The stock option juggernaut shows little signs of abating, as top executives from L.A.'s publicly held companies keep reaping tens of millions of dollars not based so much on salaries or even bonuses, but on the fortunes of Wall Street.

The Business Journal's annual executive compensation survey shows that stock options remain the coin of the realm in Corporate Los Angeles. While the base salaries of L.A.'s top executives rose by an average of 1.6 percent over last year, average total compensation was up 7.4 percent and the figure would have been even higher had 1996's results not been skewed by the 9-figure compensation of Disney chairman Michael Eisner.

"The bottom line is that out of the top 10 executives, 72 percent of their compensation comes from options," said Joshua Lurie, chief executive of Joint Information Inc., a New York-based compensation research firm that compiled the list of highest paid executives.

"That's a trend that you are going to see continue as compensation is increasingly tied to performance," he added.

Lurie said the increased weight of stock options as a percentage of total compensation is the direct result of demands from investors that executive pay be more closely tied to the health of the company.

And so with the economy booming, it's little surprise that executives like stockholders are profiting big time.

"Options continue to be the driving force behind the growth in executive compensation," said Kevin Murphy, a USC professor who sits on the National Association of Corporate Directors' committee on executive compensation.

"There certainly isn't anything short of a 4,000-point drop in the stock market that will reverse this trend," Murphy said.

SunAmerica Inc. Chairman Eli Broad is the highest paid executive, according to the Business Journal study, with total compensation of $47 million. Of that, $43.6 million came from options tied to his company's performance.

Broad ranked second in 1996 with $30 million in total compensation, of which $17.7 million was in options.

The big mover on the list was Mattel Inc. Chairman Jill Barad, who jumped from 33rd last year to No. 2 this year with $34.6 million 96 percent of that in options and other long-term incentive pay. By most measures, that makes her the highest-paid woman executive in the nation.

Noticeably absent from the top spots was Eisner, who fell to 14th place with $10.7 million a fraction of the $204.2 million he made in 1996 after exercising options on 7.3 million shares.

Even considering Eisner's diminished income, compensation experts say that his mega-payout in 1996 and the expectation of similarly large compensation in the future have lifted the bar for other companies that are trying to figure out how much to pay their top brass.

"You would be amazed how many people in companies that have absolutely nothing to do with entertainment say that they need to add Eisner's income to the pool when computing comparable compensation for their own executives," said Murphy.

Lurie notes that the high pay commanded by top executives is largely a function of supply and demand.

"When someone adds value to the company, there is no reason they should not be compensated more than the others," he said. "You can't just pull someone off the unemployment line and have them run a $10 billion company."

While stock options traditionally have been restricted to top executives, they are increasingly being used further down the corporate totem pole.

Broad said that SunAmerica has more than 50 employees with option packages worth more than $1 million, while many more have smaller stakes.

In fact, a growing number of public companies have difficulty attracting staff without stock options, which essentially allow shares in a company to be purchased at some point in the future at advantageous prices.

Warren Buffett recently warned that options are threatening the stability of corporate America because they do not need to be charged against current earnings as employee compensation costs. As a result, companies that grant a lot of options may be able to inflate their net income.

Chris Bohner, an executive compensation analyst at the AFL-CIO in Washington, said growing dependence on options makes executives more likely to lay people off in order to please investors.

Bohner also noted that huge stock options dilute the stock holding of shareholders in general. That, in turn, can hurt the company's share price.

Few shareholders seem to be complaining, especially considering how the market has performed.

"Given that the increasing value of stock options is tied to the stock market, the primary critic, which would be the shareholders, has been silenced," said David Insler, manager of Deloitte & Touche LLP's Performance Management and Compensation Practice.

"Case in point is Broad at SunAmerica. His base salary of $600,000 has not changed in years, and he is only granted option if his company's share price outperforms the S & P; 500," Insler said.

Noted Broad himself: "Given that we've been among the best performer on the index, it has worked out well for me."

The SunAmerica chairman, however, is not so sure that options are being used so effectively at other companies.

"I think a lot more of it needs to be performance based," said Broad. "If a CEO does better than the average, he should be rewarded. But if they don't perform they shouldn't get paid.

The importance of performance-based pay is seen in the $17.6 million compensation in 1997 for Richard Handler, executive vice president of the high-yield bond division at Jefferies Group Inc.

Handler, No. 4 on the Business Journal list, earned more than twice the amount made by his boss, Jefferies' Chairman Frank Baxter. But that's because Handler's pay was tied to the strong performance of the high-yield bond division, according to marketing director Stephen McMenamin.

While Handler's base salary was only $500,000, he received a $17.1 million bonus. "It's directly tied to the revenue he brings into the firm," McMenamin said. "We reward the entrepreneurial spirit here, and Richard embodies the entrepreneurial spirit. He's built an international franchise in the high-yield marketplace for our company."

But in other cases executives can get handsome paychecks even when their companies were in the red.

A total of 15 executives on the list were at companies that lost money, including two of the top 10 executives Foundation Health Systems Inc. Chairman Malik Hasan and its president, Jay Gellert.

There were five executives from money-losing firms in 1996.

The list was again dominated by executives from financial-services, with 20 executives out of 100 (including Broad).

But consolidation in the banking sector is starting to take its toll.

In 1996 Great Western Financial Corp. had five executives on the list, while Coast Savings Financial Corp. accounted for four spots. Both companies have since been acquired and are no longer represented.

That trend is bound to continue.

H.F. Ahmanson & Co., the parent of Home Savings of America, has three executives on the 1997 list, starting with Chairman Charles Rinehart. In 1996 the saving and loan had five executives on the list.

But with Ahmanson in the process of being acquired by Washington Mutual, those executives won't be on the 1998 list.

For reprint and licensing requests for this article, CLICK HERE.