How Some CEO Pay Flies Under the Radar

It's hard to feel sorry for Terrence Murray.

Like many business leaders, the head of FleetBoston Financial Corp. saw his bulging wallet shrink last year. The bank gave him no raise and halved his bonus.

But life becomes much sweeter once the 62-year-old chairman retires at year end. Under an unusually generous formula FleetBoston directors embraced in August, Mr. Murray (who recently relinquished the chief executive post) will collect a $5.8 million annual pension. That's more than twice the estimated $2.7 million a year that a prior formula would have paid. Neither figure appears in any FleetBoston regulatory filing.

In the aftermath of the recession, the bearish stock market and Enron Corp.'s collapse, corporate boards face unparalleled pressure to pinch their top executives' pay. "It's the end of a golden era," says Pearl Meyer, a veteran New York compensation adviser.

Sort of. Because while their more-public pay numbers are shrinking, certain corporate captains have discovered less obvious ways to enrich themselves. This so-called stealth wealth remains obscured because executives reap rewards after they depart, federal disclosure requirements are weak -- or both, as in the case of Mr. Murray. Besides postretirement windfalls, such tactics include stock sales to an employer, lucrative deferred-compensation plans and low-interest loans.

"Chief executives are finding well-concealed ways to restore compensation that the downturn denied them," says Sarah Teslik, executive director of the Council of Institutional Investors, a Washington group that represents 120 pension funds with more than $2 trillion in assets. "Disclosure laws aren't adequate for us to track [this]."

The result: People steering the largest enterprises are sharing some -- but not all -- of the nation's economic pain.

Chief executive officers with at least two years' tenure incurred a 2.8% median decrease in salary and bonuses last year to $1,603,125, concludes a study of the latest proxy statements of 350 major U.S. companies by New York-based Mercer Human Resource Consulting. The companies' profit plunged a median of 17.8% in 2001, according to Mercer's analysis. Standard & Poor's 500-stock index, meanwhile, fell 13%, its biggest one-year decrease since 1974.

The drop in CEOs' cash compensation was the first since The Wall Street Journal began tracking their fortunes in 1989. It also was a stark reversal from the 10% median gain to $1,844,429 in 2000. (The Mercer survey's 2000 figure reflects a slightly different sample of 350 companies.)

Despite broad cuts in pay and jobs, white-collar staffers fared better than their companies' highest bosses -- for the first time since 1991. Paychecks of nonunion salaried employees rose 4.4%, after advancing 4.2% in 2000. Excluding bonuses, which these workers usually don't collect, eliminates the gap. Base pay of business leaders climbed 4.7% in 2001, following a 5.3% increase the prior year. Overall U.S. wages and benefits rose 4.2% last year, below the 4.6% growth in 2000.

A number of corporate commanders took home smaller bonuses, a payment often tied to profits. In the Mercer study, 186 received reduced or zero bonuses, a dramatic increase from 122 in 2000. The chiefs of Boeing Co., Eli Lilly & Co., Merrill Lynch & Co. and McGraw-Hill Cos. were among those whose bonuses were slashed in 2001. Bonuses of studied CEOs tumbled 13.5% to a median of $697,657 last year, compared with a 12% increase to $1 million during 2000.

Some bosses took their shrunken compensation in stride. An omitted bonus, a 10% salary cut and largely worthless stock options simply "make me work harder," says Ned Barnholt, chief executive of Agilent Technologies Inc., a Palo Alto, Calif., producer of testing and measurement equipment. "I don't focus on the money aspect as much as I focus on navigating through difficult times."

Total direct compensation for polled CEOs fell 0.9% last year to a median of $2,959,361, again the first downturn since the Journal starting keeping track. The latest figure compares with an 8.2% rise to $2,902,886 in 2000. (In addition to salaries and bonuses, total direct compensation includes the value of restricted stock at the time of the grant, gains from exercising options, and other long-term incentive payouts.)

Performance counts here too, though, and not just profits. The chief executives of companies with the best shareholder returns were more handsomely paid than their counterparts at companies whose investors fared the worst. Heads of the 10 best-performing businesses experienced an 8.6% increase in total direct compensation to a median of $2,112,842, Mercer reported. The leaders of the 10 with the poorest returns saw their remuneration sag 52.3% to a median of $879,167. The median total shareholder return, which equals stock-price appreciation plus reinvested dividends, was 3.6% last year among the 350 companies studied.

Limited Options

The protracted market slump restrained CEOs' rewards from options. The median realized gain from option exercises totaled $2,057,580, up from the prior year's $1,892,938. There were glaring exceptions. Oracle Corp.'s Lawrence J. Ellison scored a $706.1 million paper profit when he exercised options during the fiscal year ended May 31. The co-founder and biggest shareholder of the Redwood Shores, Calif., software concern said he did so because those options were about to expire.

