Public-company CEOs lavished in perks, disclosures reveal

May 28, 2007

Investor Warren Buffett named his first corporate jet "The Indefensible." Who knows what he would say about the seven Indiana public companies that not only own corporate jets, but also let their executives use them for personal trips.

Cummins Inc., Hillenbrand Industries Inc., Zimmer Holdings Inc., Eli Lilly and Co., NiSource Inc., WellPoint Inc. and 1st Source Corp. all allow some personal use of company jets. In addition, Simon Property Group Inc. and Irwin Financial Corp. pay outside companies to ferry executives on personal trips.

Such corporate perquisites have drawn increased scrutiny this year as new rules forced publicly held companies to disclose more about the niceties they give their top brass--from company cars to country club memberships, from help with taxes to handsome health care coverage.

WellPoint CEO Larry C. Glasscock, for example, got a $4,800 "executive physical"--a price that would likely draw a deep frown from a WellPoint claims adjudicator.

Perks, while only a minor part of most compensation packages, sometimes are the most galling to investors because they come on top of eye-popping pay, which keeps growing every year.

Average compensation for the top five executives at Indiana's public companies rose nearly 18 percent last year--seven times the rate of inflation--to $969,000, according to IBJ's review of annual proxy statements filed with the U.S. Securities and Exchange Commission.

That includes salary, bonus, long-term incentive awards, stock awards and other compensation. Throw in the value of stock options, and the average zooms to $1.4 million.

"So many of the perks are unnecessary and, I think, offensive," said Charles Elson, a professor of finance and executive compensation expert at the University of Delaware. Ask for an example, and the first item off Elson's tongue is personal use of the corporate jet.

Spokesmen for Indiana companies disagree. They say providing top executives a flexible, convenient and secure way to travel ultimately is good for business.

Consider Columbus-based engine maker Cummins. Its top five execs took personal trips in one of the company's three Hawker jets for a total of 126 hours last year--at an extra cost to the company of $2,200 an hour. Cummins' total tab for the jet-setting: $277,000.

That amount exceeded what any other Indiana company reported on its 2006 proxy statement. But for Cummins--an $11 billion company that paid its top five executives more than $23 million in compensation last year--it's a drop in the bucket.

And it's a wise use of money, argued Cummins spokesman Mark Land. Cummins CEO Tim Solso and President Joe Loughrey spend at least three-quarters of their working hours somewhere other than Columbus.

"It's a more efficient use of time," he said, "because our top executives are basically on the clock all the time."

Sometimes, Solso and Loughrey use the company jets to go to one of their second homes after a business trip. Rather than fly all the way back to Columbus first, Solso has taken a Cummins jet to his home in Charleston, S.C. Loughrey has done the same to a home he has at Martha's Vineyard.

At Batesville-based Hillenbrand, CEO Peter Soderburg spent 78 hours--or nearly two standard workweeks--in the air last year, flying between Batesville and his homes in upstate New York and southwest Florida. A Hillenbrand spokeswoman said Soderburg took less in cash compensation in exchange for the $109,000 in plane rides.

Not that it pinched his wallet. Excluding free air fare, Soderburg, who became CEO on March 20 last year, still raked in cash, stock, options and perks valued at $5.8 million.

Other companies permit personal use of company jets, but with strings attached. Lilly, Irwin and WellPoint all said their CEOs used the corporate jet only to attend meetings of boards of other companies or not-for-profit groups on which they sit.

New rules on perks

Indiana companies have revealed their executives' use of planes and other perks before. But many gave more detail this year because new SEC rules required disclosure of all perks worth $10,000 or more. The old threshold was $50,000.

In their SEC filings, companies tally the value of perks in a category called "other compensation." That category was the fastest growing last year among Indiana's public companies, rising 37 percent.

Compensation experts say the increase in "other compensation" shows corporations are finally disclosing what they should have been in the past, not that corporations are giving more perks.

In fact, nearly all Indiana-based companies characterized their perks as modest in their proxy statements. When asked whether perks are a make-or-break factor in hiring and holding on to executives, most Indiana companies said no.

So why give them?

Indianapolis money manager Ken Skarbeck has a one-word theory: ego.

"They treat these guys like movie stars," said Skarbeck, managing partner of Aldebaran Capital in Indianapolis and an outside columnist for IBJ. Instead of perks, he said, "I'd rather pay them the money and let them go out and buy it themselves."

Before presidents Ronald Reagan and George W. Bush cut tax rates for high-earners, companies used perks to compensate executives without boosting their taxable income. Now, incomes are taxed less but perks are taxed more.

But the perks didn't go away. And some companies even pay the extra taxes generated by their perks so their executives don't have to. Such practices are called tax gross-ups.

The new disclosure rules, adopted by the SEC in response to investor complaints, could be "the death knell" for some of these perks, said Elson, the Delaware finance professor.

