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CEO Salaries Under Fire As Stocks Dive
By Bill Catlin, Minnesota Public Radio
March 28, 2001

Spring is proxy season, when publicly-traded corporations have to reveal what they pay their top brass. Pay packages for CEOs skyrocketed in the 1990s, surpassing gains in corporate profits and the S&P 500. This spring, with investors nursing their wounds from a punishing drop in stocks, CEOs are taking more heat from shareholders over huge pay packages. And some Minnesota companies are in the crosshairs.

This chart shows the growth of CEO compensation in the 1990s, compared with stock performance, corporate profits and salary growth for lower-level employees.
 
IT MAY BE A CASE OF - 'BE CAREFUL WHAT YOU WISH FOR.' Institutional shareholders like pension funds promoted the idea of paying executives with stock or stock options. The idea was to align CEOs' interests with shareholders. More wealth for shareholders was supposed to mean more wealth for the boss. But now, second thoughts. Richard Ferlauto of the consulting firm Institutional Shareholder Services, says many option plans cross the line from appropriate incentive to greed.

"There's a general feeling among institutional holders that executive compensation has run amok. That executives are drawing down very large packages that don't necessarily track at all with the performance of those companies," says Ferlauto.

"Shareholders are going to be much more sensitive to this," says Ann Yerger, with the Council of Institutional Investors.

Yerger says the issue of executive pay has fueled more shareholder proposals from the organization's members than any other issue this year. The council represents more than 100 corporate, union and public employee pension funds, which manage $1.5 trillion in assets.

"We've had five years of robust markets. Frankly, everybody was fat and happy, and I don't think this was a top issue. I think things are going to change," says Yerger. "If you're holding a stock that has depreciated 50 percent in value over the past 12 months, and you see an executive who's pocketed a huge compensation package, I think there's going to be unrest."

Yerger says stockholders share responsibility for excessive pay packages, but she also says no one anticipated the scale they would reach.

"Ten years ago, an option for 100,000 or 200,000 shares was considered significant. Today, that would just be pocket change for some of these executives. We routinely see option awards covering more than one million shares. And that's significant. That means a $1 change in the stock price, which may be immaterial, given where the company is trading, translates into a $1 million gain for the executive," says Yerger.



SOME PENSION PLANS PUSHING FOR REFORMS

Maplewood-based 3M is drawing fire from the pension arm of the International Brotherhood of Electrical Workers. The union wants a system that would make 3M's executive stock options worthless, unless the company's performance beats a market index. Jim Voye with the IBEW says the proposal is part of a larger campaign to promote long-term thinking among corporate leaders.

"I get more upset at what they pay mediocre baseball players than what they pay CEOs. "

- Jim Sillery, executive compensation consultant
"Make the investments in upgrading your plants, your technologies - that will pay off in the long term, as opposed to short-term thinking that may have the effect of a big payout for the senior executive officers," he says.

Voye says the concern is not related to the pay package of 3M's new CEO. He says the proposal has more to do with former CEO L.D. Desimone, who earned several million dollars in 1999, even though the return to shareholders lagged behind the overall market. Voye also stresses that the IBEW has far greater concern about compensation practices at other companies. 3M officially opposes the IBEW proposal, saying so-called indexed stock options do a worse job aligning the interests of executives and shareholders.

UNITEDHEALTH GROUP CEO UNDER FIRE FROM CRITICS

The pay of Dr. William McGuire, head of Minnetonka-based UnitedHealth Group, has drawn criticism from the Council of Institutional Investors.

"In most periods, he generally earns more money than he should earn, by a fairly significant margin," says Bloomberg News columnist Graef Crystal.

Crystal did a study for the council last September, which tagged McGuire as one of five pay "anti-heroes." The study pegged McGuire's 1999 pay package at $45 million. But Crystal says that's far less egregious than the recent pay package for Citigroup CEO Sandy Weill, which Crystal values at more than $200 million.

Last year, when the S&P 500 declined nine percent, UnitedHealth Group's share price soared 130 percent. A company spokesman says McGuire has performed extremely well, and as a result he is compensated well. Even Crystal concedes the firm's recent performance was nothing short of terrific.

"So his shareholders must be thrilled, and they are probably quite tolerant of him backing up a Mack truck right into the treasury and taking out anything he can carry. He's done very well," says Crystal.

Crystal's columns have also blasted Honeywell CEO Michael Bonsignore, and Jack Welch, the legendary chairman of General Electric, which has announced plans to buy Honeywell. Tens of thousands of layoffs are expected, and many analysts expect the cuts will fall heavily on Honeywell's former home state of Minnesota.

"And I would also note the startling insensitivity," says Crystal. "At the moment, we're paying Jack Welch $135 million for a single year's work, which work resulted in a six percent destruction of the shareholders' wealth. We are, at the same time, announcing 50,000 people at GE are going to be let go."

GE has not said how many jobs will be cut. Spokesman Gary Sheffer says Welch's pay last year was, in part, to reward 20 years of enriching shareholders, of whom the largest single group is employees and retirees.

"It's clear, based objectively on the incredible wealth that has been delivered to shareowners and employees over the last 20 years, that the decisions he's made have benefitted them. And those are tough decisions, there's no doubt about it," says Sheffer.

GOOD CEOs IN SHORT SUPPLY

Corporate spokesmen are not the only defenders of generous pay packages.

"Personally, I get more upset at what they pay mediocre baseball players than what they pay CEOs," says Jim Sillery, a senior consultant in the executive compensation practice of consulting firm Watson Wyatt Worldwide.

Though abuses get the headlines, Sillery says performance-based executive compensation packages tend to work. He says there tends to be a high level of correlation between executive pay and company performance. Sillery says what's at work here is the fundamental economic principle of supply and demand.

"There's a shortage of skilled executives, of skilled CEOs. That continues to pressure the market to provide high levels of compensation to be able to attract them," Sillery says. He also points out that stock options can punish executives for events beyond their control.

"My stock price can go down because my major competitor announced record losses, and people lose confidence in the industry sector," says Sillery.

Despite the economic downturn and stock declines, Sillery says he doubts there will be a decline in the use of stock options. And even Graef Crystal of Bloomberg News doubts executive pay will be reined in.

"I am pretty gloomy because I've been working as a critic for 10 years now, and you say, 'If you had to grade your performance as a critic, you get an "F" because you know pay is 10 times higher than it was when you started,'" says Crystal.

A preliminary analysis by Business Week indicates the stock market declines may curb CEO pay, as executives hold off cashing in their options. It remains to be seen whether a down market will be more effective at slowing executive pay than the critics have been.