Insurance and Real Estate & Retail

Elite execs raking it in: As pay swells, critics urge restraint

May 9, 2005

Special Report:
Elite execs raking it in As pay swells, critics urge restraint Highest-paid Indiana public company executives in fiscal '04. Includes salary, bonus and other annual compensation, as well as long-term pay and stock option grants.

1) includes $1.7 million signing bonus received upon becoming CEO and president in August 2004

Turns out life's certainties stretch way beyond the cliché about death and taxes, especially in corporate Indiana.

If you're a top executive at one of Indiana's biggest public companies, odds are stellar you're a man, you collected more than $1 million in total compensation last year, and you saw more of your pay tied to company performance.

Indiana companies in fiscal 2004 generally mirrored the national trend toward more responsible executive pay, according to pay experts and an IBJ analysis of compensation at more than 75 Hoosier public companies. However, corporate watchdogs still find plenty to bark about. The average executive makes $300 for every $1 earned by the average worker, and experts say many boards have a warped sense of what constitutes rea- sonable pay, even as they link more of it to hitting performance targets.

"Poor performance still leads to relatively decent pay, and spectacular performance leads to astronomical pay," said Patrick McGurn, executive vice president for Maryland-based Institutional Shareholder Services, which advises big investors. "The whole thing is not calibrated correctly, and that's the thing I think investors need to work on over the next couple years."

IBJ's analysis was based on data culled from companies' Securities and Exchange Commission filings, which typically list pay for their five most highly compensated executives. Among the findings:

The 100 highest-paid executives in IBJ's survey received average total pay-annual compensation, long-term pay and stock-option grants-of $3.7 million in fiscal 2004.

The million-dollar club isn't so exclusive anymore. The 100 highest-paid executives all topped that threshold. That's up from 58 in the newspaper's 2000 pay survey.

The rising stock market, as reflected in the 9-percent gain in the Standard & Poor's 500 stock index, may have put boards in a more giving mood. Seventy of the executives on IBJ's list of 100 highest-paid executives worked for companies whose stock price rose last year.

Boards of big companies whose shares slumped found other reasons to dole out rewards. Eli Lilly and Co. shares, for instance, fell 19 percent last year. Nonetheless, CEO Sidney Taurel topped IBJ's list, and four other company executives landed in the top 25. Sharon Sullivan, Lilly vice president of global compensation and human resource service, noted the company's sales jumped 10 percent, earnings per share rose 9 percent, and several new products hit the market.

Efforts by Indiana companies to hire and promote women have yet to translate into large numbers of highly paid female executives. Just three of the 100 highestpaid executives are women.

A little turmoil can stoke executive pay. Mark Bulriss received $6.1 million in severance after stepping down last November as CEO of perennially underperforming Great Lakes Chemical Corp. Bill Shea received $6.3 million after being forced out last August as CEO of Conseco Inc. His successor, William Kirsch, received a stew of compensation valued at $13.7 million.

WellPoint Inc., known as Anthem Inc. before the company's $20 billion purchase of California-based WellPoint Health Networks Inc. last fall, continued to dish out among central Indiana's largest pay packages. CEO Larry Glasscock received total pay of $16.6 million in 2004 after collecting $55 million the prior year, a figure that included three years of incentive payments totaling $42 million.

Big pay, big performance

It's hard to argue with the Indianapolis company's performance. WellPoint shares advanced 53 percent last year. Since the company went public in November 2001, its shares have appreciated nearly 200 percent. During the same span, the S&P 500 has tacked on just 6 percent.

"Our executive compensation principles rigorously tie pay to the performance of the company," WellPoint spokesman Jim Kappel said.

Even so, big pay packages for health insurance executives have sparked controversy at a time premiums continue to escalate. California Insurance Commissioner John Garamendi initially blocked the Anthem-WellPoint deal last summer, in part because of hundreds of millions of dollars in merger-related payments due executives of the California company.

In a column for Bloomberg News last fall, Graef Crystal, a prominent compensation watchdog, said he was wary of the size of the compensation packages for Glasscock and Leonard Schaefer, who was CEO of the California company and now serves as WellPoint's chairman.

"Both [companies] have been high performers," Crystal acknowledged. "When I look at the pay of the two CEOs and consider that each company has a long tradition of rich compensation, I begin to wonder if the shareholders of the combined company will be eating cake, or just crumbs on the cake plate."

Age-old debate

Truly talented executives deserve to make a lot of money, many business leaders say, since they are in short supply and can easily earn their keep by making good decisions and displaying strong leadership.