Maybe. But executive compensation has been on a soaring pace for three decades. An earlier rule change in the early 1990s, which also required increased disclosure, failed to slow the trend. Pay only accelerated.

"The bottom line is, everybody wants the best, the brightest, the most charismatic," said Bob Roeder, a compensation expert at the Mercer Human Resource Consulting office in Indianapolis. "There will continue to be unbelievably attractive pay practices."

Growing gap

The gap between Joe Lunchbucket and Joseph Corner Office is now nearly 10 times as large as it was 25 years ago, according to figures from the AFL-CIO, a frequent critic of executive pay. Whereas U.S. CEOs made 42 times as much as workers in 1980, CEOs now make 411 times as much as workers.

In Indiana, which has just five Fortune 500 companies, the gap is not nearly so wide. The average corporate CEO earned $2.5 million, including stock options, or 62 times the state's average wage per job.

Paul Hodgson, a senior research associate at the Corporate Library in Maine, doesn't see compensation slowing down, even if investors are upset.

"Even where shareholders might question decisions by compensation committees [of corporate boards]," Hodgson said, "the compensation committees and the executives involved don't see anything wrong with the compensation they're giving."

Jeff Smulyan, CEO of Emmis Communications Corp. in Indianapolis, acknowledged problems with executive pay. But he also sees reasons for it.

"You're asking me to defend something I'm not dying to defend," said Smulyan, who has presided over a plummet in Emmis' stock price but also agreed to take only $1 of pay for the most recent fiscal year. "But it's very hard to have a work/life balance in this job."

Steve Russell, CEO of Celadon Group Inc. in Indianapolis, agreed.

"I guarantee you I will lose more sleep than people that don't have the same degree of responsibility that I have," said Russell, who added that Celadon is the biggest trucking company in America without a corporate jet.

Russell enjoyed one of the largest pay increases of any Indiana CEO: 113 percent. Including options, he collected $4.9 million. But don't expect an investor revolt. Over the same span, Celadon stock nearly tripled in value.

"If you asked any shareholder, 'Is that OK?' they would say, 'Are you crazy?'" Russell said.

WellPoint's pay

In Indiana, the most-cited example of excessive pay is WellPoint, the nation's second-largest health benefits firm. Earlier this month, nearly 60 protesters demonstrated outside the company's offices on Monument Circle, criticizing WellPoint executive pay and calling for universal, government-paid health coverage.

Protest organizer Julia Vaughn noted that WellPoint CEO Glasscock earned as much in 2006 as the average Hoosier family would earn in 308 years. Glasscock pocketed $7 million in cash, stock and perks last year and received stock options valued at $15 million.

Taken together, Vaughn said, WellPoint executives' compensation of $54 million could buy a year of health insurance for more than 5,000 families.

Stratospheric salaries at WellPoint are nothing new. And neither is the company's defense of them. For the third year in a row, WellPoint spokesman Jim Kappel gave the same, word-for-word answer to questions about them.

"WellPoint's executive compensation principles rigorously tie pay to the performance of the company," he said.

Indeed, nearly all Indiana companies say they link pay to performance--although each defines performance in its own way. To WellPoint's credit, its stock price has risen 110 percent over the last three years.

Last year, however, WellPoint's stock fell 1 percent. Glasscock and one other executive saw their pay, excluding stock options, drop accordingly. But three other WellPoint executives--David Colby, Joan Herman and John Watts Jr.--still enjoyed increases of 10 percent to 60 percent.

WellPoint's board did end its practice of giving a tax gross-up when the company pays for executives' spouses to go with them to company events. Kappel said the decision came after WellPoint's board reviewed the practice, but he would not say why the board nixed it.

Changes ahead

Other corporate executives say it's time to scale back perks.

"The country club dues is probably a vesture of times past," said Mark Schroeder, CEO of German American Bancorp. He acknowledged that other executives at the Jasper bank use their clubs for entertaining and wooing clients. But his duties rarely require that kind of schmoozing. "As a banker, the assumption is it's good business for you to be in that [club] environment."

Schroeder is among 34 Indiana executives listed in SEC filings as having dues paid at a club. And he's one of nearly 50 who drive a company car or receive an allowance for a car.

WellPoint's Glassock is among several executives who received expensive health care the average worker doesn't get. Another is Kimball International Inc. executive P. Daniel Miller.

Miller and his wife needed extra medical tests. So the furniture and electronics company ferried them to Minnesota's Mayo Clinic and back--at a cost of $30,000.

For some companies, having increased disclosure on perks is likely to lead to more of them, said Mercer's Roeder. That's because executives can now more easily see what their peers are getting.

But for other companies, perhaps those letting executives use the corporate jet, a public and investor backlash is likely to lead to fewer perks, Roeder said.

"Those companies that have always been conservative, we're going to see an increase in those. [But] those organizations that have been doing the extremes are going to see real pressure to quit doing that," Roeder said. "There's public perception that, ultimately, can have an impact on brand perception."

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