Arizona corporate executives' pay dips for 2nd straight year

Russ Wiles
The Arizona Republic
Jun. 29, 2008 12:00 AM

Call it the trickle-up theory.


Pressures exerted by a slow economy and soft stock market increasingly
are being felt in corner offices, underscored by a drop in pay for top
executives at Arizona public firms for a second straight year.


Chief executive officers and chairmen at 54 firms reported a median
compensation package of $868,000 for 2007, down from $1.09 million in
2006 and $1.11 million in 2005, according to an annual pay survey by The Arizona Republic.

"The economy has been bad, and when performance suffers, stock prices
suffer," said Steve Sanghi of Chandler-based Microchip Technology, one
of the top-paid Arizona executives on the list.


CEO compensation figures reported by The Republic include
salaries, bonuses, earnings from the exercise of stock options and
other forms of compensation, including various perks and benefits.


The decline came despite the local emergence of a corporation with
world-class compensation levels in Freeport-McMoRan Copper & Gold,
which set up shop in Phelps Dodge's Phoenix headquarters after the
mining firms combined last year.


Freeport-McMoRan chairman James Moffett and president and CEO Richard
Adkerson placed first and second among Arizona executives last year,
with compensation of $44.3 million and $41.3 million, respectively.
They were helped by an 87 percent return last year for the firm's stock.


A company spokesman also cited record cash flow, an increased dividend, debt reduction and other achievements.


Arizona also lost, through private buyouts or mergers, various firms
that used to place CEOs near the top of the compensation list,
including Phelps Dodge, Swift Transportation, Giant Industries and
eFunds Corp. (New firms on the list include First Solar Inc. and
Limelight Networks Inc.)


Among CEOs and chairmen who stayed on the list both years, about half
logged pay increases. Still, with stock prices falling at three-fourths
of Arizona companies in 2007, CEOs had a harder time cashing in options
at attractive prices.


Executives experiencing multimillion-dollar pay drops included John
Sperling of Apollo Group; Steven Hilton at Meritage Homes; Jonathan
Ornstein at Mesa Air Group; Sanghi at Microchip Technology; and Doug
Parker at US Airways Group.


For some, a drop reflected tough times at their companies; for others, it was more a case of the timing of stock options.


Several other Arizona CEOs enjoyed multimillion-dollar compensation
increases, including Philip Francis at PetSmart Inc.; Richard Federico
at P.F. Chang's China Bistro; Roy Vallee at Avnet Inc.; and Patrick
Smith at Taser International.


Avnet and Taser both logged double-digit profit and share-price gains for the year.


Joseph Reid at Capitol Bancorp drew a smaller salary and passed up
other pay in response to his firm's sharp profit drop in 2007, but his
compensation rose modestly from the value of stock awards that vested
during the year.


In many cases, CEOs cash in options a decade or more old. Sanghi, for
instance, said he exercised options last year that were granted in
1997, when Microchip's stock price was less than a quarter where it now
stands.


"Clearly, my long-term shareholders are very happy and don't mind
paying for that performance," said Sanghi, the only CEO of the several
who were contacted for this article who opted to comment.


Plenty of non-CEOs and non-chairmen also hit pay dirt last year, led by
Kenneth Schultz, executive vice president at First Solar, who along
with other executives cashed in on the Phoenix firm's hot stock price.
Driven by option exercises, his compensation totaled $40.7 million.
Arizona firms reported 42 non-CEOs and non-chairmen who earned at least
$1 million in 2007, down from 56 in 2006.

Flat-line trend

Amid a weak national economy and lackluster stock market, CEO pay
appears to have leveled out, although it's hard to say so definitively
because studies diverge.


For example, an Associated Press survey of more than 300 big firms
estimated median CEO pay at $8.4 million, up 3.5 percent from 2006. A Wall Street Journal analysis estimated median direct compensation at $8.8 million, also up 3.5 percent. But Forbes
tabbed CEO pay at 500 large firms at $12.8 million, down 15 percent
from the previous year. Various calculation methods and different
sample sizes account for the discrepancies.


Most Arizona public corporations are much smaller than the big national
firms analyzed in these studies, and their CEOs earn smaller paychecks.


In an analysis of midsize corporations that are closer in size to
Arizona firms, consultant Mercer reported CEO compensation fell 4.6
percent on average to $4.7 million.


Even in a subpar year, the typical size of CEO paychecks raises
eyebrows at a time when so many Americans are struggling financially
and corporate prospects dimming.


"Shareholders, who are experiencing deteriorating returns, are becoming
more activist than ever and want to see compensation outcomes linked to
sustained financial and share-price results," said Diane Doubleday, a
Mercer leader in the executive-pay area.


Even in a down year, CEO compensation at Arizona firms was still 26
times that of average personal income in Arizona of $33,000 for 2007.

Shareholder apathy

Although many people seem interested in the subject - last year's Republic pay study attracted more than 300,000 page views at azcentral.com - it's rare when shareholders do much about it.


Some investors refrain from criticizing management for fear it could
hurt their stock prices. Many balk at reading about compensation
practices in proxy reports, especially because such discussions can run
more than a dozen pages. Corporate directors oversee executive pay, yet
directors frequently are accused of being too cozy with management.
Many directors are retired CEOs themselves.


At any rate, shareholders might take more interest if the topic emerges
as a significant election issue. John McCain recently lashed out at
exorbitant severance packages and said he supports shareholder votes on
executive pay. Barack Obama last year co-sponsored legislation offering
shareholders nonbinding votes on executive compensation. The bill
passed the House but not the Senate.



Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.