"The total amount of what you're paying them is relatively small compared to what they can do for the shareholders," said David Denis, the Burton D. Morgan chairman of private enterprise at Purdue University's Krannert School of Management.

"It is a pretty active labor market for top execs," he added, "and you have to pay them what you pay them in order to get good people."

But Brandon Rees, an analyst who studies executive compensation for the Washington, D.C.-based AFL-CIO, said the growing gulf between what executives earn and what average workers receive is unjustified.

In 1980, he said, the executive made $42 for every dollar the worker received. That ratio ballooned to 85-to-1 in 1990 and now stands at 300-to-1.

Yet many business leaders believe they deserve to earn many times the pay of average workers, though they acknowledge there's no magic formula.

"There's always the infamous debate about what's too much or what's too little for CEOs, and I think that will continue forever," said Jerre Stead, the lead independent director for Plainfield-based Brightpoint Inc.

"But by putting more and more of their compensation at risk for when they perform, I think it increases shareholder value, and that's a much better thing for everybody."

Pay at risk

Pay watchdogs agree companies are putting more of their executives' pay at risk, even as they maintain that the size of pay packages is often too large.

"By and large, boards have become much more responsible stewards of shareholder equity over the last couple of years," according to McGurn of Institutional Shareholder Services.

Helping to drive the change: a rash of corporate scandals in recent years that led boards to take a tougher line with executives. Mostly gone are the days when executives received the bulk of their pay in the form of large annual salaries and plump guaranteed bonuses.

Instead, boards in the 1990s flocked to award stock options, which have value when a company's share price rises. Recently, they've begun doling out more restricted stock, which vests over several years, and other forms of pay tied to hitting specific performance targets.

This move toward more performancebased pay is "a major change of significance," according to Stead, who has served on 36 public-company boards, five as chairman and CEO.

In 2000, roughly three dozen of Indiana's 100 highest-paid executives received long-term compensation in the form of restricted shares. Last year, that number swelled past 60.

Sad state

It isn't just the size of pay packages that makes some watchdogs grimace. It's the fact that the vast majority of high-level executives at big Indiana companies are men.

Of the three women who landed on IBJ's list of 100 highest-paid executives, just two work within the state. Elena Delgado, the highest-paid, is based in California. She serves as president of the Irwin Home Equity Corp., a subsidiary of Columbus-based Irwin Financial Corp.

The small number of highly paid women doesn't surprise Jean Blackwell, executive vice president and CFO for Columbus-based Cummins Inc. Blackwell, a former state budget director under Gov. Evan Bayh, fell nine spots shy of the top 100.

Indiana companies trailed others across the nation in making a concerted effort to hire and promote women executives, Blackwell said, though she thinks they have begun doing a better job.

"It takes a while to get people positioned," she said, referring to women who are climbing the corporate ladder but have yet to reach the top rungs. "I think you'll see more change in the next five years than you've seen in the last five years."

Blackwell praised her own company, noting Cummins now has six or seven women in the top 35 posts, and others in the tier below.

AFL-CIO analyst Rees said he believes cronyism among male executives has limited the advancement of women.

"There is plenty of diverse executive talent out there, if only boards could look for it," Rees said, noting the prevalence of women in leadership posts at not-forprofits.

A restrained approach

Maximizing pay wasn't a top priority for some executives last year.

Simon Property Group Inc. CEO David Simon declined a cash bonus for the second year in a row, despite a 40-percent increase in the company's stock price, SEC filings show.

Fellow real estate executive Tom Hefner, chairman and former CEO of Duke Realty Corp., asked that his cash bonus instead go toward bolstering employee benefit programs. Duke shares rose 10 percent last year.

Both men own big stakes in their companies, thus their wealth increases in step with outside shareholders'. The same goes for the top two executives of Warsaw-based Biomet Inc. Neither Chairman Niles Noblitt nor CEO Dane Miller accepts stock options. Last year, the pair received less pay than the three lowerranking executives listed in the company's SEC filings.

Also demonstrating a restrained approach to executive compensation was Celadon Group Inc., whose shares appreciated 94 percent in its fiscal year that ended in June. The trucking company's CEO, Stephen Russell, barely cracked the top 100, ranking 94th.

In fiscal 2002, a down year for the company, senior management received no bonuses. Anything else would have been improper, Russell believes, and would have eroded his credibility with rank-andfile employees.

"If the shareholders have a good year, and the employees have a good year, then executive management can have a good year," Russell said.

Conversely, he said, "when you see situations where companies are performing poorly and yet the CEO's making big bonuses, I think that creates a lack of respect."
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