Staff Reporter

L.A.'s top corporate executives have been hit with a 29 percent pay cut, as the effects of lower earnings and increased merger activity take their toll.

In the Business Journal's annual survey, the 100 highest paid local public company executives were paid, on average, $4.2 million in 1998, down from $5.9 million the year before and $5.5 million in 1996.

The figures run contrary to the national trend, which shows public company executives continuing to enjoy pay increases though at a slower pace than in previous years.

"With consolidation in certain industries and the coming down to Earth of some executive pay packages, you have really seen a drop in L.A.," said Joshua Lurie, chief executive of Joint Information System, a New York compensation research company that compiled the list for the Business Journal.

On an individual basis, there were several notable results, including the inclusion of three executives at fast-growing EarthLink Network Inc. in the top 10 as well as the sharp drop of Walt Disney Co. Chairman Michael Eisner, who was beaten out by Chief Financial Officer Thomas Staggs as the highest-compensated Disney executive.

Topping the Business Journal list is Stephen Bollenbach, chairman of Hilton Hotels Corp., with total 1998 compensation of more than $27 million (though most of that is made up of stock options that have been granted but not exercised).

Coming in second was Charles Betty, chief executive of EarthLink, at $23.4 million, followed by Linda Wachner, chairwoman and chief executive of Authentic Fitness Corp., at $19.7 million.

To determine the highest paid executives, several factors were considered, including the sum of base salaries, bonuses, long-term incentive pay plans and granted stock options. While the options were granted, they were not necessarily exercised.

In L.A., executive compensation is an especially tricky issue because it carries with it the cross-current of recruiting and retaining top people versus the elitist image that a seven- or eight-figure income often connotes. In addition, shareholder groups and institutional investors have become increasingly concerned about the role that stock options play in the executive compensation package particularly for companies that are losing money or performing poorly on Wall Street.

There are a number of possible explanations for the dropoff in average compensation the most obvious being that overall profitability at many L.A. public companies is down and that executive compensation increasingly is tied to corporate performance.

The average return on equity for the employers of L.A.'s 100 highest-paid public company executives was 16.2 percent last year, down slightly from 16.4 percent in 1997. The decline would have been greater were it not for Hilton's 95.2 percent ROE.

"We see much more attention being paid by compensation boards to performance issues," said Donald Sagolla, a consultant at William M. Mercer in downtown L.A. "They are giving options based on performance rather than (automatically receiving a) promotion."

Another explanation for the lower pay is the continuing disappearance of large public companies.

"Mergers and acquisitions in Los Angeles have taken away a number of large companies, so we have lost a number of large payouts," said David Leach, managing director of Compensation Research Group Inc. in Pasadena.

Arguably the most significant loss in terms of high-pay executives is SunAmerica Inc. Last year, the L.A.-based company's founder and chairman, Eli Broad, topped the list of highest paid public company executives, with total compensation of more than $47 million. SunAmerica, which has been acquired by American International Group Inc., had five executives on the top 100 list last year, who as a group received more than $80 million in annual compensation.

Still another reason cited for the lower compensation is that executives might be favoring cash salaries and bonuses over stock options, which could take years before being "in the money" meaning the stock price is above the options' exercise price, enabling the holder to exercise the options and then immediately sell the shares on the open market for a profit.

The exercise price on new options is typically above the current market price, so in a way, the phenomenal bull market may be making options less attractive.

"With valuations of stocks as high as they are, people may want to secure higher cash awards, and may in turn be more willing to give up some of their options," said Lurie.

Despite his healthy compensation on paper in 1998, Hilton's Bollenbach remained essentially out of the option money. The stock has been down more than 50 percent from its year-ago level, and even if it were to rise above his exercise or "strike" price, restrictions on his options prevent him from cashing in for several years.

"With the volatility of the stock market, you are starting to see people wanting to lock in compensation in the form of salaries and bonuses," said Lurie. "But at the same time, options continue to play a vital role, especially in the technology sector."

L.A. executives didn't need to work for profitable companies in 1998 to make it to the top of the highest-paid list.

The most obvious examples are the executives at EarthLink, the Pasadena-based Internet service provider that reported a net loss of $59.8 million last year (on top of a $29.9 million loss in 1997). Despite the large net loss, EarthLink's stock has more than doubled since the start of 1998.

That could become a familiar pattern in the next few years, with a growing number of local technology companies going public and seeing major stock-price escalation. In most cases, the bulk of pay packages at these firms will be in the form of stock options.

Betty, for example, received more than 98 percent of his compensation in the form of options.

"Options used to be needed in the high-tech community to attract and keep people when a company had no cash to pay them with," said Carl D. Jacobs, senior vice president with Carl D. Jacobs & Associates/Aon Consulting in Woodland Hills. Now it has become standard practice, even at companies that can afford to pay cash.

But the granting of options tends to be a hit-and-miss process, which means that annual lists of executive compensation often vary wildly.

Mattel Inc. Chairwoman Jill Barrad, who was the second highest-paid executive in 1997 with a $34.6 million payout, fell to No. 28 on this year's list, with 1998 pay of $4.6 million.

Mattel spokesman Glenn Bozarth said that under the terms of her contract, Barrad won't be getting a new round of options until next year. And the options she received in 1997 will not be in the money unless Mattel's stock price reaches $43 a share, a 65 percent climb from last week's level of $26.

Mark Hughes is among the few who have managed to remain atop the heap remaining among L.A.'s 10 highest-paid public company executives for three years in a row. The founder and chairman of Herbalife International Inc. was paid $9.9 million in 1998, placing him ninth on the list, down from fifth place last year.

Despite a history of volatile earnings in the early 1990s, Herbalife has generated steady profits in recent years.

For the latest 12-month reported period, the company ranks as the seventh most profitable company in Los Angeles, with a return on equity of 33.5 percent. Over the latest five-year reported period, Herbalife averaged an ROE of 32.2 percent, making it the fourth most profitable company in L.A. County.

Another trend that continues this year is the large number of non-CEOs on the highest-paid list. In fact, less than half the executives hold the title of chairman, chief executive or president. A number of these second-tier executives actually made more money than their bosses.

Besides Disney's Staggs, the most striking example is Richard Handler, an executive vice president at Jefferies Group Inc. The head of the firm's taxable fixed-income division, Handler received $11.7 million in pay last year. That's more than twice the $4.3 million paid to Jefferies Chairman and CEO Frank Baxter. It marks the second year in a row that Handler was the highest-paid employee at the firm.

Unlike most other highly paid executives, Handler received the bulk of his payment in the form of an $8.1 million cash bonus, which was tied to the performance of Jefferies' bond operations.

"The high-yield market was very difficult last year, and our company was one of the few in the business that made money," said Michael Klowden, president of Jefferies Group and the 68th-highest-paid public company executive in L.A., with a 1998 pay package of $2.1 million. "Handler was responsible for that."

Klowden said it is appropriate for Handler to make more money than both the chairman and president of the firm.

"Producers should make more money than managers," he said.

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