Exec Pay: More Pain for CEOs

By Louis Lavelle 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.

The 50 Highest Paid Executives

RANK

EXEC/TITLE

COMPANY

TKR

2002 SALARY & BONUS

$000

STOCKOPTIONS VALUEREALIZED$000

LONG TERM COMP.

$000

TOTAL PAY 2002

$000

TOTAL PAY 2001

$000

% CHG.

1

Jeffrey C. Barbakow

Chmn; CEO

Tenet Healthcare

(THC

)

5530

111050

0

116580

4588

2441

2

Mark S. Swartz

Exec VP, CFO

Tyco Intl.

(TYC

)

2243

0

72872

75115

33903

122

3

L. Dennis Kozlowski

Chmn; CEO

Tyco Intl.

(TYC

)

4047

0

66991

71038

39510

80

4

Irwin M. Jacobs

Chmn; CEO

Qualcomm

(QCOM

)

1750

61440

134

63324

1551

3982

5

Brian G. Kelly

Co-chmn

Activision

(ATVI

)

500

46317

0

46817

5753

714

6

Robert A. Kotick

Chmn; CEO

Activision

(ATVI

)

500

42793

0

43293

2915

1385

7

Orin C. Smith

Pres.; CEO

Starbucks

(SBUX

)

2451

36322

0

38772

2145

1707

8

August A. Busch III

Chmn

Anheuser-Busch

(BUD

)

3641

31010

11

34662

9600

261

9

Jeffrey Vanderbeek

Exec. VP; office of the Chmn

Lehman Bros. Holdings

(LEH

)

1500

24149

3572

29221

30018

-3

10

Richard S. Fuld

Chmn; CEO

Lehman Bros. Holdings

(LEH

)

1800

21125

5771

28696

105183

-73

11

Joseph M. Gregory

COO

Lehman Bros. Holdings

(LEH

)

1500

23531

3572

28603

44843

-36

12

Kenneth E. Goodman

Pres; COO

Forest Labs

(FRX

)

863

24661

0

25524

32626

-22

13

Ray R. Irani

Chmn; CEO

Occidental Petroleum

(OXY

)

5389

1697

16600

23686

10180

133

14

Philip J. Purcell

Chmn; CEO

Morgan Stanley

(MWD)

6388

14215

3064

23666

20440

16

15

Louis V. Gerstner Jr.

Chmn

Intl. Business Machines

(IBM)

3570

4713

14417

22701

127404

-82

16

Robert G. Scott

Pres.; COO

Morgan Stanley

(MWD

)

6025

12565

2972

21563

11914

81

17

Bradley H. Jack

COO

Lehman Bros. Holdings

(LEH

)

1500

15847

3572

20919

27743

-25

18

Howard D. Schultz

Chmn; chief global strategist

Starbucks

(SBUX

)

2451

17478

0.000

19923

24703

-19

19

David D. Halbert

Chmn; CEO

AdvancePCS

(ADVP

)

2264

17136

0

19401

6707

190

20

Jon S. Halbert

Vice Chmn

AdvancePCS

(ADVP

)

935

17348

0

18282

10797

69

21

Kenneth I. Chenault

Chmn; CEO

American Express

(AXP

)

3988

7920

6325

18233

23728

-23

22

James E. Cayne

Chmn; CEO

Bear Stearns Cos.

(BSC

)

10207

0

7983

18189

7173

154

23

Gary W. Loveman

Pres; CEO

Harrahs Entertainment

(HET

)

4371

8654

5120

18145

3598

404

24

Richard J. Kogan

Chmn; Pres; CEO

Schering-Plough

(SP

)

1430

0

16559

17989

5511

226

25

Robert K. Burgess

Chmn; CEO

Macromedia

(MACR

)

797

17145

0

17943

18030

-0.5

26

Patrick T. Stokes

Pres; CEO

Anheuser-Busch

(BUD

)

4441

13471

0

17912

9725

84

27

Warren J. Spector

Pres; Co-COO

Bear Stearns Cos.

(BSC

)

9694

0

7520

17213

6849

151

28

Alan D. Schwartz

Pres; Co-COO

Bear Stearns Cos.

(BSC

)

9738

0

7476

17213.333

6853

151

29

Bruce Karatz

Chmn; CEO

KB Home

(KBH

)

8677

0

7828

16505

44376

-63

30

Arthur D. Collins

Pres; CEO

Medtronic

(MDT

)

1842

14345

305

16492

1683

880

31

Howard B. Bernick

Pres; CEO

Alberto-Culver

(ACV

)

3297

11155

2025

16477

5311

210

32

Robert E. Rubin

Chmn, Exec committee;

Member, Chmn's office

Citigroup

(C

)

11465

0.000

5000

16465

16410

0.3

33

David W. Quinn

Vice Chmn

Centex

(CXP

)

6548

9861

0

16409

8333

97

34

Thomas J. Matthews

COO

Intl. Game Technology

(IGT

)

1229

15133

0

16362

NA

NA

35

Euan Baird

Chmn; CEO

Schlumberger

(SLB

)

1950

13681

0

15631

3500

347

36

Edward D. Breen

Chmn; CEO

Tyco Intl.

(TYC

)

4076

0

11428

15503

NA

NA

37

Robert C. Wright

Vice Chmn; Exec officer

General Electric

(GE

)

4641

0

10672

15313

5784

165

37

Philip .G. Satre

Chmn

Harrahs Entertainment

(HET

)

5238

9991

0

15228

7320

108

39

Jeffrey R. Immelt

Chmn; CEO

General Electric

(GE

)

6950

950

7219

15118

6364

138

40

Thomas B. Mackey

COO

Tenet Healthcare

(THC

)

3126

11910

0

15036

2587

481

41

Deryck C. Maughan

Vice Chmn; Chmn; CEO

Citigroup Intl.

Citigroup

(C

)

2934

9085

2967

14986

4369

243

42

Laurence E. Hirsch

Chmn; CEO

Centex

(CXP

)

4950

0

10000

14950

4184

257

43

Miles D. White

Chmn; CEO

Abbott Labs

(ABT

)

2813

33

11468

14314

10563

36

44

Larry A. Mizel

Chmn; CEO

MDC Holdings

(MDC

)

9513

4391

0

13904

15025

-8

45

John W. Thompson

Chmn; CEO

Symantec

(SYMC

)

1181

12623

0

13804

1948

609

46

Wade R. Fenn

Pres, entertainment& strategic bus dev

Best Buy

(BBY

)

1016

12783

0

13799

2176

534

47

Nolan D. Archibald

Chmn; Pres; CEO

Black & Decker

(BDK

)

4226

9482

0

13708

23553

-42

48

David D. Mandarich

Pres; COO

MDC Holdings

(MDC

)

9343

4231

0

13574

16682

-19

49

Steven H. Temares

Pres; COO

Bed, Bath & Beyond

(BBBY

)

773

12766

0

135340

8084

67

50

Sanford I. Weill

Chmn; CEO

Citigroup

(C

)

1557

11808

0

13364

42613

-69

Lavelle covers executive pay issues for BusinessWeek in New York