TIME: Almanac 1993/TIME Almanac 1993.iso/time/050492/0504200.000

Text File | 1992-09-10 | 14.0 KB | 278 lines

                                                                                BUSINESS, Page 46

EXECUTIVE PAY

The Shareholders Strike Back


Angry investors and the public have long been shocked by the
millions that some corporate bosses make. Now it's becoming
the hot issue at annual meetings.

By THOMAS MCCARROLL


    At the Hyatt Regency in Pittsburgh last week, senior
managers of the $3.3 billion bank holding company Equimark sat
in miserable silence while a shareholder, retired C.P.A. Joseph
Cestello, scolded them for their "outrageously generous"
compensation, including stock options and hefty retirement pay.
Cestello even suggested that the company's board resign "for
lack of oversight" and demanded that Equimark, whose losses
totaled $148 million in the past two years, adopt policies that
would tie pay to performance.

    There is nothing unusual about gadflies and dissidents
using yearly stockholder gatherings to air their gripes, while
executives wait in patient condescension and other shareholders
fidget. But Cestello, 74, received a loud round of applause, and
his motion received 16% of the votes -- an alarming vote of
no-confidence in management by the standards of such gatherings.
"I was pleased with the outcome," says the investor. "At least
I didn't get laughed off the stage."

    On the contrary, Cestello had addressed a topic that is no
laughing matter these days. Like the managers of Equimark, a
growing number of chief executives this spring are feeling
compelled to defend their gargantuan paychecks. After a decade
of unchecked growth -- during which CEO pay grew four times as
fast as the income of the average worker and three times the
rate of corporate profits -- executive compensation has become
a hot-button issue. From investors, big and small, to public
officials at every level, ceos are catching flak as never
before.

    Plainly put, stockholders are angry because their
investments are increasingly bogged down by lackluster corporate
earnings while the boss's pay goes through the roof. In
Washington a growing chorus on Capitol Hill is calling for some
form of government intervention. And CEO compensation has become
a presidential campaign issue for both parties. Vice President
Dan Quayle recently criticized "some of these exorbitant
salaries paid to corporate executives unrelated to
productivity." Democrat Bill Clinton has called executive
salaries "excessive."

    Spurring the revolt is a ruling made earlier this year by
the Securities and Exchange Commission, historically
sympathetic to management on such issues, that made it easier
for shareholders to challenge companies on CEO compensation
through the proxy system. Shareholders at 43 companies,
including Chrysler, IBM and Eastman Kodak, have submitted
proposals seeking to curb executive pay. Next year the number
could double. Says Ralph Whitworth, president of the United
Shareholders Association: "What we're witnessing is a full-scale
rebellion against corporate greed run amuck."

    The numbers are breathtaking. The top five American CEOs
earned a combined $322 million in income last year. Even
departing CEOs managed to walk away with huge sums. Hamish
Maxwell, who retired as head of Philip Morris, was awarded a
generous retirement gift of $24 million, mainly in stock grants
and options. Earlier this year, former Compaq Computer CEO
Joseph ("Rod") Canion, who was ousted by his board last year,
was awarded $3.6 million. And N.J. Nicholas, the co-CEO at Time
Warner who, in February, was also bumped by his board, is
expected to land softly with a salary, deferred pay, bonuses and
stock estimated by some at up to $45 million. Even the nation's
leading charity, United Way, fell into the controversy after it
was disclosed that president William Aramony, who was forced
out, was paid $463,000 a year and enjoyed lavish perks.

    Typically, an executive's pay is determined by the board
of directors' compensation committee, which usually recommends a
package consisting of a mix of incomes. The base salary, for
instance, generally accounts for a third of an executive's
compensation, while an additional 15% comes from annual bonuses.
The rest -- upwards of 50% -- is paid in stock incentives,
usually in the form of options that carry no risk if the stock
price declines. Critics complain that corporate boards lack
clearly delineated formulas for setting pay and that they are
not independent enough because chief executive officers often
serve as chairmen of boards. The conflict of interest can be
eliminated, they argue, by preventing the CEO from wearing both
hats. Consultant Graef Crystal charges that compensation
committees are often loaded with other high-paid CEOs. "It's a
cozy you-scratch-my-back-I'll-scratch-yours arrangement," he
says. "If you're a CEO, you don't want Mother Teresa or the
Sisters of Charity on your compensation committee."

