The CEO Gravy Train Just Got Derailed

During the go-go '90s, CEOs had it made. Thanks to a booming stock market and the magic of stock options, boards could shower top managers with rich pay packages without having to dig deep for more cash. It made for some astonishing paychecks. Who can forget Charles B. Wang's $655 million haul of restricted stock from Computer Associates International Inc. (CA) in 1999? Even after stocks began falling that year, many boards continued to pile on the dough. Some underperforming chiefs got raises. Others were bailed out of underwater options by new grants or lower exercise prices on old ones.

Those days are gone. Thanks to the weak economy and the slumping stock market, the gravy train has been derailed. Directors are finally giving more than just lip service to the idea of pay for performance. In line with diminished corporate performance, bonuses are being scaled back or cut altogether. And some chief executives, including Thomas M. Siebel of Siebel Systems Inc. and John T. Chambers of Cisco Systems Inc., are taking voluntary pay cuts in a show of solidarity with beleaguered employees and shareholders. (Chambers, at least, didn't go away empty-handed. Three days after cutting his pay to $1, the Cisco (CSCO) board gave him two million additional stock options--a healthy incentive to get the share price back up.)

With stocks down and bonuses a fond memory, 2001 could deliver one of the biggest executive pay cuts in years, with CEOs likely to see double-digit declines. Ira T. Kay, national practice director for compensation consulting at Watson Wyatt Worldwide, says total pay--including options exercises--for CEOs of the nation's 1,000 largest companies is likely to fall by a third, dipping below the $1 million mark for the first time since the early '90s.

FEWER OPTIONS. It's easy to see why. Without the rocket fuel of a runaway stock market, executive pay is being forced into a lower orbit. According to BusinessWeek's annual survey of approximately 365 large U.S. companies, the average CEO earned $13.1 million last year. Almost four-fifths of that pay came from option exercises. This year, fewer execs have had the chance to cash in. The number of big-company CEOs sitting on underwater-only options has nearly doubled since Jan. 1, to 25%, according to Pearl Meyer & Partners Inc.

With board compensation committees meeting this month and next to decide 2001 bonuses and option grants, it will be a winter of discontent for many CEOs. Pay consultants who have met with those committees in recent weeks say boards that once rewarded underperforming CEOS to keep them from jumping ship are not inclined to do so this time. Shareholders are feeling too much pain for that kind of generosity. With many companies in dire financial straits and layoffs mounting, power has shifted to the board. Says pay consultant Alan Johnson: "This isn't the year you're going to go to your board and say, `Hey, I need some nourishment here."'

To their credit, boards now appear to understand that "pay for performance" means both getting rich in times of plenty and being humbled when prospects head south. Indeed, many companies are taking a strict by-the-numbers approach. Sportswear manufacturer Russell Corp. (RML) expects to end the year with earnings of $1.23 to $1.33 per share, well below last year's $1.90. CEO John F. Ward earned nearly $1.3 million in 2000, including a $519,579 bonus. Losing his bonus would mean a 41% cut in pay. Says Herschel M. Bloom, a Russell compensation-committee member: "There are benchmarks that have to be met before bonuses are granted. If it does not appear we are going to meet the benchmarks, there will be no bonus."

SPREADING THE PAIN. At some companies, especially in transportation, media, and other industries crippled by the September 11 terrorist attacks, the question is whether to hold the boss accountable for an unavoidable economic disaster. As compensation committees meet to set salaries and goals for 2002, some may be inclined to lower the bar. An August survey of 101 large U.S. companies by William M. Mercer Cos. found 29% had already tweaked their bonus plans. The goal: to avoid punishing execs for events outside their control and to provide an incentive after conditions improve.

Other companies are just spreading the pain evenly. For example, National Semiconductor Corp. (NSM) not only has eliminated 2001 bonuses for high-ranking execs but will also delay salary increases companywide in 2002. Compensation-committee member Modesto A. Maidique says the terrorist attacks have made the timing of a recovery even harder to forecast. "We were expecting a tough time, and September 11 made it tougher," he says. This year, everyone is going to share in the hard times. By Louis Lavelle in New York

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