Top executives at the 50 biggest public companies in Los Angeles County pulled down salaries, bonuses and other compensation of $441 million last year, virtually identical to the previous year.
But when the value of exercised options and vested stock grants from prior years is factored in, the aggregate compensation realized last year more than doubles to $1.1 billion up 17 percent from the year before, according to data compiled by the Business Journal.
Much of the compensation went to one executive, Ray Irani of Occidental Petroleum Corp., who easily topped the list with $55.6 million in total company compensation. Add options exercised and grants vested from prior years and his payday hit a jaw dropping $464 million.
Also standing head and shoulders above the rest of the executives was No. 2, Angelo Mozilo of Countrywide Financial Corp., who received $48.1 million in total company compensation. The value of options exercised and vested grants also brought him into the nine-figure club with $127 million.
Irani and Mozilo did not comment.
The proxy statements released this year were the first requiring companies to more thoroughly detail their executive compensation with one goal being to reduce gargantuan payouts.
That may happen eventually. Ralph Ward, publisher of the Boardroom Insider newsletter, said he's gotten "a good amount of anecdotal cases" in which compensation committees were stunned when they saw the numbers added up on one page. "Seeing that total on paper is now going to have an influence in the future," he said.
The Business Journal compiles a list of the highest paid executives at the biggest publicly traded companies each year following the filing of proxy statements detailing their compensation.
This year, like last, the Business Journal has followed the lead of the Securities and Exchange Commission and ranked the executives based on salary, bonuses and the company's estimated value of stock grants and options awarded in 2006. Also included in the figure is the value of pension plans and other miscellaneous compensation, such as security services.
The rankings separately compile the value of options granted in past years but exercised in 2006, as well as the value of vested grants all data the companies separately report in the proxies.
The Business Journal found that despite all the attention on executive pay, new disclosure rules and boards of director efforts to better link pay with performance, not much has changed. In fact, aggregate compensation increased this year, though in Irani's case some of that is ironically linked to an Occidental effort to lower its total executive compensation.
Irani elected to take a lump sum of $93.3 million from a deferred stock program that the company decided to discontinue because of its cost. However, even excluding that sum, Irani had a near record payday, largely from netting $270 million after cashing in 7 million stock options granted over a period of years, plus $44.9 million in stock grants that vested last year.
The 72-year-old executive, who was L.A.'s highest paid executive in the previous two years, received a salary of just $1.3 million, a $2.8 million bonus and $3.16 million in miscellaneous compensation. Boosting his compensation was $17.4 million in option awards as well as $31 million in stock grants.
Of course, Irani, who was promoted to chairman and chief executive in 1990, has clearly participated in the company's rise to the nation's fourth-largest oil company by market capitalization, currently pegged at $48.6 billion.
Mozilo, a founder of Countrywide and its chairman and chief executive since 1998, was not far behind. Although the 68-year-old earned a salary of only $2.87 million, he got a bonus of $20.5 million and option awards valued at $23 million.
His aggregate compensation was boosted by $72.2 million in options exercised.
After Irani and Mozilo, the 2006 compensation for other local executives falls off significantly. R. Chad Dreier, Ryland Group Inc. chairman, chief executive and president, had $31.4 million in total compensation and $57.6 million in aggregate compensation. He got a big boost by netting $19.7 million in exercised stock options in 2006.
Fourth on the list, Amgen Inc. Chairman and Chief Executive Kevin Sharer, had $24.1 million in total compensation and reported no option exercises or vested grants in 2006. On top of his $1.48 million base salary, Sharer did receive a $4.53 million bonus, $10.4 million in stock awards and $6.7 million in option awards.
Rounding out the top five, Ronald Sugar, Northrop Grumman Corp.'s chairman and chief executive, earned $21.7 million in company compensation and $26.5 million aggregated.
Comparisons with previous years are somewhat more difficult this year because while the SEC required greater detail in disclosures for 2006, regulators did not require companies to go back and recalculate at least one or two of the most recent years for comparison.
More detail, less clarity?
Indeed, the proxies examined by the Business Journal were far more difficult to decipher this year than in the past, despite rules requiring the companies to use "plain English" to described their compensation.
"Many companies translate 'plain English' as being lots of English," said Paul Hodgson, senior research director at the Corporate Library, a corporate governance research firm.
Some of the challenge comes from reconciling the varying components of employment agreements that have been negotiated and renegotiated over the years.
"Countrywide has 15 or so compensation plans in place, multiple long-term incentives, multiple deferred compensation, multiple retirement plans, annual bonuses that do one thing for (Mozilo) and another thing for everyone else," Hodgson said. "Some people have at least three retirement plans, all based on changes in tax rules over time. It's crazy. They're making it difficult for themselves to explain this very simply."
Linda Lampkin, research director at the Economic Research Institute, which provides compensation data to companies struggling to attract and retain their top people, said another part of the problem is that compensation committees can value the same compensation plan differently, depending on how they predict future company performance.
"There is a lot more sunshine these days, but there are also a lot of assumptions made by compensation committees over which reasonable people might differ," said Lampkin.
Another big recent trend has been a switch by boards from stock options to performance-based stock grants. Still, many longtime executives, such as Irani and Mozilo, have employment agreements guaranteeing them types of compensation and benefits that younger executives would be unlikely to negotiate these days.
Stock options in particular have proven a thorny topic in the chief executive compensation debate, costing Bruce Karatz his job at KB Home. Karatz resigned in November after an internal committee determined he had knowingly benefited from back-dating options to provide a larger return when exercised.
