Published: November 30, 2008 6:00 a.m.

http://www.journalgazette.net/apps/pbcs.dll/article?AID=/20081130/BIZ/811300447

 

Many want pay based more on performance

MARTY SCHLADEN

The Journal Gazette

In 2007, as their companies started to falter, many executives were
getting increases to compensation packages that already paid more in a
day than most Americans make all year.

Take Brian F. Roberts, chairman and CEO of Philadelphia-based
Comcast Corp. His actual compensation for 2007 was $39.8 million. In
hourly terms, assuming a demanding, 60-hour workweek, that’s $12,746 an
hour.

Roberts’ compensation for 2007 was only 4 percent more than in 2006.
But a CEO wouldn’t have to work long with that pay to amass enough for
a comfortable retirement, regardless of what became of his company.

Some critics, such as Rep. Barney Frank, D-Mass., chairman of the
House Financial Services Committee, think massive pay packages might
encourage CEOs to take risks that ultimately harm shareholders and
taxpayers.

Many others think the fortunes of highly paid executives should rise
and fall with their companies as virtually every executive compensation
plan promises. Because much of a CEO’s actual pay is spelled out years
in advance, however, that’s rarely the case.

For example, Comcast points out that in terms of bonus, incentives
and stock options, the corporate board awarded Roberts about $6 million
less in 2007 than it did in 2006.

But that doesn’t count the more than $22 million in options that
Roberts exercised in 2007 or the nearly $3 million in stocks that
vested after being awarded in earlier years.

Company spokesman John Demming released a statement saying that
Comcast designs its pay policies to attract the best people, pay them
for their performance and provide similar levels of compensation as
Comcast’s competitors do.

But the size of some executive-compensation packages has even some local CEOs crying foul.

“I think it’s gotten completely out of hand,” Donald Schenkel, CEO
of Tower Financial, said during a question-and-answer period last month
at a business forum at the University of Saint Francis.

He referred to one particularly egregious example, that of Alan
Fishman, CEO of mortgage company Washington Mutual Inc. In late
September, as his company collapsed, Fishman walked away with $18
million – after three weeks on the job.

As with many other small, regional banks, Tower avoided heavy
investments tied to subprime loans, although it did have to write off
some bad debts. Schenkel said, however, that his bank is sound and has
money to lend.

Schenkel was rewarded for his leadership during 2007 with a 4
percent raise over his 2006 salary. The result was total compensation
of $682,844.

“Compensation is often tied to the size of a company, but executives
at big companies don’t necessarily make better decisions than at
smaller ones,” said David Findlay, Warsaw-based Lakeland Financial
Corp.’s chief financial officer.

Lakeland’s share price has held its own as other banks’ stocks have
fallen, some dramatically. Findlay said it’s not an accident that his
company avoided some of the pitfalls that have hurt some of its
competitors.

“We manage for the long term, and we manage for consistent performance,” he said.

In fact, the $838,000 in stock options that CEO Michael Kubacki
exercised in 2007 is part of that strategy, Findlay said. Lakeland
executives have to wait five years to exercise options, giving them an
incentive to stay in their jobs and see to the company’s long-term
health, Findlay said.

“That’s pretty conservative,” he said.

Fair pay

Some experts think that, in general, companies’ systems of paying top executives work well.

“There really is a pretty strong tie between what a CEO gets paid
and the performance they deliver for their companies,” said Peter
Opperman, a partner in Mercer LLC, which advises companies on executive
compensation.

That’s true at least for some companies. A study published last
month by the Corporate Library said that in 25 of the 2,700
corporations surveyed, CEOs each saw a 90 percent drop in compensation
because of lackluster performance. One, Arbor Realty Trust Inc. CEO
Ivan Kaufman, received no compensation in 2007.

Kaufman is founder of Arbor’s parent company and a major shareholder
in Arbor. Under a management agreement with the parent company, Arbor
pays Kaufman only under an incentive plan.

As the real estate market went soft in 2007, the company didn’t meet
the requirements of the plan, according to Arbor’s SEC filings.

The Uniondale, N.Y.-based company didn’t return a phone call seeking comment.

But CEOs like Kaufman were the exception, the study found. Even
though the economy slowed and corporate earnings dropped, most CEOs of
large and mid-sized companies saw their compensation increase by 10
percent or more.