Altogether, 148 of the surveyed chiefs cashed in a median of 102,601 options apiece, compared with the 151 exercising a median of 98,333 options each in 2000. Many hoping for rosier days ahead can take comfort from a big remaining stash. Mr. Ellison, for instance, still held 47.9 million exercisable options, valued at about $497.6 million, at the end of fiscal 2001.

Median unrealized gains from options amounted to $4.96 million in 2001, down from 2000's $5.84 million, the Mercer analysis showed. Overall, unrealized option gains for polled executives sank to $7.6 billion from $15.48 billion.

L. Dennis Kozlowski, the 55-year-old leader of Tyco International Ltd., didn't exercise any options in the Bermuda-based conglomerate's fiscal year ended Sept. 30, because his nearly 10.15 million exercisable options were then worth a scant $6,667. Tyco's stock hasn't been entirely cooperative since then, either. It climbed 32% from $45.50 on Sept. 28, the last trading day of the fiscal year, to its current 52-week high of $60.09 on Dec. 5. But it has since dropped about 47% to around $32 recently in New York Stock Exchange composite trading.

On the other hand, Tyco gave its chairman and chief executive restricted shares valued at $30.4 million and 1.4 million options initially valued at $21.8 million during fiscal 2001. (Mr. Kozlowski could lose his restricted shares if the business misses tough earnings goals. His new options replaced exercised ones.)

Last year, leaders of 111 businesses tracked by Mercer got such so-called megagrants, up from 85 in 2000. An options megagrant has a face value of at least eight times an individual's salary and bonus. The face value is computed by multiplying the number of options by the market price at the time of the grant. A restricted-stock megagrant has a face value of at least two times salary and bonus. Restricted shares typically cost the executive little or nothing; limits on selling the stock usually disappear within five years.

Weak Rules

In addition to his megagrants, Mr. Kozlowski made more than $70 million selling about 1.2 million shares back to Tyco during fiscal 2001. The three sales occurred while he continued to state publicly that he rarely if ever sold his Tyco shares.

And even though he shed most of that stake in October 2000, Tyco didn't disclose the transactions until a Nov. 13, 2001, filing. The Securities and Exchange Commission allows companies to disclose such insider transactions just once a year, with the filing deadline set 45 days after the fiscal year ends.

Mr. Kozlowski says he routinely sells shares to Tyco to repay loans taken to cover his tax liability on restricted-share grants. "Every year, we turn back stock because we have to," he says, calling scrutiny of his share sales a case of "Enronitis." Reacting to criticism that the permitted reporting delay concealed sizable compensation, he vows that in the future, "I will not give back one share of stock unless it's preannounced."

SEC rules also explain why no one knew until February of this year that former Enron Chairman Kenneth Lay had sold $70.1 million of stock back to the Houston energy trader between February and October 2001. He did so to repay borrowings from Enron. During much of that period, Enron's share price kept sinking and Mr. Lay was exhorting employees to keep buying shares. Enron's December bankruptcy filing wiped out much of the retirement savings for most workers there.

"CEOs are getting far more skilled at hiding this [pay] stuff," says William Patterson, director of the AFL-CIO's Office of Investment. "There is far more anger because of the surreptitious disclosure." He is especially enraged over Mr. Murray's FleetBoston retirement package.

'An Extraordinary Pension'

The Boston bank changed a pension formula previously based on roughly 60% of its CEO's last five years' annual salary and bonus, according to an SEC filing. Instead, the board will base Mr. Murray's pension on the average of his highest three years of taxable compensation from 1996 to 2000. The revised formula covers salary, bonus, option-exercise gains, vested restricted shares and the payout of certain deferred compensation.

"I cannot think of another major company that counts stock-option gains in determining a CEO's pension," says Brian Foley, an executive-compensation consultant in White Plains, N.Y., who calculated the annual $2.7 million due Mr. Murray under the old method. Bank officials computed the new formula's price tag of $5.8 million a year in response to a Wall Street Journal query. "This is an extraordinary pension in terms of sheer size and how it was calculated," Mr. Foley says.

Mr. Murray declines to comment, according to Fleet spokesman Jim Mahoney. The bank's latest proxy statement says the richer pension formula partly reflects the fact that "Mr. Murray built the corporation into the seventh-largest financial holding company and is a long-service and high-performing chief executive." FleetBoston's market capitalization soared to about $40 billion by the end of 2001 from $200 million when Mr. Murray took the helm in 1982, says Mr. Mahoney. Directors, he adds, felt "that's an enormous addition to shareholder value," which took precedence over the bank's earnings slide last year.

Others disagree. FleetBoston shares "have underperformed the average bank for a decade," says Michael Mayo, a Prudential Securities banking analyst. "What happened to [just] getting a gold watch?" Mr. Mayo is equally miffed over what he considers the bank's insufficient disclosure of the revamped pension's cost. "The owners of the company have a right to know what managers are getting paid, especially after they retire," he says.

