Firms Measure a CEO's (Net) Worth

Last year, directors of fund manager Waddell & Reed Financial
Inc. looked at the roughly $70 million Chief Executive Henry Herrmann
had collected in stock, pension benefits and deferred compensation over
his 36-year career, and deemed it "sufficient" for retirement,
according to its proxy statement. The board stopped extra contributions
to Mr. Herrmann's retirement fund.

Waddell & Reed is among a growing number of
companies scrutinizing how much they have paid executives over time.
Nearly 15% of Fortune 500 firms said they took such "accumulated
wealth" into account in setting 2007 executive pay, up from 8.4% in
2006, according to data tracker Equilar Inc. Part of the increase is
due to the Securities and Exchange Commission, which is encouraging
companies to disclose the role of historical pay in their compensation
decisions. Few acknowledge reducing CEO pay or benefits, as Waddell
& Reed did.

The sums involved can be significant. The median CEO
in Equilar's study of 338 large companies held $56.7 million in stock,
outstanding stock options and accumulated retirement benefits. Its
analysis doesn't include gains from stock-option exercises, another big
source of wealth.

"Compensation committees are all wrestling with the
question of how much is too much," says Miles Meyer, vice president for
human resources at Kellogg Co.

In vetting 2007 pay for CEO David Mackay, directors of
the cereal maker looked at his $24 million of previously accumulated
shares, which they projected would grow to $65 million in five years
with equity grants and increases in Kellogg's share price. They
compared that with potential shareholder returns and the compensation
of CEOs running similar companies with similar performance, says Mr.
Meyer. Ultimately, the compensation committee didn't adjust Mr.
Mackay's pay, which included $3.2 million in salary and bonus and stock
options valued at $3.7 million.

"Intuitively, there's some point at which you'd say,
'Gee, that seems like enough wealth accumulated for the time being,' "
says Mr. Meyer. He says the committee hasn't discussed where that point
might be.

Some proponents view accumulated-wealth analyses as a
way to curb executive pay and forestall blowups, like the 2003 outcry
over former New York Stock Exchange CEO Dick Grasso's $187 million
retirement package. Many of the exchange's then-directors said they
didn't realize how big Mr. Grasso's total payout was.

THE BOSS'S PAY

 

See who's getting the largest salaries,
stock options grants and more. The Wall Street Journal has partnered
with Hay Group for an ongoing look at annual executive compensation at
the largest public U.S. companies.

When directors realize how much they have given
executives, there are "eye-opening, 'Holy Cow' moments," says Jesse
Brill, a San Francisco lawyer who advocates "turning off the hose" for
some CEOs. Others, including pay consultants Deloitte & Touche LLP
and proxy adviser RiskMetrics Group Inc., recommend that boards use
wealth analyses to compare pay with performance over the long term.

Once executives accumulate a significant amount of
equity, "you can ask very legitimately, 'Why should you pile more of
that on top?' " says Thomas Theobald, chairman of the compensation
committee at real-estate firm Jones Lang LaSalle. The company says in
its proxy that it adjusted 2007 equity grants for executives to reflect
"previous wealth accumulation," but Mr. Theobald declines to discuss
specifics.

Most companies approach the topic gingerly. Many -- like General Motors
Corp. -- say they look at past and potential pay when setting
compensation, but that it isn't a big factor in their decisions.
Others, such as Petroleum Development Corp., say they won't "punish" a well-paid executive by reducing current awards. Auto insurer Progressive Corp. says it awards equity based on performance, so capping awards could make pay uncompetitive.

Many companies take a nuanced view of how much is
enough. Directors at Waddell & Reed generally don't believe in
reducing awards just because executives have earned a lot in the past,
says compensation-committee chairman Ronald Reimer. But he says the
committee has reduced Mr. Herrmann's equity grants and boosted cash
since 2006, because the CEO will soon retire and owns plenty of stock
already.

Many CEOs aren't happy with the idea of capping pay. Aflac
Inc. Chief Executive Daniel P. Amos, who holds 9.9 million shares
valued at about $650 million, says he views equity awards as a way to
keep score of his performance and that he would be less motivated if
his pay was cut below that of other CEOs.

But Richard Brooks, chief executive of apparel maker Zumiez
Inc., says his 3.7 million shares -- valued at about $72 million -- are
adequate incentive. Mr. Brooks hasn't received stock options or equity
since 1993, and when other executives accumulate sufficient equity they
won't either, he says.

"At some point [getting more stock] doesn't change behavior," says Mr. Brooks. "So how is it going to change performance?"

Write to Phred Dvorak at phred.dvorak@wsj.com