Posted on: Sunday, May 2, 2004

Some CEOs get stratospheric pay for mediocre work

By Edward Iwata and Barbara Hansen
USA Today

The shareholders' revolt over sky-high pay for imperial CEOs has forced some companies to clip their pay packages for top executives. But overpaid management teams are nowhere near extinction.

While some executives earned their pay last year for steering well-run businesses, other top corporate officers landed bloated pay packages as their companies lost millions of dollars, according to a comprehensive study of executive pay this proxy season.

Undeserving CEOs and their management teams were paid "stratospheric sums for mediocre performance" in 2003, says Greg Taxin, CEO of Glass Lewis, a proxy research firm in San Francisco that analyzed this year's proxy filings of 444 companies in the Standard & Poor's 500 for USA Today.

"We have been surprised by the degree to which pay at many firms continues to be disconnected from performance," Taxin says.

Last year, for instance, the five highest-paid executives at Schering-Plough made $28 million in total compensation, and new CEO Fred Hassan was paid $11 million — even though the firm lost $92 million in that time. Their pay was above the median compensation for rival drug and healthcare firms.

Company spokesman Stephen Galpin says that Schering-Plough's top executives arrived just last year to turn around the company, which faces a federal investigation into its sales practices. Given the firm's problems, Hassan turned down a $2 million bonus last year, and his compensation is below the median of Schering-Plough's six large pharmaceutical rivals, Galpin says.

In contrast to Schering-Plough, Southwest Airlines, Adobe Systems and other companies do well by shareholders by not overpaying executives and focusing on steady financial growth, according to Glass Lewis. Southwest paid CEO James Parker and his management crew just $3.3 million for delivering a 16 percent return to shareholders and an 81 percent gain in earnings per share. That's in an industry whose biggest players lost money in 2003.

The Glass Lewis study, and others released this spring, suggest that efforts by regulators and shareholders to rein in executive pay may have fallen short. The use of stock options is waning, but some executives still are reaping small fortunes in stock-based pay, and salaries and bonuses are up. Some boards still have members "who seem to believe that more money for CEOs is routinely better than less," Glass Lewis says.

In its analysis, Glass Lewis counted salaries, bonuses, restricted stock, the estimated value of stock options granted in 2003 and other compensation, such as use of company aircraft. The firm did not count options exercised last year or long-term incentive payments. Some other executive-pay studies do, which produces much higher figures than Glass Lewis' study.

Among the study's findings:

• Managers at troubled companies earned princely sums. Glass Lewis gave failing grades to companies whose executive pay was most out of sync with financial performance in 2003.

The pay plans for executive teams at 25 corporations receiving F's was a median $24.3 million last year, according to Glass Lewis. The median of the CEOs' compensation was $9.7 million. Meanwhile, the companies' median return to shareholders (stock growth plus reinvested dividends) fell 2 percent.

Compensation for executives at these troubled firms falls short of the lavish pay packages of the 1990s, when CEOs and other executives cashed stock options worth hundreds of millions of dollars. But shareholders still are ill-served, Glass Lewis analysts contend.

"Poor-performing executives should not be rewarded with gobs of shareholders' money," Taxin says.

At Qwest Communications, the telecom firm hurt by an accounting scandal, executives were paid more than rivals, even though Qwest performed worse than its peers.

Last year, Qwest's management team was compensated $20.5 million — higher than the median pay for 34 telecom rivals, according to Glass Lewis. CEO Richard Notebaert last year made $9.6 million.

In the meantime, Qwest's total return to shareholders sank 14 percent, and the company lost $1.3 billion.

"This is one of the worst boards in Corporate America when it comes to fulfilling their fiduciary responsibilities to investors," says Lynn Turner, former chief accountant at the Securities and Exchange Commission and a managing director of Glass Lewis.

Qwest spokesman Steven Hammack said its board sets executives' pay at "appropriate and competitive levels." Qwest executives have "achieved remarkable results in less than two years," including reducing debt by $1.9 billion, improving customer satisfaction and launching products.

• Executives at 25 well-run firms are models of executive compensation.

Glass Lewis gave A's to management teams at Adobe, 3M, Coca-Cola, United Parcel Service and other corporations for running shareholder-friendly firms.

The median pay package for the five highest-paid corporate officers at these 25 companies was $7.6 million — a pittance next to the jaw-dropping pay during the dot-com boom.

Their CEOs also were relatively affordable, with median pay of $2.5 million last year.

These high-performing executives are worth their paychecks, Glass Lewis says. Why? Because their companies' median return to shareholders was 44 percent, and their earnings per share rose 23 percent.

At 3M, CEO James McNerney was paid $13.5 million — about midrange for CEOs in 3M's peer group. His management team took in $24 million, which was below the median pay for companies of similar size.

Their pay appears high, but not when compared with the shareholder wealth that 3M created. Its net income grew 35 percent to $2.4 billion, and its earnings per share climbed 21 percent. "McNerney turned out a terrific performance in the short term and long term," Taxin says.

• Pay for performance is gaining popularity.

More companies are shying away from stock options. Last year, 278 publicly traded corporations awarded options to employees, vs. 298 in 2002, according to a study of 350 large companies by Mercer Human Resources Consulting for The Wall Street Journal.

Plus, the number of corporations that awarded "megagrants" — stock-option grants valued at eight times a CEO's total yearly compensation — dropped to 22 last year from 62 in 2002, according to Mercer. From IBM to General Electric, companies are designing new pay plans that award stock and bonuses based on stock price, earnings and revenue gains, or other long-run measures.

Ideally, the new plans will lead executives to focus on their companies' performance over many years, instead of cashing their stock options and leaving.

"Executives used to say, 'Show me the cash,' " Turner says. "Now it's a new world. Companies are saying, 'Show us performance, then we'll show you some cash.' "

Why the big shift from options?

Angry shareholders are pressuring companies to scale back their pay practices.

Corporations loaded with stock options fear that controversial rules proposed by the Financial Accounting Standards Board, an industry group, will hurt their profits. The rules, to be adopted soon, would require firms to record stock options as expenses against earnings.

Finally, in a post-Enron world, companies increasingly sensitized to issues of ethics and public image are engaging in good corporate governance, including reasonable pay practices for their executives.

• • •