The new pension formula, Mr. Mahoney replies, "is laid out pretty clearly in the proxy."

Once Mr. Murray leaves, another regulatory filing states, he also will enjoy lifetime use of a corporate aircraft for as much as 150 hours a year, a car and driver when requested, an office and assistant, a company-paid home security system and financial planning. His wife and guests can take free flights even if he stays behind -- an extremely rare perk.

Boards increasingly let a retiring leader use a corporate jet for life, because fuel usually is the only extra cost. The permanent perk "is an efficient way of delivering something of value to the executive," says Yale D. Tauber, a Mercer principal in New York.

Exactly how valuable? FleetBoston's filings don't say. If the Murrays and a friend take 15 coast-to-coast trips every year on a typical corporate jet, the former chief executive will have to pay taxes on about $180,000 of imputed income, estimates Mary B. Hevner, a compensation specialist and partner at Washington law firm Baker & McKenzie.

Enviable Deal

General Electric Co. spurred jet envy elsewhere by negotiating a postretirement consulting accord with longtime leader John F. Welch Jr. that gives him lifetime access to company aircraft in exchange for working up to 30 days a year. He stepped down in September. His personal use of the aircraft was "minimal" in 2001, a spokesman says.

GE also gives Mr. Welch several other perks whose value isn't readily apparent, on top of a pension that Mr. Foley estimates at nearly $9 million a year. (GE doesn't disclose the exact figure.)

A special life-insurance policy GE set up in 2000 will pass benefits to Mr. Welch's heirs free of estate and income taxes. In what is known as a split-dollar policy, businesses pay the vast majority of premiums for an arrangement typically used to shelter a senior executive's pension. "It's like an interest-free loan," says David M. Leach, head of compensation consulting for Buck Consultants in New York.

GE also allowed Mr. Welch to contribute as much as 90% of his $3.4 million salary last year to a deferred-compensation account and guaranteed him a 12% annual return. The company has paid him interest ranging from 10% to 14% a year on money deferred since 1987. The spokesman declines to divulge how much any GE staffer defers.

Mr. Welch can withdraw this nest egg over 20 years; the balance will keep earning the same returns. GE investors have no idea "how much Jack Welch will continue to tap into the coffers of the corporation," says Judith Fischer, managing director of consultants Executive Compensation Advisory Services in Alexandria, Va.

Mr. Welch was unavailable to comment for this article.

A guaranteed high interest rate for a CEO's deferred compensation "is the scam of the century," says Patrick McGurn, director of corporate programs for Institutional Shareholder Services, a proxy-advisory firm in Rockville, Md.

Outrage Swells

Some critics say the same about the stealth wealth that WorldCom Inc. provides in the form of bargain interest rates on loans to Bernard J. Ebbers. The Clinton, Miss., telecommunications company, which he founded and runs, charges him 2.15% annually on a $198.7 million loan, and between 2.14% and 2.16% a year on a separate loan of about $144.3 million, a March 13 regulatory filing shows.

WorldCom has said those are its own borrowing rates. The $343 million is the most any publicly held corporation has lent to a single officer in recent memory. The low rates significantly sweeten the deal. Mr. Foley figures Mr. Ebbers saves about $15.6 million a year, based on the difference between the debt's average interest rate of 2.15% and a recent benchmark corporate bond rate of 6.69%.

WorldCom says the loans benefit shareholders, who would suffer if Mr. Ebbers were compelled to sell millions of shares to raise collateral. The SEC is investigating the Ebbers loans as part of a broader inquiry into the company's finances. Mr. Ebbers declines to comment, according to a WorldCom spokeswoman.

Charging little for massive loans suggests "you have overcompensated executives, and boards that lack backbone to admit it," says Ms. Teslik of the Council of Institutional Investors. "They are just trying to hide compensation."

Outrage over stealth wealth is swelling. The council has asked the SEC to require more proxy information about repricing of worthless options. TIAA-CREF, a leading pension system for U.S. colleges and universities, wants the commission to mandate greater disclosure of the value of executive pensions and deferred compensation. The SEC has yet to act.

And last month, Rep. George Miller, a California Democrat, introduced a bill that would require executives to inform their corporate pension plans' administrators of insider stock sales within 24 hours. Plan officials would then have to immediately notify employees. The measure also covers shares sold back to a business. The U.S. House of Representatives may consider his proposal Thursday.

In response to such outcry, two big companies have decided to disclose top executives' options awards quarterly rather than annually, says Frank Glassner, CEO of New York consultants Compensation Design Group. He declines to identify those clients or three others considering the same move. Their voluntary disclosures will "put executive pay further out in the open," he says, sending investors a message "that not everyone is a bad guy."

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