Compensation and Executive pay and Public Companies and Banking & Finance and Executives

Soft Landing: Pay slipped for most execs in 2009, but cuts weren't deep

May 22, 2010

Millions of Hoosiers have weathered the recession with extended salary freezes, deep pay cuts or even wrenching unemployment.

But top executives at Indiana’s public companies have largely been insulated from the economic crash.

IBJ’s review of executive pay found that, although 131 of the 238 executives listed in proxy statements the past two years saw annual compensation fall in 2009, only 10 experienced cuts of more than $1 million.

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And nearly as many executives—103—saw the value of their packages increase, 17 to the tune of more than $1 million.

IBJ found all but 46 of the public company managers listed in proxy statements made at least $200,000 in 2009, and 89 collected $1 million or more.

“A person can live a pretty nice life on $200,000 a year. When you get up into these astronomical figures, they make no sense. What is it we’re supporting? Five homes? Ten homes? Travel?” asked Indianapolis money manager John Guy, president of Wealth Planning and Management LLC. “It’s absurd.”

Many executives, board members and consultants who help companies set their compensation policies don’t see it that way.

They point out that the market for top talent is competitive. Not everyone has the skills or savvy necessary to navigate a severe recession, let alone gain ground. Management decisions always make or break companies, but the stakes were particularly high last year.

“Like any position, there is a market for a qualified individual,” said Betsy Field, an Indianapolis-based consultant for New York-based executive HR firm Towers Watson Inc. “If you don’t pay at the market, it’s going to be difficult to get those individuals or keep them in your organization.”

Climbing out of a hole

By two broad measures, Indiana public companies made significant strides on the road to recovery last year.

Of the 64 Hoosier firms IBJ reviewed, 36 turned a profit. A similar number posted increases in stock price, and 25 bettered the robust 2009 performance of both the Dow Jones industrial average and S&P 500.

But sorting out reasons firms prospered isn’t always easy. Take ITT Educational Services Inc., the operator of for-profit trade schools. Its profit soared 50 percent, to $300 million, and enrollment rose 30 percent, to 81,000.

executive payThe gains reflect well on CEO Kevin Modany’s leadership. But the company also benefited from the recession, which sent unemployed and underemployed adults flocking back to the classroom to upgrade their skills.

ITT’s board, meanwhile, gave Modany a pat on the back befitting a management guru. It boosted his pay $2.9 million—the state’s fifth-largest raise—to $7.6 million. An ITT spokesman declined IBJ’s requests to interview Modany, citing his travel schedule.

Cummins Inc. CEO Theodore Solso took the deepest cut last year, $2.3 million. The decline reflects that 80 percent of Solso’s pay is variable and tied to performance, company spokesman Mark Land said.

“We view it as a sign our compensation structure is working the way it’s supposed to work,” Land said.

But pay critics say that, even with the cuts some companies imposed, many packages remain too large.

“I don’t see a whole lot of giveback in the executive suite these days,” said Ken Skarbeck, managing partner of locally based money management firm Aldebaran Capital and an IBJ columnist.

“The bonuses are there, the performance awards are there, the directors’ fees still seem high. Yet you don’t see executives necessarily reaching into their pockets and buying their own stock with their own money, which I think demonstrates something to shareholders.”

Biggest paychecks

No Hoosier executive took more heat over 2009 pay than Angela Braly, CEO of health insurance giant WellPoint Inc.

Many members of Congress cast WellPoint as a villain as they debated health care reform. Lawmakers became especially indignant after the company early this year announced plans to raise premiums in California as much as 39 percent.

A House subcommittee in February grilled Braly about the proposed increase—which the company later rescinded—and contrasted that with her pay package.

Under questioning, Braly said she earned about $1.1 million in salary, plus received another $9 million in stock and other incentive compensation.

“Well, of course, it makes sense then that you would need a big rate increase,” Rep. Jan Schakowsky of Illinois said sarcastically.

IBJ, which uses the Associated Press’ executive compensation formula, found Braly actually earned $13.1 million, or $4.4 million more than the year before—the state’s third-largest raise.

WellPoint spokesman Jon Mills pointed out that the company in 2009 doubled earnings per share, despite a challenging business climate and that, even with her raise, Braly earned less than she had in 2007.