Paul Hodgson, the researcher who conducted the Corporate Library
survey, says the sheer size of CEO compensation insulates CEOs from the
ups and downs of their businesses.

“You don’t actually have to perform that well to get pretty
significant levels of compensation,” he said. “If you’ve just been
awarded 500,000 stock options five years ago, the stock price doesn’t
have to go up that much for that to be a pretty substantial amount of
money.”

But being well-paid and being financially secure can be two different things.

Opperman argued that even the best-paid CEOs are at risk if their companies tank.

“Ask Richard Fuld about that, the former CEO of Lehman Brothers,”
Opperman said. “He was well insulated, he made enormous amounts of
money, and his wife is out now selling their paintings.”

Fuld and his wife, Kathy, put about $20 million worth of sketches up
for auction in August as Lehman failed, the Wall Street Journal
reported. But the couple still had a sizable art collection, a $21
million Park Avenue co-op, homes in Vermont and Idaho, and a $13.75
million oceanfront home in Jupiter Island, Fla., the newspaper reported.

In fact, “golden parachutes” – huge paydays for executives who are forced out at big corporations – are common.

Lincoln National Corp. CEO Dennis Glass would get $56 million if
control of the company changes and he’s out of a job, $32 million if
the board fires him for poor performance, and $9 million if he’s fired
after a determination of misconduct, according to the company’s federal
filings.

Verizon Communications Inc. CEO Ivan Seidenberg would get $38
million if he’s fired without a finding of misconduct but nothing if
the board determines he committed fraud, violated the provisions of his
contract or was guilty of some other violation.

If, as some members of Congress are demanding, General Motors Corp.
forces out CEO Rick Wagoner in order to get a federal loan, Wagoner
will walk away with $9 million.

Pay decisions

Dean Spangler’s company has an effective way of holding him accountable.

The CEO of Bryan, Ohio-based Spangler Candy Co. jokes that self-preservation is his strongest job motivation.

“We have 125 shareholders, and I’m related to 110 of them,” he said
at the forum at the University of Saint Francis. “We don’t have
parachutes. If I do something wrong, they’re going to hunt me down and
kill me.”

For public corporations, the system is much different

Executive compensation is decided by compensation committees.
Company directors sit on committees that craft pay proposals that are
sent to the entire board for a vote.

In many cases, board membership includes the CEO whose pay package
is being voted on. And the directors voting on the packages usually are
top executives at other companies.

In the case of Lincoln National’s 12-member board, nine are current
or retired CEOs, chief financial officers, presidents or vice
presidents of their own companies.

Opperman points out that pay packages are based on those for
executives in companies of similar size and those in the same business
sector. But as the Corporate Library study shows, the pay rates are
tied to a peer group whose pay is rising much faster than it is for the
average family.

Ian Rolland, retired chairman and CEO of Lincoln National,
acknowledged that some boards have unwisely structured executive pay in
a way that rewards poor performance.

“I have said many times that I should have figured out a way to get
fired before I retired,” he joked to the audience at Saint Francis.

But he doesn’t believe the government should get involved. Instead,
a company’s shareholders should force boards to structure executive pay
responsibly, Rolland said.

Shareholder power can be limited, however.

Vanguard Group, one of the biggest institutional investors in the
United States, monitors corporate governance. But it rarely has more
than 2 percent or 3 percent of the voting shares in a given company’s
stock, said Glenn Booream, who heads up Vanguard’s corporate-governance
unit.

And shareholders might not have much of a voice with directors in
any event. When Lincoln National’s shareholders voted on the company’s
board this year, their only choices were the same 12 directors who were
already in place.

Hodgson, of the Corporate Library, proposed a more technical solution.

He recommends that companies give top executives stock options on
the following basis: The more the company’s stock outperforms the
market and other companies in its sector, the lower the price at which
executives can exercise their options.

Hodgson said giving executives large blocks of stocks and stock
options – or “equity compensation” – doesn’t amount to pay for
performance.

“The majority of equity compensation isn’t really tied to
performance,” he said. “It’s tied to the performance of the stock price
typically, which unfortunately is something of a blunt instrument.”

Stocks often go up with the rest of the market or for other reasons
“which are not specifically linked to the CEO’s actions, but just are
linked to general increases in stock values,” Hodgson said. “If we can
remove that element of it, I think we would see a much closer link
between pay and performance.”

mschladen@jg.net