Performance pay sends salaries into higher orbit

Execs' rewards overshadow raises given typical worker

By
David Milstead, Rocky Mountain News
(Contact)

Originally published 03:18 p.m., June 6, 2008
Updated 11:03 p.m., June 6, 2008

http://www.rockymountainnews.com/news/2008/jun/06/performance-pay-sends-salaries-higher-orbit/

 

Executive pay continues to increase at a pace far beyond the raises typical workers see in their paychecks.

Last year, the median compensation figure for the 50 best-paid
Colorado executives was $7.66 million, a jump of 25 percent from 2006's
$6.11 million.

By contrast, the average wage in Colorado in 2007 was roughly $45,000, the Rocky estimates, about 3.5 percent above 2006's figure.

The Rocky tallies pay for this annual survey by counting
salary, bonus and other cash payments, plus the value of restricted
shares and other long-term compensation plans that are based on the
company's stock. Then, we add stock option profits from the prior year.

This year's survey captures a shift in the way companies are paying
their leaders. There's a growing emphasis on performance-based stock
awards. Stock options, previously the favored form of incentive
compensation, are becoming a less-important part of the executive pay
package.

In past years, "shareholders embraced options as a way of aligning
management's and shareholders' interests; companies embraced them
because of their (previously) favorable accounting treatment," said
Shirley Westcott, managing director of policy at shareholder-advisory
firm Proxy Governance. (The cost of options didn't have to be reflected
anywhere in the company's income statement, so it was like giving away
free money.)

But, companies needed to issue millions of shares of stock when the
options were exercised, so existing shareholders' stakes got diluted.

"And options can also create perverse incentives - bolstering the
share price in the short-term to exercise options," Westcott said.

As stock prices collapsed in the early part of this decade, many
investors began to sour on options. The Financial Accounting Standards
Board then required companies to begin expensing options in 2006, and
the shift toward new forms of compensation was on.

Compensation consulting firm Mercer found that among America's 350
biggest revenue-producing companies, long-term performance- based plans
were nearly as common as stock options in 2007 compensation. Studies by
comp consultants Watson Wyatt and Frederic W. Cook & Co. came to
similar conclusions.

"If you look at some of the numbers, it's almost a flat-footed tie,"
said Donald Sagolla, a Los Angeles- based consultant with Mercer. "It's
not that options are going away. The higher up you get, the more you
really want the feet to the fire for specific performance."

Still, there is skepticism about the shift. Few believe these new
pay plans will reverse the longstanding expansion of executive pay,
even if companies turn in mediocre performance.

"More of these stock awards are dependent on meeting performance
targets than are option awards, and more are performance-related than
at any time in the past," said Paul Hodgson of The Corporate Library, a
Portland, Maine-based research firm that's often critical of pay and
governance practices. "But in many cases, the performance required to
vest in them is not as challenging as shareholders would expect."

Perhaps no company better illustrates the shift to performance-
based pay than Liberty Global, an owner of international
cable-television systems spun off from John Malone's Liberty Media in
2004.

All five Liberty Global executives named in the company's
compensation disclosure are among Colorado's 10 best-paid executives
for 2007, thanks entirely to a new stock-based incentive plan the
company implemented last year.

The value of awards under Liberty Global's senior executive
performance incentive plan last year ranged from $30 million to $55
million for each of the officers, with CEO Michael Fries getting the
biggest grant. The plan could pay even more when it concludes next
year, the company says.

According to Liberty Global's disclosure, its board used a
compensation consultant in late 2006 to conclude that Fries' total
possible pay, which included a stock option award, was below the 25th
percentile for the company's peers and "was no longer competitive."

Incentive plans

To retain Fries and the other top managers, the company created the
incentive plan, setting aside $313.5 million in maximum possible
awards. Just 13 participants are eligible for $302.5 million of that.
Fries has a maximum possible award of $64 million. Participants in the
plan received no other options or stock awards in 2007, and they will
not receive any this year, the company said.

Liberty Global will measure operating cash flow growth - "the
primary measure used by our board and management to evaluate our
operating performance," the company explains to shareholders in it most
recent proxy. If it grows at a compound annual rate of 12 percent for
2007 and 2008, adjusted for acquisitions, the awards will begin to kick
in. The maximum awards come at 17 percent annual cash-flow growth. (The
company said it posted 2007 cash flow growth of 16.2 percent, adjusted
downward to reflect acquisitions.)

Liberty Global structured the plan to prevent executives from
immediately walking away in 2009 once the goals are met. The company
intends to pay out the awards in stock over the three years from 2009
to 2011, but only if the executives stay with the company.

Liberty Global spokesman Rick Westerman said, "The reported stock
awards for our executives include the present value of a long- term
incentive plan put in place in the second half of 2006 that compensates
the team for superior operating performance over a multiyear period.
It's worth noting that our stock price was up over 30 percent in
calendar 2007 and up over 70 percent since the beginning of 2006,
significantly outperforming our peer group over both periods."

Past service rewarded

While Liberty Global's plan may represent the future of executive
compensation, many executives are still being rewarded for past service.

Crocs CEO Ron Snyder made nearly $42 million by exercising Crocs
stock options in 2007. The company's shares rose during 2007 from
$21.60, to $75, before settling in at $36.81. Snyder's options, granted
when Crocs was a private company, typically had exercise prices of $1
or less. (Crocs stock has subsequently sunk sharply, to below $10.)

