job, we'll pay you even more," he said.

Indeed, an examination of local executives' pay packages shows that, even with the pay-for-performance rationale that has helped shape compensation packages for more than a decade, most CEOs are in a position to hit paydirt when times are good but face only a limited downside during lean times.

"Executive pay has been remarkably sticky on the downside," said Clark Tucker, a senior consultant at benefits consultant William M. Mercer's Rochester office. "People haven't had to suffer much."

That's the case nationally, too, where a Mercer survey of CEO pay at 350 of the nation's biggest public companies found that total compensation rose a median 6.9 percent last year, even as the slumping economy caused corporate profits to fall by 12.5 percent and the stock market sunk. Meanwhile base salaries rose by a median of 4.7 percent.

But CEOs at the country's biggest companies make a whole lot more than top local executives, earning a median of $7 million last year, even though their total pay went up by the smallest amount since Mercer started doing the survey in 1994. Median means half earned more and half earned less.

While the numbers are much smaller locally, the trends are pretty much the same. Top local executives enjoyed a median salary increase of 7.6 percent last year, which is more than 4 times the inflation rate and more than double the 3.7 percent increase in wages and salaries that the average American worker received last year.

That helped brunt the pain from a 23 percent decline in the size of the median bonus that the executives received, which slid to $84,000 last year. But when you combine the increased salaries with the smaller bonuses, the executives still came out slightly ahead, with their median cash compensation inching up by 1 percent.

"In general, pay-for-performance packages work only on the upside," UB's Newman said. "You very seldom see wages dropping because of poor performance."

As a result, six local executives still managed to take home more than $1 million last year. That compares with seven in 1999 and 2000, but less than half as many as 1998, when 13 of the region's CEOs belonged to the millionaire's club.

The reason? Stock options. Those options, which typically allow an executive to buy a share of the company's stock at a fixed price sometime in the next 10 years, have become big money-makers for many executives, who have been loading up on options as the share prices of their firms have shot up since the early 1990s.

Here's how stock options work: If an executive receives 100,000 options to buy stock at a price of $10 per share, and the stock shoots up in price to $20 during that predetermined period, usually 10 years, then the manager can cash in on a $1 million profit by exercising those options.

On the other hand, stock options don't give the executive any downside risk, since the manager won't lose any money if the company's shares don't rise in price and the options expire worthless. The exercise price of the options typically is the market price of the stock on the day the options are granted.

The very nature of stock options means that while executives may reap a windfall one year, their options may not put any cash in their pockets the next, should they choose not to cash in any.

That's how Robert G. Wilmers, M&T Bank Corp.'s president and chief executive officer, ended up with a pay package worth $24.4 million last year. While Wilmers' salary, bonus and other pay were slightly less than $1 million, he earned more than $23.4 million by cashing in options that he'd accumulated over the years.

The same was true for Robert E. Sadler, M&T's executive vice president, who reaped a $9.9 million gain by cashing in some of his stock options. M&T's stock rose by an average of almost 22 percent a year from 1991 to 2001.

Overall, though, executives at local companies weren't rushing to cash in their options last year, even though the stocks of Buffalo-based companies rose by an average of 12.6 percent in an otherwise dismal stock market.

Consequently, just 28 percent of the local executives surveyed exercised options last year, down from 31 percent in 2000 and 40 percent the year before. That helps explain how just 47 percent of those executives ended up taking home more in total pay - stock option profits included - than they did the year before.

Yet local companies continued to dole out options, with 58 percent of the executives getting options last year, down from nearly 75 percent in 2000 but up from 50 percent in 1999.

No local executive got more options than CTG's new chief executive officer, James R. Boldt, who got 400,000 options to buy CTG stock at $3.08 per share after he was hired to replace Jennings. Because CTG's stock has soared by almost 50 percent since then, Boldt has a paper profit of $600,000 on those options.

But it's not that simple. Options come with restrictions that typically allow executives to cash them in only after a certain amount of time has elapsed, so the vast majority of Boldt's options still can't be cashed in.

The biggest bonus went to National Fuel's Kennedy, who got a performance-based bonus of $848,150, on top of his $848,150 maximum award under an incentive-pay program linked to the firm's earnings and customer service goals.

"The largest part of his pay is based on performance-based measures," Cox said, noting that National Fuel's utility operations are responsible for about a quarter of Kennedy's pay.

National Fuel earlier this year sweetened its bonus plan, getting shareholders to approve a change that allows top executives to earn up to two times their annual salary, or as much as $2 million. The old system had capped executive bonuses at the lesser of annual salary or up to $1 million.

Top executives also get other lucrative perks, ranging from company cars to help with tax preparation and lucrative supplemental retirement plans to bolster their traditional pensions. To encourage top executives to own more of their company's stock, some firms give special loans to their senior officials to help them buy more shares.

Bush Industries has granted interest-free loans to its top four executives to help them buy more company stock, including one to chief executive Paul S. Bush that had an unpaid balance of more than $376,000 in late February. At Graham Corp., chief executive Al Cadena owes $178,750 on an interest-bearing loan from the company that was used to buy stock.

Some build other ties. Columbus McKinnon, for instance, hired its chairman, Herbert P. Ladds Jr., as a consultant. That contract runs through December 2003 and pays him $285,000 a year for up to 40 hours of consulting services per month, which breaks down to a rate of almost $594 an hour.

At M&T, the banking company paid $220,352 last year for the use of a plane that is half-owned by Wilmers and leased to a commercial aviation service. M&T said it expects to pay a similar amount for use of the plane this year.
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