    Often missing is any real link between pay and
performance. Although American corporations are losing ground
to foreign rivals, their executives continue to be the most
richly paid on earth. While the average Japanese chief executive
earns $400,000 in annual pay and the typical head of a major
German company makes about $800,000 a year, most heads of major
U.S. companies make $1 million to $4 million a year. This
disparity was embarrassingly highlighted earlier this year when
the Big Three auto chiefs accompanied President Bush on an
ill-fated trade mission to Japan. Although General Motors',
Ford's and Chrysler's combined losses totaled $7.5 billion last
year, their top executives were together paid $5.3 million.
Their counterparts at Toyota, Nissan and Honda collectively made
$1.8 million.

    While common sense may dictate that executives are
rewarded for successes and punished for failures, corporate
America stands such logic on its head. Company profits declined
for the third consecutive year in 1991, plunging 19%. But CEO
pay increased 6%, not counting bonuses and long-term incentives.
Westinghouse Electric CEO Paul Lego took a 69% pay cut when his
bonus for '91 was eliminated. But he was awarded 700,000 shares
in options, with a present-day value of $4.1 million, even
though the company lost $1.1 billion last year. Counting the
options, Lego actually received a 41% increase in compensation.
By contrast, Japanese executives recently competed with one
another to see who would take the largest pay cut in the wake
of the Tokyo stock-market plunge.

    "Pay masks a much bigger problem," says Robert Monks,
whose group, Institutional Shareholder Partners, has waged proxy
fights for board representation at Sears, Roebuck. "The real
problem is the lack of accountability. CEOs are today's absolute
monarchs and their boards are the House of Lords, and they feel
they can thumb their noses at us shareholders without fear of
being held accountable. But I guarantee you, the days of
corporate royalty are over."

    Until this year, investors seeking to submit proposals
aimed at curbing executive pay were largely frustrated by SEC
rules that disallowed such petitions on the basis that
compensation was a matter of day-to-day management. But under
pressure from Congress and some institutional investors, the SEC
changed its tune by allowing shareholders to put "nonbinding"
resolutions to a vote at annual meetings.

    Such petitions threaten to turn once passive annual
meetings into rancorous affairs. Two weeks ago, for example,
shareholders at Baltimore Gas & Electric asked the company to
"voluntarily cap the total pay and other compensation of its
executive officers to no more than 20 times the pay of the
average employee of the company."

    The measure was defeated, but many corporate boards are
choosing to negotiate a peaceful settlement with aggressive
shareholders rather than face an embarrassing tongue-lashing.
When the United Shareholders Association, whose 65,000 members
own $320 billion worth of stock in 4,000 major corporations,
sponsored a petition challenging the compensation for the
executives at Time Warner, top officers of the company quickly
paid a visit to negotiate a deal: the group agreed to drop its
challenge on pay, and the company would eliminate its takeover
defenses, including so-called poison-pill provisions designed
to scare away potential bidders.

    The California Public Employees' Retirement System, known
as Calpers, the nation's largest public pension fund, sent
letters to 12 corporations, including American Express, ITT and
Dial (formerly Greyhound). One by one, senior executives from
each company paid a visit to Calpers' Sacramento headquarters
to negotiate with its chief, Dale Hanson. American Express boss
James Robinson, for instance, immediately bowed to Calpers'
demands that the company set up an independent compensation
committee. Only Dial has so far refused to meet with Calpers.

    ITT CEO Rand Araskog, whose $7 million in 1990
compensation touched off a maelstrom, agreed to a dramatic
overhaul of his pay package. The company replaced outright stock
grants with options based on the performance of the company's
stock, and Araskog agreed to reduce the size of his annual
bonus. Says Hanson: "Shareholders are waking up to the fact that
they're owners and not just investors."

