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If you think the recession hit you hard, consider Michael
Eisner. The Walt Disney chief executive suffered a stunning 92 percent
pay cut last year. Though he hardly needs cheering up from Mickey and
Goofy (his bonus the previous year was $11.5 million), at least Eisner's
2001 pay moved in the same direction as Disney stock, which fell 51 percent.
Eisner is not alone. Median CEO pay at large U.S. firms dropped 2.8 percent
last year, to $1.6 million, according to Mercer Human Resource Consulting.
While salaries actually rose slightly, performance-based bonuses were
hammered by sagging earnings and stock prices, dragging overall cash compensation
down for the first time in a decade.
No real drop. But don't shed any tears for the captains of industry. When
the huge helpings of stock grants, options, and perks are added, median
CEO compensation didn't fall at all in 2001--it rose 6.9 percent to over
$7 million.
That correlation may not be apparent to the untrained eyes of ordinary
wage earners. The average CEO made 531 times the average hourly worker's
pay in 2000, including exercised stock options, up from 42 times in 1980,
according to a comparison of Business Week surveys and Bureau of Labor
Statistics data. Last year's numbers aren't likely to close the gap.
And despite the numerous CEOs whose pay was connected, however tenuously,
to performance, there are many who cashed in while their stockholders
and employees suffered.
American Express CEO Kenneth Chenault is one of them. He saw his compensation
more than double, to $14.5 million, in 2001, while the company's net income
dropped by half, its stock price fell by a third, and huge layoffs were
announced. "That's a very handsome increase in the face of poor performance,"
says executive compensation expert Graef Crystal. "Some CEOs are
showing conscience, some aren't." Throw in the estimated value of
a generous stock option grant, and Chenault's paycheck was larger yet.
So even though cash pay flagged, "companies were continuing to spread
eternal wealth" to their CEOs, says Judith Fischer, managing director
of Executive Compensation Advisory Services.
And it's becoming more and more noticeable to shareholders--as well as
a subject of fierce political and corporate debate (Page 34). Once upon
a time, the board could double the CEO's pay, and the difference would
be lost in rounding a digit on the balance sheet. That's no longer the
case when a CEO such as Oracle's Larry Ellison cashes in $706 million
of options, which he did last year.
No way but up. Because a CEO's performance is so critical to a company's
success, corporate boards, which set executive pay, attempt to come up
with pay packages that spur the CEO to new heights of innovation, efficiency,
and industry. Yet critics say boards are far too congenial toward management,
offering all carrot and no stick. They reward executives with astronomical
pay when things go well and above-average pay when they don't. So executive
pay climbs every year regardless of results.
Other executive perks continue to pile up, too. Million-dollar life insurance
policies for CEOs and their families, lifetime pensions, and use of the
company jet for life are common enough. A new perk emerged in the 1990s:
low-interest and no-interest loans to senior executives. In the months
before it declared bankruptcy, Kmart loaned $18 million to nine executives.
Often, such loans are forgiven when the executive departs.
Yet, companies who don't give executives all they want and more may lose
out, says Chingos. "It's a very competitive market out there for
qualified leaders."
The system is fraught with conflict. Companies use compensation committees
of their boards to set executive pay, in an attempt to show independence.
But often CEOs sit on each other's boards and committees. Many boards
rely on compensation consultants to design pay packages for the CEO and
other senior managers. But "all too often those consultants have
millions of dollars tied up in other work for management," admits
Frank Glassner, CEO of Compensation Design Group. "There were very
few times I recommended a cut in executive pay," says Crystal, who
worked as a compensation consultant for 20 years, "and every time
I did I was fired." At the heart of the pay spiral is the complex
issue of stock options, which give employees the right to purchase stock
at a preset price. They have become the way to reward CEOs in recent years--the
ultimate diamond-encrusted carrot to motivate CEOs to pump up earnings
and stock prices. The bull market of the 1990s seemed to justify the method,
at least until its collapse in 2000. And because most companies do not
account for them as a cost, "stock options continue to be the most
cost-effective way to compensate executives," says Mercer's Chingos.
Stock options now make up more than two thirds of CEO pay. But valuing
and reporting them remain slippery tasks. Measuring their worth when they're
awarded is more art than science. Counting them when they're exercised
is equally arbitrary, as CEOs have wide latitude about when to cash in.
Because they're often exercisable after the CEO retires, many are never
reported at all.
Some critics question their inherent value to companies, too. It's doubtful
that Oracle's Ellison, who owns more than $16 billion in Oracle stock,
would work much harder for an additional $700 million. "Companies
should continue to use stock options and other equity-based vehicles,"
says Glassner, "but be realistic about it."
Option maneuvers. The downturn in the market over the past two years rendered
big chunks of outstanding options completely worthless. That was especially
the case in Silicon Valley, where options are the coin of the realm. "Options
grants increased but not nearly enough to offset sinking stock prices,"
says Ira Kay, compensation consultant for Watson Wyatt. In the past, companies
dealt with market downturns by repricing their executives' underwater
options, lowering the exercise price to put them back in the money. But
the Financial Accounting Standards Board essentially disallowed that practice
in 2000. So now, some firms are piling on the options. In October, Apple
Computer's board handed CEO Steve Jobs 7.5 million new options because
Apple's sagging stock, which dropped 40 percent in fiscal 2001, had put
most of his old ones underwater. (The previous year he got a $42 million
Gulfstream jet.)
Meanwhile, a new trick has emerged: Just cancel worthless options and
promise to replace them with new ones at a new price in six months--and
avoid accounting repercussions. About 130 companies did that last year,
according to Institutional Shareholder Services.
But the method's logic is dubious. To maximize their profit potential,
option recipients want the lowest possible exercise price. And options
are issued at the current stock price. So, during the six-month waiting
period, if the option replacement is broad enough, "you're creating
a literal incentive to keep the stock price down," says Patrick McGurn,
vice president at ISS. Some carrot.
Kenneth Chenault
CEO of American Express
Though the company had a bad year, his compensation more than doubled.
He was awarded an extra $308,000 in January, for "individual performance
and leadership."
2000 COMPENSATION: $6.2 MILLION
2001 COMPENSATION: $14.5 MILLION
Larry Ellison
CEO of Oracle
The world's fifth-richest man took no salary or bonus in 2001 but cashed
in over $700 million of stock options. He was granted 40 million options
the year before.
2000 COMPENSATION: $208,000
2001 COMPENSATION: $0
Douglas Daft CEO of Coca-Cola
In a tough year, the company lowered performance goals tied to his compensation,
so he was able to cash in anyway. Daft also was awarded 1 million stock
options in May 2001, "to recognize his performance."
2000 COMPENSATION: $33.5 MILLION
2001 COMPENSATION: $53.0 MILLION
John Mackey
CEO of Whole Foods Market
Mackey had a good year, but then so did his company. His pay jumped 67
percent, the stock rose 15 percent, and income rose 14 percent. Yet Mackey's
pay is limited to 14 times that of his average employee.
2000 COMPENSATION: $210,250
2001 COMPENSATION: $350,500
CEO pay raises far outpace those of average workers.
[Complete chart data are not available.]
Cumulative increase
CEO pay up 571 pct.
Corporate profits up 114 pct.
Worker pay up 37 pct.
Inflation up 32 pct.
[Chart labels]
1990 '92 '93 '94 '95 '96 '97 '98 '99 '00
Sources: www.faireconomy.org, Business Week, Bureau of Economic Analysis,
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