Karatz, who had been chief executive since 1986 and chairman since 1993, had been the second highest paid executive in Los Angeles, netting more than $118 million from stock option exercises in 2005. His successor, Jeffrey Mezger, ranks only 22nd this year, his $5.16 million in total compensation reflecting his previous position as the company's chief operating officer.
For 2007, Mezger is set to receive $1 million in base salary and stock options currently valued at $4 million, according to his employment agreement. In addition, he is eligible to receive 54,000 or more "performance shares" of common stock, depending how well the company does this year relative to its peer group.
How well some CEOs will fare this year under tougher performance-based compensation guidelines is unclear. Using stock appreciation as one measure, Occidental's Irani and Northrop's Sugar should fare well. Oxy's stock price increased 15 percent to $48.60 in 2006 and is up another 20 percent to more than $56 last week. The company posted 43 percent higher earnings in the first quarter, largely based on continuing high oil prices.
Northrop's stock price gained 16 percent last year and has since added another 14 percent to more than $76.
Cutting Own Pay
In comparison, Countrywide's stock, which appreciated 23 percent last year, has since fallen 7 percent to $39, largely based on concerns about the financial services company's exposure to the subprime mortgage lending sector and the overall troubles in the residential home market.
In what might be seen as a symbolic gesture, Mozilo last month agreed to reduce his 2007 compensation and link it more closely to Countrywide's performance. The company estimated his base salary, performance-based bonus and equity-incentive pay likely would be 48 percent to 62 percent lower this year. Those items exceeded $40 million last year.
Mozilo said at the time that his decision represented an effort "to be responsive to the environment we're in today," with closer scrutiny of executive compensation, not a signal that he has been overpaid.
Carol Bowie at the Investor Responsibility Research Center said companies still tend to set the bar too low for executives to earn their performance-based compensation.
"There's a natural tendency to set compensation based on an aspirational peer group, companies bigger than you are, but not set performance goals equally as high," said Bowie, chief of governance research for the proxy research and analysis firm. Bowie notes that Occidental uses earnings per share to determine 60 percent of what top executives will receive as a cash incentive, but has tended to set the target minimum EPS lower each year. The target was $4.50 in 2006, the company's core basic EPS turned out to be $5.10, resulting in executives receiving a 120 percent payout. And this year, the goal is only to reach $3.25.
"It's almost as if they're expecting the bubble would burst on oil prices, but in fact the ride has not come to an end," Bowie said. "They're all making out quite well."
Ryland's Dreier and Amgen's Sharer potentially could see compensation affected by challenges facing their companies. Share prices at home builder Ryland, as well as at KB Home, have been hit by a stalled residential market, that has limited potential profits.
Amgen's share price, which stood at $80.36 at the beginning of 2006, fell 15 percent late in the year as safety concerns began surfacing about its flagship anemia therapies. That decline accelerated this year as additional concerns came to light and disappointing clinical trials appeared to limit the potential market for some newer drugs. Shares were trading at around $57 last week, down 28 percent over the last 18 months.
Equally uncertain is the impact that the need to restate six years worth of earnings reports might have on the final payout for Van Honeycutt, Computer Science Corp.'s chairman and former chief executive. Honeycutt, the eighth highest paid L.A. executive last year, recently announced he will retire at the end of July after 32 years with the company, the past 12 years as CEO.
Honeycutt earned $16.8 million in total compensation last year, and received $2.8 million in restricted shares in lieu of a cash bonus. His aggregate compensation totaled $21.9 million after netting $5.1 million from options exercises.
Computer Science's board on May 21 elected chief operating officer Michael Laphen to succeed Honeycutt as chief executive. The company on May 31 then announced that it planned to restate fiscal earnings from 2000 to 2006, after finding "significant errors" in tax liability accounting, and take a charge of up to $400 million.
Ironically, some CEOs who are among Los Angeles' richest residents have in comparison some of the most modest compensation packages on the list. In part that may be due to the significant stakes they already hold in their companies.
Abraxis BioScience Inc.'s Patrick Soon-Shiong, Westco Financial Corp.'s Charles Munger, and Mercury General Corp.'s George Joseph, who ranked seventh, 19th, and 34th, respectively, in the Business Journal's Wealthiest Angelenos list this year, only rank 41st, 50th and 43rd on the executive compensation list.
Soon-Shiong, who controls 84 percent of shares in the biotech he founded, draws only a $600,000 salary and received a $225,000 bonus last year. His total compensation was only $1.95 million.
Joseph, who has been with Mercury since 1960, holds 18.8 million shares valued at more than $1 billion. Last year he drew a relatively modest $800,000 salary and earned a $932,000 bonus. He retired from the day-to-day work of chief executive the end of 2006, but continues to serve as chairman.
Munger officially doesn't even draw a salary from Westco, but it's not like he needs one. His personal net worth is largely based on his $1.7 billion stake in Warren Buffett's legendary Berkshire Hathaway, where he serves as vice chairman. Munger does receive $100,000 compensation for his involvement in Blue Chip Stamps, a Berkshire entity that controls 80 percent of Westco's stock, but Westco does not reimburse Blue Chip.
Top Three CEOs by Total Company Compensation*
Ray R. Irani
Occidental Petroleum Corp.
Angelo R. Mozilo
Countrywide Financial Corp.
R. Chad Dreier
Ryland Group Inc.
*Includes salary, bonus, new stock grants and options, and other compensation.
For reprint and licensing requests for this article, CLICK HERE.