After three years of modest gains, higher corporate earnings and rising stock prices helped many executives post their largest personal financial windfalls since the go-go 1990s.
CEOs pulled in median compensation of about $14 million in 2004, up 25 percent from 2003, according to a USA Today analysis of the largest 100 public companies filing annual proxies through March 25. Compensation includes salary, bonus, incentives, stock awards, stock-option gains and potential returns from fresh option grants. Data were provided by executive-pay-tracker eComp Data Services.
USA Today reviewed several hundred fiscal 2004 proxy statements filed with the Securities and Exchange Commission and found that some of the biggest compensation winners oversee small companies. Coach's Lew Frankfort pocketed $84 million exercising options, and received fresh grants worth more than $130 million, while Forest Laboratories' Howard Solomon gained $90.5 million from exercising options. Across a broad cross-section of companies, there was extensive use of income-boosting retention bonuses, supplemental retirement pay and perks ranging from tax reimbursements to personal use of corporate jets.
''Forget restraint,'' says Paul Hodgson, analyst for shareholder watchdog group The Corporate Library. ''After years of moderate gains, it's business as usual.''
Institutional shareholders, the corporate governance movement and tighter regulatory scrutiny mandated by 2002's Sarbanes-Oxley Act have prompted greater corporate oversight by directors and have emboldened more boards to oust CEOs over non-performance, malfeasance, even moral lapses. Despite new Nasdaq and New York Stock Exchange rules mandating board autonomy, directors remain largely beholden to management when it comes to compensation.
Compensation consultants say many boards are more diligent in linking pay for performance and sensitive to shareholder criticism, especially after several slow years on Wall Street. But ''there's still a culture that says any sort of positive performance has to be met with a significant increase in pay,'' says Pat McGurn of proxy adviser Institutional Shareholder Services. ''It's become an executive entitlement system.''
Since scandals at Enron, WorldCom and other companies, directors share the same liability for corporate collapses as the CEOs they oversee. So it's understandable that most spend more time scrutinizing management over finances than over executive compensation. Based on current proxy data, there's little apparent change.
"It could've been worse": Many boards have changed pay practices to better align interests with shareholders. PepsiCo, among others, jettisoned traditional stock options for performance-based restricted shares that are worthless unless earnings targets are met.
Board consultants contend CEO pay would have been even higher if not for more diligence. ''Directors are giving a lot more consideration to what they're handing out,'' says Blair Jones of Sibson Consulting.
Veteran board consultant Ira Kay of Watson Wyatt agrees. ''Keep in mind that what executives are asking for is quite a bit more than what compensation committees are giving. So it could have been worse.''
At least there is evidence that some CEOs are tempering their pay. Citigroup CEO Chuck Prince, noting regulatory setbacks in the USA and abroad, asked directors to cut his incentive award 15 percent.
Other executives remain tied to pay plans regardless of stock performance. Tommy Hilfiger's contract with the apparel marketer that bears his name pays him $900,000 a year. The company's incentive plan pays Hilfiger 1.5 percent of annual sales above $48.3 million, which provided a $17.4 million bonus in 2004, $19.7 million in 2003 and $21.5 million in 2002. Hilfiger shares? They peaked at $41 in 1999. Wednesday's close: $11.64. The company declined comment.
Given increasing shareholder unrest and some shift in the fraternal culture among directors, ''We're seeing some make moral and ethical obligations to shareholders to make sure pay practices are reasonable,'' says Bill Coleman of compensation tracker Salary.com. ''But you've got boards still saying, 'What does the CEO want?' Most directors are in the ostrich crowd, sticking their heads in the sand and doing what they've always done.''
Among companies where pay and stock performance diverged:
Cincinnati-based Fifth Third Bancorp's shares lost 20 percent and earnings fell 12 percent. But CEO George Schaefer received an $825,000 bonus after directors used their ''best business judgment'' analyzing measures such as the economy, his progress on regulatory matters and leadership objectives, according to its proxy. Schaefer also got options worth up to $17 million and gained $9 million exercising options. The company did not return calls.
''CEOs should take the biggest hits when the company doesn't perform,'' says retired Medtronic CEO Bill George, author of Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value. ''We get the benefits when business is good. We should take the biggest hit when it doesn't. Boards can't justify incentive pay because management did as well as it could under the circumstances.''
''There can be disconnects in incentive pay and actual performance,'' says Jan Koors of consultant Pearl Meyer & Partners. ''When there are so many subjectives to consider, it's all hocus pocus.''
A competitive market: CEO pay will likely spiral higher as the hunt for seasoned replacements at companies such as Fannie Mae and Boeing force boards to pony up fat sign-on deals. Hewlett-Packard just hired NCR's Mark Hurd in a four-year deal potentially worth more than $70 million.
Vacancies at a handful of high-profile companies overshadow broader upheaval. Outplacement firm Challenger Gray & Christmas counted 103 CEO departures in February - the first monthly turnover of more than 100 CEOs since early 2001 - and 92 in January.
A robust CEO job market makes retention crucial at other firms, further driving pay.
Increasingly, paying up for talent applies to next-tier managers, especially CFOs. Apple directors want shareholders to approve plans to pay key managers up to $5 million in annual bonuses. Without it, Apple says, its executives make 35 percent less cash than competitive market rates. More problematic, governance experts say, are boards boosting potential payouts even when there is little apparent rationale for higher pay, particularly at companies run by founders or long-tenured CEOs nearing retirement.
Even if boatloads of CEOs are not threatening to jump ship, base salaries and target levels for bonuses are creeping higher as companies benchmark rivals. Many boards try to keep their CEO's pay above median levels, a practice known among pay critics as the Lake Wobegon effect: where most every CEO is considered above average. Says compensation expert and UCLA professor David Lewin: ''Pay keeps ratcheting up because everyone tries to do better than the Joneses rather than just keeping up with them.''
Revenge of the shareholders? Increasingly, shareholders are challenging boards to temper CEO pay. More than 100 proposals to curb pay, set stringent performance guidelines and limit severance packages are on shareholder ballots this proxy season, says Shirley Westcott of adviser Proxy Governance. Most boards have resisted similar proposals, contending they limit the ability to attract, retain and motivate management. Even when such measures have gotten majority shareholder approval, boards often ignore them.
Also under consideration: Nearly two dozen shareholder proposals seeking to end the boardroom's insular atmosphere where most shareholders have little choice in selecting directors, essentially affirming management's nominees. Most companies reject the idea and recently persuaded the Securities and Exchange Commission to table implementing an open-access measure enabling shareholders to nominate board candidates.
''Shareholders have little influence, if any, because directors literally can't not be elected,'' Bowie says. ''Most are chosen by boards, and there are the same number as board seats. It's like the communist election system: You can't lose.''
Until regulators require companies to provide more disclosure on pay practices and open up director elections, boards are under no pressure to change, governance experts say.
''Large pay packages continue to touch a raw nerve,'' says Harvard professor Lucian Bebchuk, author of 2004's Pay Without Performance: The Unfulfilled Promise of Executive Compensation. ''As long as boards are unaccountable, Corporate America won't change and fundamental problems will remain.''