At home builder MDC, shareholders got burned as the stock declined
over the year from $55.24 to $36.71. But the company's longtime top two
executives, CEO Larry Mizel and President David Mandarich, each made
more than $7 million by exercising stock options granted years before.

"There is usually a timing difference between executive actions that
result in a rising stock price and the year that options are exercised
and option profits are taken," said Peter Miterko, a consultant with
Denver Management Advisors.

"It might take two or three years of executive effort to show up in
the stock price, and the executive may not exercise until years after
that, if the stock price stays buoyant," he said. "Of course, the
opposite is also true. Share price might rise in a bull market, even if
company performance is worse."

Lucrative years at end

The long-term power of options often means an executive's final
years are the most lucrative ones. Typically, the executives exercise
bunches of stock options given out over multiple years. On top of that,
they collect other types of severance goodies.

Former Qwest CEO Richard Notebaert left the telco in early 2007, but
not before exercising $22.2 million in options. He also received just
over $8 million in severance pay.

Former Newmont Mining CEO Wayne Murdy made about $4 million in
option profits before his midyear retirement. His compensation was
boosted instead by $13.2 million in special pension benefits, awarded
as part of an employment agreement that gave him extra service time if
worked until he was 62.

You don't have to be a CEO to get this treatment, however. Newmont
gave former executive Vice President of Operations Thomas Enos $9.25
million in pension benefits in his final year.

Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.

 

By the numbers

Million-dollar men

Salaries of $1 million or more

* R. David Hoover, Ball Corp. chairman, president and CEO $1,030,000

* Gregory B. Maffei, Liberty Media president and CEO $1,000,000

* Larry A. Mizel, MDC Holdings chairman and CEO $1,000,000

Bonus, baby

Bonus and incentive pay of more than $2 million

* Gary D. Black, Janus Capital Group chief executive officer $6,315,531

* Jonathan D. Coleman, Janus Capital Group EVP and Co-CIO $5,495,867

* R. Gibson Smith, Janus Capital Group EVP and co-CIO $5,373,195

* Mark A. Hellerstein, St. Mary Land and Exploration former president and CEO $3,885,668

* Ronald R. Snyder, Crocs president and CEO $3,200,000

* Gregory B. Maffei, Liberty Media president and CEO $2,650,000

* R. David Hoover, Ball Corp. chairman, president and CEO $2,577,197

* Larry A. Mizel, MDC Holdings chairman and CEO $2,000,000

* David D. Mandarich, MDC Holdings president and COO $2,000,000

* Leo Kiely, Molson Coors Brewing chief executive officer $2,000,000

Lots of options

Executives with option grants valued at $3 million or more

* Gregory B. Maffei, Liberty Media president and CEO $12,406,752

* Edward A. Mueller, Qwest chairman and CEO $8,602,400

* John C. Malone, Liberty Media chairman of the board (former principal executive officer) $4,623,470

* Richard C. Notebaert, Qwest former chairman and CEO $4,548,370

* Ronald R. Snyder , Crocs president and CEO $3,925,390

* Charles Y. Tanabe, Liberty Media executive vice president, secretary and general counsel $3,508,037

Cashing out

Executives who made more than $6 million from stock option profits

* Ronald R. Snyder , Crocs president and CEO $41,797,105

* Richard C. Notebaert, Qwest former chairman and CEO $22,201,901

* Shane O'Neill, Liberty Global senior vice president, chief strategy officer $8,741,843

* Larry A. Mizel , MDC Holdings chairman and CEO $7,530,255

* David D. Mandarich, MDC Holdings president and COO $7,229,901

* Larissa L. Herda, Time Warner Telecom chairman, president, and CEO $6,978,752

* Michael T. Fries, Liberty Global president and CEO $6,650,302

* F.H. Merelli, Cimarex Energy chairman, CEO and president $6,281,250

* David B. Christofferson, Venoco former CFO $6,186,271

Best-paid female executives

Their rank in relation to the Top 50

* 11. Larissa L. Herda, Time Warner Telecom chairman, president and CEO $12,689,918

* 58. Robin C. Beery, Janus Capital Group EVP and chief marketing officer $3,115,531

* 59. Dessa M. Bokides, ProLogis former CFO $3,056,009

* 71. Paula Kruger, Qwest executive vice president, mass markets group $2,510,176

* 79. Martha D. Rehm, Vail Resorts former executive vice president and general counsel $2,279,717

 

Glossary of terms

* Bonus: Bonuses used to be pretty simple - a cash
payment in addition to salary, almost always an award for the company's
prior-year performance. Now, companies also disclose "non-equity
incentive plan compensation." That is cash given to an executive if the
company uses a specific formula or measurable goal to arrive at the
amount given. If it's just a bonus for good performance, it's still
called a bonus.

* Stock options: Options allow the holder to buy a
share of stock for a specific price for a set period, often for 10
years. As the share price rises, the option is worth more.

* Restricted stock: The stock is "restricted"
because the executives who receive it can't call their broker and sell
their shares immediately. Instead, either time must pass or the company
has to hit a certain goal.

In the past, most restricted stock was "time-based," meaning an
executive just had to keep working for one to five years to get the
shares. Now, more and more companies are issuing "performance-based"
shares, which require the company to hit certain financial targets, or
"market-based" shares, which require the company's stock price to
appreciate.