Last year was brutal for Republic Airways Holdings Inc., as it was for most companies. Struggling with low demand, excess
capacity and the bankruptcy of a key customer, the firm in July eliminated 10 percent of its work force, laying off 500 pilots
and flight attendants.
In the same year, Republic CEO Bryan Bedford took home a $375,901 raise, bringing his total 2008 compensation to $3.11
For investors, 2008 was the worst year since the Great Depression. Even so, Bedford was far from alone in seeing the value
of his pay package rise from 2007.
An IBJ analysis found shares of only 10 of Indiana's 66 public companies posted a positive total return in 2008, and
46 companies shed more than one-third of their stock market value. Republic's stock slid 46 percent.
Meanwhile, more than half of the Indiana public company executives whose pay was listed in proxy statements each of the
last two years saw increases in compensation.
For example, James Prieur, CEO of Carmel-based insurer Conseco Inc., got a 14 percent raise, bringing his pay to $3.57
million. Last year, the value of Conseco's stock fell 58 percent and the company lost $1.13 billion.
All told, 74 Hoosier executives enjoyed pay increases of six figures or more. Seventy-three more were newly hired, or elevated
to management's top ranks, and thus required to disclose their pay for the first time. Meanwhile, 72 Indiana executives
endured pay cuts greater than $100,000.
The pattern was in step with the national trend, pay watchdogs say.
The Corporate Library, a Maine-based group that monitors corporate governance, found base pay for top executives increased
7.5 percent over the past two years. It found "generous incentive compensation" was a factor in driving up 2008
"Many companies did not really attempt to share in the pain of the recession," added Vineeta Anand, an analyst
for the AFL-CIO Office of Investment.
"In fact, they looked for and found ways in which to reward their chief executive officers, even as they were firing
employees and cutting back on retirement benefits."
But other experts say boiling down pay to a single executive compensation figure doesn't tell the whole story.
That's because at most Hoosier public companies, the bulk of pay comes in the form of grants of restricted stock or
stock options—the value of which depends entirely on future stock performance.
Company proxy statements value stock awards based on the share price on the date of grant. In the case of many companies,
that was in the spring of 2008, months before last fall's market meltdown. Valuing options—which give holders the
right to buy shares in the future at the price on the date of the grant—is even more elusive. Many companies use a formula
known as Black-Scholes that assumes a company's stock price will increase over the life of the grant, typically 10 years.
When that happens, options can be wildly lucrative. But if stock prices stay below the option price, they're completely
Some Hoosier executives saw their grants fizzle in value—or even get revoked—just months after they were handed
out. Well-Point Inc. CEO Angela Braly, for example, received $2.4 million worth of restricted stock and $4.9 million in options
in March 2008. When WellPoint missed its return-on-equity target for the year, the board canceled the restricted stock.
Braly got to keep the options. But they have an exercise price of $70.80, according to the company's proxy statement.
WellPoint's stock currently trades at about $48 per share.
Making matters worse, compensation experts say,
share prices fell so precipitously in 2008 that the value of grants of stock or stock options handed out in previous years
also were decimated.
"These are times when shareholders are losing substantial wealth. In almost every large public company, executives
are also losing the wealth they have at stake," said Mike Smith, a former WellPoint chief financial officer who now serves
on the boards of Calumet Specialty Products Partners LP, Vectren Corp., HHGregg Inc. and Kite Realty Group Inc. "Many
of these executives have virtually been wiped out."
"I think the market works pretty well at policing fairness in compensation," he added.
The political tide is moving in the opposite direction: toward more regulation. Earlier this month, President Obama appointed
the nation's first "compensation czar" to oversee executive pay at companies that have received federal bailouts.
