Public-company proxy statements have begun filing in, and it's no surprise that executive pay is going up.

The average chief executive of a major U.S. company received $10 million in total compensation in 2004, up 9 percent from 2003, according to compensation consultant Pearl Meyer & Partners.

Bruce Karatz, chairman and chief executive of homebuilder KB Home, the giant homebuilder, received $23.9 million in total compensation last year, including salary, bonus, restricted stock awards and other short- and long-term compensation a 30 percent jump from 2003. (Karatz also cashed in $26 million in previously granted stock options and received 280,000 stock option grants.)

"With profits growing 30 percent companywide for the fiscal year, the CEOs' compensation mirrors that success," said Derrick Hall, a spokesman for KB Home.

Ray Irani, chairman and chief executive of Occidental Petroleum Corp., took home $30.9 million total compensation, a 23 percent increase from 2003. Irani also cashed in 1.2 million in stock options, reaping another $37.2 million bringing his total haul to $68.1 million.

In Los Angeles, fewer than 10 percent of the publicly held companies that make up the LABJ 200 Stock Index had filed their 2004 proxies as of last week.

While the numbers never seem to astonish, there are signs that after years of public outcry over accounting scandals, public trials and legal battles between compensation committees against former chief executives, compensation is beginning to align better with shareholders' returns.

"This process is really evolving in the post-Sarbanes-Oxley, post-Dick Grasso, post-Jack Welch environment," said Jannice Koors, managing director at Pearl Meyer. "We are seeing the results of a financial performance rebound in 2004."

The use of stock options, for example, has finally been curbed after accounting changes that favor the use of restricted stock awards that are easier for shareholders to quantify.

And last year, the stock market rebounded with a 9.3 percent increase in the Standard & Poor's 500 Index of large public-company stocks rose 9.3 percent the same average increase of pay packages.

"The strategy now is to draw the line on salaries and shift to stock awards based on performance," said Mark Poerio, an attorney at Paul Hastings Janofsky & Walker, who counsels top executives on employment agreements.

At both KB Home and Occidental, for instance, the share prices have skyrocketed, giving executives a rationale to show that their pay was tied to performance.

But a booming real estate market was a large factor in the 50 percent increase in KB Home's stock price last year, and higher oil prices were a well-documented and arguably dominant reason for Occidental Petroleum 42 percent share price increase.

Under pressure from shareholders, compensation committees also appear to be pushing for more disclosure of executive perks such as the cost of corporate jets, car leases, security, country club dues and supplemental retirement plans.

This year, Walt Disney Co. disclosed that Chief Executive Michael Eisner received $716,335 for security advice and personal protection services, and $18,663 for security systems and equipment. (His successor, Robert Iger, received about $474,000 in similar services.) Occidental paid $915,384 to safeguard Irani and company President Dale Laurance, who retired on Dec. 31.

Corporate directors' own fees have risen due to increased liability resulting from Sarbanes-Oxley legislation. Those regulations increasingly seek to hold directors responsible for corporate accounting troubles or malfeasance.

Easy targets
A lingering complaint of watchdog groups is that performance targets set by corporate boards at the beginning of each year are simply too easy to reach, ensuring that executives get big bonuses and other payouts.

"The suspicion is that compensation committees make the performance goals relatively easy, so the hurdles to earn bonuses have gotten much lower," said Carol Bowie, director of governance research at the Investor Responsibility Research Center, a Washington-based provider of proxy research and analysis.

The process of deciding the pay package for an executive typically starts in January or February, with a board's compensation committee setting goals for an executive to meet by year-end. Boards typically work with compensation consultants to break down the different elements of compensation. Because there is wiggle room in compensation plans, most companies try to make bonuses and restricted stock awards generous, the argument goes, so they don't lose highly qualified executives.

Robin Schachter, a lawyer at Akin Gump Strauss Hauer Feld LLP in Los Angeles, said there are various methods and formulas used to link pay to performance, but no common standards. "There's no real uniformity in how compensation can be measured," he said.

One reason for the easy targets may be legislation passed in 1993. The law limited the corporate tax deductibility of executive compensation to $1 million, unless it qualified as substantially performance based.

Since then, base salaries have inched up just 3 percent to 4 percent annually, while performance-based bonuses, options and restricted stock grants have surged.

Of 15 local companies that had reported on executive compensation last week, only two paid their chief executive more than $1 million Irani at $1.3 million and Avery Dennison Corp.'s Philip Neal at slightly over $1 million and eight had bonuses that eclipsed their base pay, sometimes by multiples.

(Jerrold Perenchio, chairman and chief executive of Univision Communications Corp. has received no salary, bonus or any other compensation in the past five years.)

R. Chad Dreier, chairman, president and chief executive of Ryland Group Inc. received a 28 percent jump in his 2004 bonus to $12.2 million. Eisner received a cash bonus of $7.2 million last year, after receiving no bonus in 2003.

Pearl Meyer found that of 50 large companies with average revenues of $18 billion in 2004, 21 executives had base salaries of over $1 million, with average bonuses jumping 26 percent last year. The average size of restricted stock awards rose 34 percent in 2004. (Recipients of restricted stock awards are prohibited from selling for a defined period.)

"What's happening is this whole renewed interest in restricted stock is causing people to drill down and think of issues with a greater degree of focus," said Koors.

New rules
The shift to hefty bonuses and restricted stock awards comes as new accounting rules go into effect this year that require stock options be expensed as corporate earnings. That's because when executives cash in stock options, they dilute the value of existing shares, making each worth a little bit less.

The Financial Accounting Standards Board has said employee stock options should be included in corporate income statements starting in 2005. Many companies have already made the switch by reducing stock options in favor of restricted stock.

"A lot of companies have already looked ahead at the implications of these new accounting rules, and one of the trends is more use of performance-based restricted stock," said Schachter.

Currently, FASB guidelines require only that stock option grants be disclosed in footnotes. The FASB proposal, which is open to comment through June, has sparked an outcry from technology companies that claim the use of stock options helps them retain and attract top managers to fast-growing start-ups. Generally, companies are making the switch to avoid taking a hit to their earnings.

"More companies are saying we can restructure our compensation packages by making them more in line with shareholders," said David Gordon, a managing director at Pearl Meyer and former compensation expert at O'Melveny & Myers LLP. "Where the criticism has been most vocal is at underperforming companies that have executives who have very large pay packages."

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