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By now it should be no secret that 2002 was as bad as it gets for chief executives and their much-debated pay packages (see a table of the 50 highest paid execs). Compensation consultants say when the final numbers are tallied in coming weeks, average executive pay could be down by as much as 10% to 15% -- the second consecutive double-digit dip. Preliminary data suggest that the situation is considerably worse for the very highest-paid executives.
Among corporations that have filed 2002 proxies to date, the 15 highest-paid chief executives netted an average of $35.8 million, including salary, bonus, long-term compensation, and exercised stock options, according to Standard & Poor's ExecuComp. In 2001, when average CEO pay in BusinessWeek's Executive Pay Scoreboard declined 16%, the 15 highest-paid of the bunch took home a staggering $135 million on average. Even excluding Oracle (ORCL
) CEO Lawrence Ellison's record-shattering $706 million payday, the 2001 average was still $94.2 million, nearly three times the 2002 average. Clearly, the mighty have fallen the farthest.
Overall, compensation consultants say 2002's executive-pay decline is the result of two factors. With performance in the tank, some executives have had their bonuses reduced or eliminated. And with many stock options underwater, others will have minimal gains from option exercises.
"SERIOUSLY FLAWED"? With few exceptions, the chief executives who landed at the top of the heap did so by bucking that trend and exercising large numbers of options granted years earlier. In the top slot, Tenet Healthcare's (THC
) Jeffrey C. Barbakow exercised 3 million soon-to-expire options for a gain of $111 million. A Tenet spokesman says BusinessWeek's methodology, which counts option exercises as part of 2002 compensation, was "seriously flawed."
Across the board, pay for performance seemed to be working. A study by compensation consultants Mercer Human Resource Consulting of 100 early proxy filers found that CEO bonuses rose 12.2%, closely tracking those companies' net income, which rose 12.5%. At pharmaceutical-services firm AmerisourceBergen (ABC
), transportation industry supplier Arvinmeritor (ARM
), and tax-services company H&R Block (HRB
), corporate chiefs who boosted earnings were rewarded handsomely. And at specialty-chemical outfit Ashland (ASH
), chemical supplier Cabot (CBT
), and other businesses where earnings fell, cash compensation for the chief executive followed suit.
Among those getting top pay for top performance were the third-highest-paid CEO, Qualcomm's Irwin M. Jacobs, and No. 5-ranked Orin C. Smith at Starbucks (SBUX
). Jacobs hauled in $63.3 million, including $61.4 million from exercising options and an $800,000 bonus, the latter up from $600,000 in 2001. But consider his accomplishment. In a year when tech was hurting more than most, Qualcomm (QCOM
) was no exception, with its stock losing 40% of its value in fiscal 2002. However, Qualcomm did an about-face on profits in 2002, earning $360 million, up from a $578 million loss in 2001.
WINNERS AT LOSERS. At Starbucks, Smith took home $38.8 million, including $36.3 million on option exercises and cash compensation of nearly $2.5 million, a 14% increase in total. But few investors are complaining. In fiscal 2002, sales were up 24%, net income gained 18.7%, and Starbucks' shares leaped 40.1%.
Not everyone was as diligent as Jacobs and Smith in toeing the pay-for-performance line. At Walt Disney (DIS
), CEO Michael Eisner won a $5 million stock-unit bonus, even as operating income fell nearly 16% and Disney shares dropped 21%. The board noted "the effectiveness and quality of Mr. Eisner's leadership...in a difficult economic environment."
General Electric's (GE
) Jeffrey R. Immelt saw his 2002 pay more than double after taking the helm, from $6.6 million to $14.4 million -- even though GE stock lost nearly 40% of its value. Nearly half of the pay package, $6.7 million in GE stock, was a long-term incentive payment for meeting operating margin, cash flow, and return on capital goals since 2000. The remainder was based on GE's 7% earnings growth and key strategic accomplishments, including the reorganization of the former GE Capital. "That's what we do at GE," says spokesman Gary Sheffer. "We set aggressive goals, and people are rewarded if they meet them."
"NEW APPROACH" NEEDED. At National Semiconductor (NSM
), where shares gained 14% despite a $121.9 million loss for fiscal 2002, CEO Brian L. Halla nevertheless took home $1.6 million in cash, up from $832,666 in 2001. The board cited "incremental improvement" in National Semiconductor's financials throughout the year, including a fourth-quarter profit of $17.1 million.
Pay for performance took perhaps its biggest hit at Tyco (TYC
), where former CEO L. Dennis Kozlowski -- who stands accused of looting millions of dollars from the company -- netted $71 million in 2002 and ranks as the second highest-paid executive in the BusinessWeek survey, at least for now. Tyco's new management has taken Kozlowski to court to get that money back and plans to implement "a whole new approach" to pay, a spokesman says.
While the highest-paid executives of 2002 earned considerably less than the highest-paid of 2001, it's worth noting that two thirds of last year's 50 highest-paid executives enjoyed significantly bigger pay packages. Since few top executives make it a habit to exercise huge batches of options year after year, the winners one year are frequently losers the next. As a result, many individual high paid executives earn more from year to year by virtue of option exercises alone. But as a
group -- the members of which change from year to year -- the highest paid have pay packages that fluctuate, up and down, depending on financial performance, stock prices, and the generosity of their compensation committees.
Setting executive pay is an inexact science at best. Many executives suffered or benefited last year right along with their corporations' shareholders. Yet, many others still continued to reap the benefits of a system that allows them to profit while investors watch their portfolios dwindle. With 2003 shaping up to be another dismal year for shareholders, many top executives are counting on that system to keep them ahead of the pack.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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