Cincinnati Enquirer, June 20, 2008 -- Who has say on pay?

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It is now easier than ever to determine how much individual
executives at publicly traded companies get in salary, bonuses, stocks
and perks.

But have you ever tried figuring out how and why those pay figures were set?

An
Enquirer analysis of regulatory filings by the area's major public
companies shows that several companies did not reveal the metrics, or
the measuring stick, used to determine whether bonuses and stock grants
are awarded - despite new rules set by federal regulators two years ago
requiring more disclosure on how executive compensation figures are
determined.

In general, those pay packages are going up and down with the
fortunes of the individual firms. But the vast majority of area firms
did not reveal the target numbers needed to get incentive-based pay and
stock.

This mystery and perceived lack of transparency
surrounding how compensation packages are determined remains the crux
of the emotional issue of executive pay, experts say.

• Lafley's pay not high for top CEOs

• How we calculated executive compensation

• What's next for executive pay legislation

"The
fact that this is all done behind a curtain with no shareholder input
or knowledge has been the criticism for years - especially as executive
pay takes an increasing share of a company's revenues and profits,"
says Barbara Black, a securities law professor and director of the
University of Cincinnati's Corporate Law Center.

"How to
determine and then disclose the goals, how to measure whether they meet
the goals and then what to tell the public and shareholders - those are
the money questions here."

In fact, this perceived lack of
clarity around how pay is set has gained the attention of the
Securities and Exchange Commission, which toughened the compensation
disclosure rules in late 2006.

The agency that regulates
financial filings by publicly-traded companies issued more comments
(which are non-binding and do not require a response) on the lack of
disclosure of performance targets than on any other topic when it
reviewed 350 proxy statements last year.

A separate review by The
Corporate Library late last year found that less than a third of the
companies listed on the S&P 500 index disclosed performance targets.

"It's
the single-biggest issue the SEC has with companies right now," says
Paul Hodgson, senior analyst with the Portland, Maine-based corporate
governance and compensation research firm. "I would imagine there would
be even more attention on this than last year."

PUTTING STOCK IN PAY

The Enquirer reviewed area executive compensation packages,
determining values by analyzing 38 companies' proxy statements, which
include details on 2007 pay packages for executives.

Of those on
both lists, 122 executives saw the values of their compensation package
decrease and 28 had their pay packages increase - and there was a very
strong correlation between that and company performance numbers such as
profits, revenues and stock price.

Many of those packages
included major chunks tied up in stock grants and options, however, an
offshoot of a 1993 tax law change by Congress that said any
non-incentive pay (salary) over $1 million was no longer tax-deductible.

Most
area companies saw their stock prices decline as the markets overall
had a down year in 2007, and compensation followed for many executives.

Downtown-based
media company E.W. Scripps' stock price was down 10.1 percent over
2007, for example, and profits turned into a loss; company president
and chief executive officer Kenneth W. Lowe saw his overall
compensation fall 44 percent to $5.4 million.

On the other hand,
West Chester-based steel producer AK Steel Corp. saw its 2007 profits
rise more than 3,000 percent, and its stock price more than doubled
during the year. AK's top executive, James Wainscott, saw his total
compensation package go up 71 percent - including a stock package worth
$4.2 million. The stock package value alone more than doubled in value
over 2006, but Wainscott also saw his non-equity compensation go up 49
percent.

This linkage between the values of pay packages and
stock price makes it hard to determine who actually got a raise and who
got a pay cut based on individual and company performance, experts say.

For
example, Fifth Third president and CEO Kevin Kabat had an overall pay
package worth more than $10 million in 2007 - and got a significant
raise on paper because of a promotion. But included was a grant of
nearly 750,000 stock options that Kabat cannot cash in unless Fifth
Third's stock price hits at least $38.27 a share.

Given that
Fifth Third stock is currently trading around $10 a share, and that any
profit would only come from the difference in the option "strike price"
and the market price, a big payday for Kabat - named chairman last week
- off these options is at best remote for the immediate future.

Jannice
Koors, managing director for the Chicago office of compensation
consulting firm Pearl Meyers & Partners, says determining the
actual worth of such equity-based compensation by looking at the proxy
statement remains difficult, adding that the figure in that document
"has nothing to do" with how much executives might profit from stock
awards.

Yet despite these issues, Koors and others say executives should have a significant portion of pay tied up in company stock.

"Obviously
for a publicly traded company the ultimate definition value of
shareholder value is stock price, so it is absolutely critical some
portion of the executive pay package is directly linked to creation of
value for shareholders," Koors says. "Fundamentally, we don't live in
an age of indentured servitude - we do have to pay these people to work
for our companies and pay them competitively."

Still, Koors acknowledges there remains "a lot of noise" and lack of clarity around determining the overall number.

WHO SETS THE NUMBER?