Experts expect Congress to legislate mandatory "say on pay" shareholder votes and other restrictions for public
companies within the year. Legislators are reacting to general outrage over the recession, most often aimed at the executive
"Wall Street seems to expect a separate set of rules," said U.S. Rep. Andre Carson, D-Indianapolis, in a June
11 statement after a House Financial Services Subcommitee meeting. "For my constituents, this double standard is nothing
new. They know that 30 years ago, CEOs took home 30 to 40 times what average workers made. Now that number has exploded to
344 times an average worker's pay."
Hoosiers who serve on public company boards say they're not sure how to respond to the shifting regulatory environment.
The challenge is most acute for the dozen Hoosier banks that accepted loans under the federal Troubled Asset Relief Program,
or TARP. The money came with strings attached, including limits on executive pay.
"Everybody is spending money on lawyers trying to understand what they're allowed to do," said Chuck Schalliol,
a former state budget director who leads the compensation committee at First Merchants Corp.,a Muncie bank that received $116
million under TARP.
Executive compensation packages paid in 2008 were established in 2007, long before the downturn began. And many were rewarding
past achievements as much as they were attempting to provide an incentive for strong performance in the future.
Republic Airways, for instance, has had a great run since Bedford—a CPA and pilot—took the reins a decade ago.
In that span, revenue grew from $88 million to $1.5 billion, with profit increasing every year.
Even last year, Republic earned $85 million. In September, it recalled 100 of its idled employees.
The company reported record revenue and profit despite "incredibly challenging business conditions," a spokesman
said in an e-mail response to questions.
The statement noted that the compensation reported in the company's proxy is based on the theoretical value of grants
that "may or may not translate into real value for our executives."
In a February conference call reviewing 2008 performance, Bedford noted that the company has achieved a compound annual
growth topping 40 percent over the past nine years.
"We're not going to see that growth in 2009. We're going to have to use our time wisely to focus on digesting
the growth that we've had, streamlining our business operations to maintain a position of cost leadership and quality
leadership in the regional airline industry, and prepare the business for the new challenges and opportunities ahead."
Thanks to the recession, most Indiana companies are in a similar position. They're not expecting much growth in 2009,
and perhaps not in 2010 either. That's why compensation experts are counseling boards to emphasize goals that peg performance
to improving stability, rather than aggressive sales.
They're also trying to get out in front of outrage from the rank and file.
"I advocate to clients, 'Tell your story,'" said Washington D.C.-based Watson Wyatt Worldwide compensation
consultant Sanjay Patel. "Talk about stock ownership. Talk about to what extent your executives' wealth is tied to
That's just what some Indiana companies are doing. Columbus-based Cummins Inc., for example, saw its stock slide 56
percent in 2008. As a result, CEO Tim Solo's total compensation dropped $1.5 million. The rest of the company's top
executives saw similar cuts.
"The principals behind compensation at
Cummins have not changed as a result of the recession," said Cummins spokesman Mark Land. "Cummins has always been
a place where pay has been closely tied to performance." In Solso's case, Land said, more than 83 percent of his
total compensation hinges on performance.
More than ever, executive pay is becoming a litmus test on capitalist philosophy. Those who side with labor see a system
that's out of balance—and desperately need of correction.
Those who align with management still believe executives' unique skills merit outsize pay, especially if it's not
given as base salary or an automatic bonus. Consider Don Brown, CEO of local software-maker Interactive Intelligence Inc.
He already owns 27 percent of the company. Yet the company's board in February 2008 granted him options to acquire
more, an award valued at the time at $429,300. The company ended up posting a disappointing 2008, with revenue increasing
10 percent, to $121 million, but profit tumbling 75 percent, to $4.3 million. The stock price also shed 75 percent.
Because Interactive missed its operating income target for 2008, the board late in the year canceled the option grant.
That meant Brown took home only his base pay, $350,000.
"We do try to structure plans so there are nice incentives, and if things go well, if the company is making money,
our board is very happy to see the executives well compensated," Brown said.
"If the company is not doing so well, we structure the compensation so they're not so well compensated. It just
seems like the fair way to go."•