Infonet Services Corp., El SegundoJohn Legere
Asia Global Crossing, Beverly HillsHenry Yuen
Gemstar International Group, PasadenaMichael Eisner
Walt Disney Co., BurbankJill Barad
Mattel Inc., El SegundoCompensation Gets Boost From Options
It could be the last hurrah for executives seeking instant wealth.
L.A.'s 100 best-paid corporate executives saw their total compensation jump 34 percent in 2000 to an average $8.3 million from $6.2 million in 1999, according to Joint Information Inc., a compensation consulting and research firm that compiled the list for the Business Journal.
But reflecting the economic slowdown that began in the second half of last year, base salaries and bonuses both dropped. In a signal that corporate boards weren't entirely pleased with financial performance, the average executive salary fell about 10 percent, to $533,787 from $589,252 in 1999, while the average bonus dropped slightly, to $856,716 from $864,354.
It was in the realm of the now-familiar stock option grants where executives fattened their potential, if not actual, paychecks. The average value of options rose $1.5 million, up 35 percent from the previous year.
"The data is consistent with my expectations," said George Paulin, president of Frederic W. Cook & Co., an executive compensation consultancy in West Los Angeles. "Cash compensation was pretty flat vs. 1999. But on the long-term side, stock options and other equity compensation continues to rise. The grant value of options in 2000 was significantly higher than in the previous year."
But as he and others pointed out, being granted stock options is one thing. Exercising them for a huge return is something else.
In the late 1990s, stock options became the watch-word for instant riches because it was assumed that once a company, especially a technology company, went public, the values of its shares would skyrocket and ensure riches for its executives.
But the IPO goldmine scenario is a thing of the past.
Nowhere is this more evident than for the person topping this year's list. Jose Collazo's total compensation package as chairman, president and chief executive of El Segundo-based Infonet Services Corp. was a whopping $83.9 million. Four other senior officers at Infonet Services made the top 20 as well.
However, the vast majority of the Infonet executives' compensation was in the form of long-term stock options that are unlikely to be vested anytime soon. In Collazo's case, the 5 million options granted carry a potential value of $79.1 million, according to Infonet's proxy statement. That same year, Infonet reported a loss of $27 million.
"In the high-tech industry, when talking about overall compensation, you're talking about stock options, lots of them," said Joshua Lurie, chief executive of Joint Information. "When a company is growing fast, as this one is, the board of directors and compensation committee is looking at retaining executives for the long haul. I'm not justifying the hundreds and hundreds of millions of dollars paid out. But there continues to be a shortage of top talent, especially in the technology field."Industry powerhouse
Infonet provides communication services to multinational corporations, with operations in 180 countries. Although not well known in the United States, the company, which is controlled by six international telecom corporations, is highly rated by the analysts who follow it. In a recent report, ABN Amro reiterated its "buy" rating on the stock, with a 12-month target of $14 a share, and projected that Infonet would see revenue growth of better than 20 percent over the next few years.
The company announced in the spring that it was on the block, and a report last week indicated that Infonet expects to announce a buyer for all or part of the company in August.
The stock rose about $1 a share on the news, and was trading at around $8.50 as of late last week. But that's well off its 52-week high of $18.63. And it's way below the $22.55 strike price at which the options granted to Infonet's executives last year would become profitable.
The high strike price was determined in December 1999, when Infonet went public, a reflection of the optimism at the time. Executives who get stock options now are unlikely to face quite so high a ceiling.
"It's really the last gasp of the market of '99," said Jason White, a consultant in the executive and incentive pay practice in the L.A. office of Watson Wyatt & Co. "I would find it surprising if this option grant were made after September (2000)."
Besides Collazo, other Infonet executives on the best-paid list are: Senior Vice President Ernest Gambaro (No. 12 with total compensation of $14.7 million), Executive Vice President John Hoffman (No. 16 with $13.7 million), Chief Financial Officer Akbar Firdosy (No. 17 with $13.5 million) and Executive Vice President Michael Timmins (No. 18 with $13.5 million).Infonet response
The company declined to make any of its executives available for comment. But in a prepared statement, Infonet called the inclusion of the stock options in the Business Journal survey "misleading," arguing that it "bears no relation to actual total compensation received."
Infonet also released to the Business Journal a draft of its 2001 proxy statement, which shows that Collazo was awarded more than 2.5 million new options in the fiscal year ended March 31, with an exercise price of $5.88. That's below the $8.50 market price as of late last week with a projected payout of $9 million.
"It is definitely different if you're talking about realized option profits than the (projected) value of options," Fredric Cook's Paulin noted. "But it was the company that issued 5 million options (to Collazo in fiscal 2000) instead of 1 million. And they expect the price to go up. That's the incentive."
Another newly public telecommunications company saw its executives figure prominently in this year's list. John Legere, chief executive of Asia Global Crossing Ltd., which like parent Global Crossing Ltd., is run from Beverly Hills, is No. 2 on this year's best-paid list, with total compensation of $79.4 million, of which $77 million was long-term stock options. John Scanlon, the company's vice chairman, is No. 33 with a package worth $8.2 million, while Darrel Green, president of its Japan operations is No. 40 at $7.6 million and General Counsel Charles Carroll is No. 46 at $6.6 million.Eisner's encore
After a few years out of the top 10, Walt Disney Co. Chairman Michael Eisner made something of a comeback, with total compensation of just over $50 million, placing him fourth on the list. Although much of that was in unexercised options, Eisner pocketed an $8.5 million bonus, even though Disney's net income in fiscal 2000 fell from the year before.
Another studio chief was the highest-paid L.A. public company executive strictly in terms of salary: Metro-Goldwyn-Mayer Inc. CEO Alex Yemedijian, at $2.6 million.
"Executives such as Eisner and others make bonuses based on long-term agreements," Lurie pointed out. "Most executives like these have been with the company for a long time."
Such long-term agreements have their pitfalls most evident in the lesson drawn from No. 5 person on the list, former Mattel Inc. CEO Jill Barad. Although she resigned from her job under fire in February 2000, Barad remained on the company's books. Her compensation totaled $39.7 million, thanks in part to items specified by the terms of her severance agreement. That includes a country club membership worth $78,000, the forgiving of $8.5 million in loans made to Barad by Mattel, and $26.4 million in severance pay, among other things.
With the stock market more volatile than when Barad took the helm, compensation committees and boards are unlikely to fashion such golden parachutes in the future.
"I don't think you're going to see those lucrative contracts structured if they're done today," White said. "They were structured two or three years ago under very different conditions."
Also different is the absence of fear that an executive may bolt for a more lucrative deal, now that options are no longer the lure they once were. That is a relief to company boards and shareholders, whose growing outrage over pay packages is beginning to be noted, if not always heeded.
"When companies go to grant (options) as a long-term incentive, it has to be approved by the shareholders," Paulin said. "2000 and 2001 have probably been the most difficult and contentious years in getting shareholder approval for these long-term compensation plans. (But) companies are using more (option) grants than ever before, and it's not going to stop."
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