    Some companies slashed pay unilaterally. Ford CEO Harold
Poling, for example, took a 6.6% pay cut last year, while Avon
boss James Preston froze his salary at $610,000 and lowered his
bonus 23%. IBM chairman John Akers took a 40% cut, reducing his
compensation by $1.1 million, to $1.6 million. Others are
revamping their pay structure. AT&T junked its stock-option plan
in favor of an incentive package based on staggered performance
targets.

    Not everybody caves. Two weeks ago, Coca-Cola chairman
Roberto Goizueta stood up before shareholders and defended his
1991 pay of $86 million, which included a record $80 million in
stock grants, on the grounds that under his management, Coke
stock had increased 1,300%. Goizueta was interrupted four times
-- by thunderous applause. U.S. Surgical CEO Leon Hirsch, who
earned $118 million in salary and stock incentives, maintains
that he's worth it. "I'm not paid enough," he says. Since 1988,
U.S. Surgical's market capitalization has, to his credit,
increased 1,350%; in the past three years, shareholders have
enjoyed a 22% return on equity. In addition, Hirsch challenges
the $118 million calculation: counting the stock-incentive
portion of his pay ($115 million) is misleading, he claims,
since the options won't be exercised until later years. He
blasts the compensation consultants who estimate executive pay
as "a bunch of self-appointed pseudo experts who thrive on
sensationalism and pure hokum." A recent survey conducted by the
National Association of Corporate Directors found that chief
executives are extremely reluctant to grant outsiders any power
over their pay. Although 20% said they would be willing to have
shareholders approve directors' compensation, only 8% were
willing to give them similar control over their own pay. Says
Edmund Pratt Jr., the recently retired CEO of Pfizer and
chairman of General Motors' compensation committee: "We're
making far too much of this issue. It has become the political
hot button. They're comparing our pay to office boys' and the
Japanese without knowing what Japanese get. When you compare
executive pay with what private entrepreneurs make, or sports
figures, musicians and entertainers, or even lawyers, we're kind
of poor."

    Kevin Murphy, associate professor at Harvard Business
School, charges that the campaign against CEO pay "is a
disguised attack on wealth." By holding CEO pay up to public
criticism, he says, "we run the danger of driving our best
people out of the boardroom."

    But CEO pay has emerged as a populist issue that no
politician can resist. This year Michigan Senator Carl Levin
introduced the "Corporate Pay Responsibility Act," which, among
other things, would permit shareholders to vote on the policies
directors use to set compensation. The real target of the bill
is stock options, which Levin describes as "stealth
compensation" because the value of options does not show up on
the books of companies as expenses. So long as companies don't
have to expense the value of options against earnings, says
Levin, executives will be generous about awarding themselves
this form of pay.

    A bill sponsored by Minnesota Congressman Martin Sabo is
even more drastic. He wants to bar companies from taking income
tax deductions for pay that is more than 25 times what the
lowest-paid employee makes. The Sabo bill, say analysts, would
set an arbitrary ceiling on how much CEOs should be paid. Sabo
chose the multiple 25 because it would result in a salary of
roughly $200,000. "That's what the President of the U.S. gets,"
says Sabo. "Why should some corporate executive get more?"

    The SEC is contemplating new rules that would force
companies to disclose executive compensation more fully in proxy
materials. In addition, it would compel boards to justify in the
annual report or proxy statement what a CEO's pay really is --
in all its components -- and why it's reasonable. Companies
would be required, for example, to spell out in a new summary
table which elements of executive pay are cash and what the
present values of stock grants and options are -- something only
compensation experts are able to calculate now.

    Originally, when shareholders were few in number, they had
real control over the companies they owned. But as corporate
"democracy" widened ownership, the power of shareholders became
diffuse, while corporate management grew in strength. The new
assertiveness by pension-fund managers and stock-owner groups,
abetted by the changes contemplated by the SEC and Congress,
should serve to restore some power to the real owners of each
company. After all, argues the new breed of rebels, that's what
capitalism is all about.