At WellPoint’s annual meeting May 18, shareholders approved a proposal allowing them to take a non-binding vote every year on executive pay. The proposal, made by the Connecticut Retirement Plans and Trust Funds, had failed twice previously, and WellPoint opposed it.

A shareholder at Eli Lilly and Co.’s annual meeting earlier this spring also tried to pass a company-opposed measure aimed at clamping down on executive pay, but it fell short.

executive payThe proposal, submitted by the AFL-CIO, would have barred current or former public company CEOs from serving on Lilly’s compensation committee. Passage would have booted two of its four members, Ball Corp. CEO R. David Hoover and former United Parcel Service CEO Michael Eskew.

The union argues that CEOs sitting on compensation committees have an inflated view of how much pay is needed to attract and retain talent. It also questions their independence, noting that they benefit from one another’s increases since pay often is based on what peers earn.

It’s a direct shot at John Lechleiter, who moved from Lilly’s presidency into its top job in March 2008. The AFL-CIO believes his pay—which topped $16.4 million in 2009—is excessive, considering the company’s struggles. Lechleiter was the highest-paid Indiana executive last year, and his raise, $5.7 million, was the second largest.

Lilly spokesman Mark Taylor defended the package, saying the company posted strong performance. But Taylor also said Lechleiter has asked the compensation committee not to increase his 2010 target compensation. And he noted that part of the 2009 increase stemmed from a change to an incentive program that will be a wash over time.

The company did return to profitability last year, earning $4.3 billion after losing $2.1 billion in 2008. But it still faces an onslaught of patent expirations that could cause sales to tumble, and its stock price has been on a downward trajectory for a decade.

Vineeta Anand, chief research analyst for the AFL-CIO’s Office of Investment in Washington, said it was galling that both Lilly and WellPoint awarded big raises in a year that the soaring cost of health care was in the national spotlight, and so many Americans were struggling.

“In a bad year, it really is a lot of money to be giving a CEO, and it sends the wrong kind of message,” Anand said. “It sends the message, ‘We don’t really care how the economy is doing, or how the average worker is doing.’”

Deepest cuts

Keith Busse, CEO of Fort Wayne-based Steel Dynamics Inc., understands investors’ frustration about runaway pay—especially the rich packages awarded top Wall Street executives whose firms received multibillion-dollar federal bailouts.

Investors in his company may be disappointed in its 2009 performance—sales fell 50 percent, and the company lost $11 million. But no one can say he isn’t sharing in the pain.

Busse took a $2.2 million pay cut last year, third-biggest among Indiana executives, leaving him with a $1.9 million package. The other four members of his management team also took deep cuts, with each ranking among the state’s 15 largest.

“Nobody likes having their pay cut 54 percent,” Busse said of his reduction. “But we all understand the system and how it works. There was no crying about it. We just rolled up our sleeves and worked harder.”

Busse said his team had to find ways to preserve cash, even as demand for steel dropped dramatically. That meant stepping up bill collections from slow-to-pay customers, shrinking inventories and temporarily shutting some operations. The result: Steel Dynamics returned to profitability in the third quarter of 2009, a nimble turnaround for a heavy industrial firm.

Across Indiana, board compensation committees last year wrestled with how to adjust pay to reflect the recession but also reward executives who successfully navigated daunting economic forces beyond their control.

“No one in the world could tell how deep the recession will be, how long it will last, or if we’ll be in a bad business climate for years,” said Eliza Hermann, who chairs Brightpoint Inc.’s compensation committee.

Hermann, former vice president of human resources for British Petroleum, praised CEO Bob Laikin and his management team for slashing debt and expenses, while keeping the wireless-phone distributor’s operations humming.

“The executives provided exceptional leadership in hunkering down to weather the storm … while at the same time meeting and exceeding customer expectations to deliver the phones and operate the business very well,” she said.

Still, all of Brightpoint’s executives saw their pay packages shrink last year. And Laikin’s $1.2 million reduction was the state’s 10th-largest.

Pay critics like such cuts, but wish they were even deeper. Even with his 35-percent reduction, for instance, Laikin earned $2.2 million.

“If a guy takes a deep cut in bad years, at minimum he’s being sensitive to the feelings of his employees, customers and the public at large,” said Guy, the wealth manager. “It just conveys a sense of, ‘Hey, I’m really in there with you.'

“They’re not, because they’re still making … seven figures. But it conveys a connection.”•

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