On paper, compensation committees for individual boards have final
say over how much executives make and how incentives and goals are
reached.

And those committees have gotten more influence over
executive pay with several rule changes and requirements put into place
over the last decade after corporate scandals at Enron, MCI and other
companies.

In 2003, the New York, Nasdaq and other major stock
exchanges required member companies to have "independent" compensation
committees, meaning those board members could not have any affiliation
with the company or be an officer of the company.

These coincided
with other reforms at the time, most notably the Sarbanes-Oxley law
that also required companies to have independent audit committees,
which are responsible for reviewing and approving a company's financial
documents.

"The days of executives treating the company as their
own private piggy bank are pretty much gone," University of Denver
securities law professor Jay Brown says. "There is a different regime
in place now. And these boards do have a tough job in trying to attract
and retain talent while keeping the best interests of the shareholder
in mind."

But when asked to discuss how their board's executive
committees determined executive pay packages, or even in requesting
access to individual members of compensation committees, several area
companies declined, saying they would not go any further than what was
in the proxy statement.

One who would talk was Chiquita Brands
International chairman and chief executive officer Fernando Aguirre,
who sees the issue from both the executive and board perspective - he
is on the board of directors for beverage bottler Coca-Cola Enterprises
and serves on that board's executive compensation committee.

Aguirre says boards are increasingly independent and that he believes he has a genuine personal stake in how Chiquita performs.

"About
60 percent of my compensation is equity-based, and only 20 percent is
fixed, as in my salary," says Aguirre, who earned a 2007 compensation
package worth about $5.4 million that included a major stock grant
deferred from 2006. "So that means everything else is variable - and I
got roughly 50 percent of my target compensation in both '06 and '07.
And as a CEO, I can certainly refute any argument that it is possible
to manipulate the stock price to my own benefit - there are just too
many checks and balances in place now.

"As for boards, I would
say that the movement toward transparency has helped, but we need to be
careful that the pendulum does not swing all the way out there."

Chiquita
did disclose that it used net income for its short-term awards and
earnings per share for its long-term goals - and that it did not award
executives either short-term or long-term awards in 2007.

But
Aguirre declined to reveal specific financial targets the Chiquita
board set for both its long-term incentive program (paid in stock) as
well as the actual numbers used for its bonus and short-term stock
award programs.

He says such disclosure would reveal sensitive
information to competitors - a very common reason given by firms for
not disclosing target numbers or the thought behind them.

That lack of specific disclosure remains the essential problem with the system, says The Corporate Library's Hodgson.

"This is something that happened in the past, so it makes no sense for them not to disclose it," says Hodgson.

RISING TIDE

In addition to company performance measurements, compensation
committees increasingly are using "peer reviews," or a comparison of
compensation at similar companies.

For instance, at
Cincinnati-based Kroger Co., a compensation committee of board members
keeps the executives' compensation in line with industry peers and
structures bonuses for long-term impact, a spokeswoman said.

David B. Dillon, chairman and chief executive of Kroger, received a $9 million pay package, up from $7.5 million for 2006.

"Kroger
had an outstanding year and exceeded several performance goals,
including higher-than-expected same-store sales, about 5 percent each
quarter," said spokeswoman Meghan Glynn.

As required by the 2006
SEC disclosure rules, many companies locally and nationally are
starting to show the other companies used in that comparison. In
addition, they are required to disclose which consultants they work
with, if any.

Disclosure of peer review was supposed to shed
further light on the process and potentially put a curb on pay, but
Brown and others say this has only led to further escalation of
compensation packages.

"There is no question that this is putting
upward pressure, and it leads to the argument from companies that if
they are paying someone $10 million and he wants $14 million because
his competitor is getting it, he will walk if he doesn't get it," Brown
says. "I do not believe that is a credible argument though. Everyone
loses sight of what they are actually making vs. what they could make."

Koors calls it "the Lake Wobegon" effect.

"Everyone
wants to think that their CEO is above average, to paraphrase Garrison
Keillor," says Koors. "Well, everyone can't get paid above the average
without pushing the pay up everywhere. You've got to remember that the
executive suite at a major publicly traded company features some of the
most competitive egos you will run across, so that will always be a
part of it."

Chiquita's Aguirre says that it comes down to
picking appropriate peer groups, adding that he realizes that he "never
will be able to match what P&G pays, for example."

For Brown, even if companies are increasingly revealing metrics and peer comparisons, they are not answering the key question.

"What
shareholders are asking is whether this is just political cover for
boards so they can do what they've always been perceived as doing,
which is to give the CEO what he wants," Brown says. "The problem is
that people ... do not believe that the board is making a compensation
decision that is really based on the CEO's true value to the company
and in the best interest of the shareholders.

"And despite all these new rules and supposed independence, the jury is still out on that one."

Staff writer John Eckberg contributed.