CEO Pay Up Again Despite Weak Profits

By RiSHAWN BIDDLE
Staff Reporter

In spite of reforms and ongoing criticism of hefty compensation packages, L.A.'s chief executives continued to reap rich rewards last year even as overall earnings suffered.

Chief executives at the 50 largest companies in the county, ranked by market capitalization, took home an average of $6.3 million in 2002, a 28 percent increase from the previous year, according to data compiled by the Business Journal.

The figures took into account salary, bonuses and other cash compensation, restricted stock grants and stock options exercised.

The increases come even as pension funds, labor unions and shareholder activists have taken aim at executive pay in response to corporate accounting scandals and sagging company performance. Companies too have added independent directors to their boards and restricted the input that chief executives have in determining their own pay.

Thus far, these efforts have fallen short. According to a Mercer Human Resource Consulting survey of 350 U.S. companies, median chief executive pay rose 15 percent to $3 million last year after a slight drop-off in 2001.

"Despite all the talk about pay-for-performance, nothing's changed," said Matt Ward, president of WestWard Pay Strategies, a San Francisco compensation consultancy. "CEOs still have low-risk, high-pay jobs that reward them year in and out."

Stock windfalls

In L.A., some top bosses boosted their take-home pay by exercising stock options, a form of compensation that's been under increasing criticism.

Nearly all of Activision Inc. co-Chairman and Chief Executive Robert Kotick's $43 million package the biggest paycheck on this year's list is attributable to gains from exercising options.

Last year, a number of major companies began to expense stock option grants, after shareholder advocates and prominent executives like Warren Buffett argued they diluted company earnings. However, there is disagreement over how to best value them.

Last week, Microsoft Corp. said it would stop issuing stock options altogether, opting instead for restricted stock which does count against earnings and is easier to tally. Germany's DaimlerChrysler is reportedly considering a similar move.

Locally, some companies are turning to restricted stock grants, which chief executives sometimes cannot receive until they are fully vested. R. Chad Dreier, chief executive of homebuilder Ryland Group, received $14 million in restricted stock last year, while restricted units accounted for most of Chief Executive Michael Eisner's compensation from Walt Disney Co.

The changes are often coming after pressure on company management.

"There's no restraint on managers to not give (options) out prodigiously," said Chris Bohner, senior research analyst with Culinary Workers of America, which recently won a non-binding resolution to put new options packages at Cheesecake Factory Inc. up to a shareholder vote.

A Cheesecake spokeswoman, Jane Vallaire, declined to comment beyond a statement issued at the time. In it, the company said its board would "carefully consider" the resolution.

Pay-performance disconnect

Even without counting stock option exercises, median take-home pay in the L.A. sample rose to $1.5 million from $1.2 million.

Meanwhile, corporate performance slackened. Cumulative net income for the 50 largest companies fell more than 90 percent to just $388 million, from $4.9 billion in the previous year.

The decline includes a $6 billion loss by Pasadena-based Gemstar-TV Guide International Inc. Median net income, which lessens the impact of such extraordinary figures, fell to $61.5 million among L.A.'s 50 largest from $68.6 million in 2001 mirroring the national trend.

To rank the effectiveness of the chief executives of the 50 largest public companies in L.A., the Business Journal took each one's take-home pay, including all cash payouts, stock grants and stock option exercises, and divided it by the company's reported net income.

A. Jerrold Perenchio of Univision Communications Inc. and Charles Munger of Wesco Financial Corp. remain the top two performers on the list. Neither took a salary, but both own substantial stakes in their firms.

By contrast, Activision's Kotick (No. 42 in the Business Journal's effectiveness ranking) took in the biggest percentage of net income. His $43 million amounted to 83 percent of the company's 2002 net income of $52 million.

Activision officials didn't return calls for comment.

A meaningful effectiveness rating couldn't be calculated for companies that posted losses. As with better-performing companies, there was great variance in executive compensation.

Gemstar-TV Guide's Jeff Shell brought home a less-than-average $808,000 last year after taking over for co-founder Henry Yuen, who was forced out in an accounting scandal and is battling the SEC in court.

By contrast, Amgen Inc. Chief Executive Kevin Sharer took home $13 million last year. The biotech firm reported a $1.4 billion loss after writing off $3 billion for its acquisition of Immunex Corp.

Like any other measurement, the Business Journal's efficiency index doesn't take into account every variable in assessing performance. Some executives near the top of the list run the largest companies in the area, so their compensation makes up a smaller percentage of net income.

Disney's Eisner, for example, garnered the No. 8 ranking despite a $6 million paycheck and ongoing board skirmishes over the company's performance and corporate governance.

Others, like Gemstar's Shell, are in the midst of cleaning up messes that were left by others.

Such tumult is being taken as a signal by some that more substantial changes are on the way.

"In some ways, the world has changed permanently," said Steve Hall, president of executive compensation consultant Pearl Meyer & Partners. "Companies will have no choice but to change some things," he said.

Hall said he expects future salary increases to be smaller, but executives will get higher bonuses if they meet profit and revenue goals.

However, formulas can often yield a bonus during a period of poor performance if other metrics are met, such as identifying and naming a worthy successor.

"If you make just 80 percent of what you made last year and it's better than the overall sector, you can still make a lot of money," Hall said.

Which means shareholders will still have to depend on chief executives to do right by them. Last year's example: Entravision Communications Corp.'s Walter Ulloa (No. 43), who asked the company not to give him the bonus to which he was entitled.

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