04/21/97 WHICH BOSSES EARNED THEIR PAY, AND WHICH DIDN'T?

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WHICH BOSSES EARNED THEIR PAY, AND WHICH DIDN'T?

Microsoft Corp. Chairman William H. Gates III doesn't fuss about the size of his salary. In fact, he even jokes about lowering it. But as the software giant's largest shareholder, Gates certainly doesn't need a megapay package. His 23.7% stake in Microsoft is worth a colossal $27.7 billion. Salary or not, he comes out a big winner.
And his shareholders haven't done so badly either. Gates is one of this year's two pay-for-performance winners. A BUSINESS WEEK analysis shows that Gates gave shareholders the highest return relative to his pay. And for the second year, James E. Preston, chief executive of Avon Products Inc., delivered the highest return on equity (ROE) relative to his pay (table, page 60).
NETWORK. Gates has driven Microsoft to develop one success after another. Windows 95, along with applications such as Office, lofted sales to $8.7 billion last year, up from $5.9 billion in 1995. Gates also engineered a wrenching change last year, making the Net central to all new products. Microsoft's Web browser, Internet Explorer, has now racked up more than a 20% market share. Since 1994, Gates's total pay has been just $1.4 million, while shareholder returns have jumped 310%.
Preston is the CEO whose company performed best relative to his pay. To align his pay with performance, Preston froze his $610,000 salary five years ago and began taking most of his compensation in stock options. Over the past three years, Preston has earned $8 million. Avon's average ROE is 141%. In part, that reflects Avon's renewed growth, although an aggressive stock-buyback program has also left Avon with a small equity base. This year, Preston's salary will jump to $1 million. But with $22 million in options yet unexercised, he insists he's still a big advocate of pay for performance. ''I will do well or not well depending on how the stock does,'' he says.
On the other side of the ledger, Conseco Inc.'s Stephen C. Hilbert gave shareholders the least for the $165 million he's collected since 1994. Most came from a $107 million stock-option exercise in 1994 and a $23 million exercise last year. Since 1994, shareholder return has been 133%. A company spokesman argues it's unfair to compare the value of Hilbert's options with performance over the past three years. He says it should be compared with the 3,100% return created over the 10 years since the first option grant. Adds Hilbert: ''I'm certainly not embarrassed about our success or mine personally.''
Stephen M. Case, CEO of America Online Inc., provided the worst corporate performance relative to his pay. During the past three years, Case earned $33.5 million, while the ROE was negative 413%. Most of his gains came from exercising $27.4 million in options last year. Last summer, the stock was driven down by growing pains and a restructuring to change AOL's controversial accounting practices. CFO Lennert J. Leader says AOL is concentrating on growing its customer base and revenues, as opposed to short-term profits. But as Case struggles to get AOL back in the black, the payoff--for the company, if not for him--appears far away.
By Lori Bongiorno in New York, with bureau reports

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