By JOANN S. LUBLIN
Gilbert F. Amelio cried all the way to the bank.
During his 17-month tenure as head of Apple Computer Inc., the company racked up losses totaling nearly $2 billion. But when the board ousted him last summer, Mr. Amelio walked away with severance pay of $6.7 million, in addition to his $2 million in salary and bonus for the year ended Sept. 30. And Dr. Amelio vows to seek a still juicier deal in his next CEO job. Despite the severance windfall, he says the Apple package "didn't protect my downside as well as I had hoped it would."
Welcome aboard the Chief Executive Gravy Train. It overflows with treasure when things go well -- and even when they don't. Corporate boards see such unfettered largess simply as the price they must pay for luring and retaining executive talent amid a hot job market. For top corporate bosses, the message seems to be: No gain, little pain.
"You are definitely losing the linkage between pay and performance," says Carol Bowie, research director of Executive Compensation Advisory Services, a consulting firm in Springfield, Va. "There is no longer any risk financially to being a CEO."
Such "risk-free" compensation takes many forms besides sweet sayonara. CEOs get inflated signing awards and guaranteed first-year bonuses. Colossal grants of stock options and restricted shares. Midterm "retention" bonuses tied solely to longevity. Loans for share purchases that are insulated against plunging prices.
Many investors find the trend abhorrent. For the CEO, however, it all adds up to a trainload of dough. Last year, chief executive officers scooped up an 11.7% increase in salaries and bonuses, on the heels of an 8.9% jump in corporate profit, according to a survey conducted by New York compensation consultants William M. Mercer Inc. for The Wall Street Journal. It's the swiftest rise in the survey's nine-year history.
Mercer's analysis, based on the latest proxy statements from 350 of the nation's biggest businesses, found that the top executive's median salary and bonus climbed to $1,596,667, from $1,471,250 in 1996. The prior year's figure represented a 5.2% boost.
The increase in CEOs' cash pay again outpaced that of their white-collar employees, primarily because business titans are more likely to get annual incentives on top of their salary increases. Paychecks of nonunion salaried workers grew a modest 4.2% in 1997, compared with 4% in 1996.
Excluding bonuses, the gap in pay increases between big bosses and their salaried subordinates narrows. Base pay for CEOs advanced 5.3% in 1997, compared with 5.1% the year before, according to the Mercer analysis. Overall U.S. wages and benefits went up an estimated 3.1% last year, compared with 1996's 2.8% rise.
One for the Books
But add in the windfall from stock-option exercises, and there's really no comparison. Mercer's study found that 179 corporate chiefs cashed in options during 1997, up from 166 the previous year. And thanks to the protracted bull market, the median gain realized from these option deals reached an all-time high of $1,868,268, up from $1,256,936 in 1996.
Sanford I. Weill, chairman and chief executive of Travelers Group Inc., landed a spot of his own in the record books: He realized a stunning $220.2 million gain from exercising options to acquire 14.7 million shares last year.
Altogether, business leaders at the companies surveyed saw their total compensation surge 29.2%, to a median of $3,093,018, exceeding the $3 million mark for the first time in any Journal study dating back to 1989 pay data. That compares with an 18% increase to $2,375,620 in 1996. (Total compensation includes salaries, bonuses, the value of restricted stock at the time of the grant, gains from option exercises and other long-term incentive payouts.)
The vibrant stock market gave U.S. chief executives huge piles of potential wealth, too. Median unrealized gains from unexercised options jumped 72% to nearly $9 million, the study showed. Michael Eisner, Walt Disney Co.'s CEO, sits atop the biggest stash. When Disney's fiscal year ended last Sept. 30, Mr. Eisner had unexercised options worth $590.6 million.
The market's rising tide "lifts all boats -- and so even mediocre performance gets paid," says B. Kenneth West, senior consultant on corporate governance for New York-based TIAA-CREF, the world's biggest pension fund. At the same time, the growing scarcity of talent means that bad performance isn't penalized, either.
Many boards no longer insist "that if you don't produce, you don't get paid," agrees Alan Johnson, managing director of New York pay consultants Johnson & Associates. Corporate chiefs hold greater leverage to say, " 'Show me the money' no matter what," Mr. Johnson says.
That certainly seems true for 44-year-old Richard E. Belluzzo, named chairman and CEO of Silicon Graphics Inc. in late January. The ailing computer maker, based in Mountain View, Calif., lured the Hewlett-Packard Co. star by promising him handsome rewards even if Silicon Graphics's share price tumbles for years.
Mr. Belluzzo won options to acquire three million shares -- backed by an unusual guarantee, according to his contract: If those options and other stock awards prove worthless after four years because of a falling share price, Mr. Belluzzo will collect a $10 million consolation prize. The rationale? To match what he would leave behind at H-P. On the day Mr. Belluzzo quit H-P, he surrendered 76,406 restricted shares worth about $4.7 million. (At the same time, however, he also realized an indicated gain of about $3.6 million from exercising his H-P options.)
"What does it take to attract somebody of this caliber?" asks Kevin Burr, a Silicon Graphics spokesman. "You have to be competitive." Mr. Belluzzo also received a starting salary of nearly $1 million, plus a $1 million signing bonus, a person familiar with the situation says.
AT&T Corp. enveloped its new leader, C. Michael Armstrong, with similar Teflon protection. If his 224,561 restricted-stock units have a value of less than $10 million in October 2003, the telecommunications giant will make up the shortfall in cash.
Major investors are deeply suspicious of such money-back guarantees. Mr. Belluzzo "had better perform with that kind of deal," says Mr. West of TIAA-CREF, whose CREF equities arm owned 1.95 million Silicon Graphics shares at year end. "If he doesn't, institutional investors will raise hell."
The most popular mechanism for lowering a chief executive's pay risk is the so-called megagrant. These grants consist of a stock option with a face value of more than three times the executive's salary and bonus, or a restricted-stock award with a face value of more than the cash compensation.
Either way, the executive has almost nothing to lose and plenty to gain. The restricted-share awards cost the recipient little or nothing, and their limitations usually disappear after three to five years. So even if the stock price falls, the CEO can still make money by selling the shares after a few years. A sizable-enough wad of options, meanwhile, produces plentiful profits from even a tiny advance in the share price.
Last year, 164 businesses awarded their CEOs megagrants, up from 134 in 1996 and the highest level since the debut of The Wall Street Journal survey.
Eric Schmidt landed a stunning double megagrant -- hefty options and restricted stock -- when Orem, Utah, network-software maker Novell Corp. tapped him as chief early last year. Dr. Schmidt received options to buy 2.75 million shares with no performance strings attached. He also got 900,000 restricted shares, initially valued at $7.7 million, for which he paid a token $9,000. Novell has said the restricted stock partly compensated him for options he forfeited by leaving Sun Microsystems Inc.
If Novell's shares merely climb at a 5% compounded annual rate through 2002, Dr. Schmidt's combined package would be worth $16.3 million, an analysis by SCA Consulting concludes. Yet with such sluggish share-price growth, long-term investors "will have lost money, because that's not a competitive return," contends Robin Ferracone, president of the Los Angeles consulting firm. A Novell spokesman declines to comment. The company's share price plunged 64% in the five years before Dr. Schmidt arrived last April.
At any rate, multiple megagrants remain a rarity; only 13 of surveyed concerns offered them to their CEOs in 1997.
Going Nowhere
Risk-free packages are being used not only to lure new talent, but also to retain veterans. More long-tenured chiefs are collecting sizable retention bonuses, which they keep for staying put -- no matter how poorly the business and investors fare.
Data General Corp., for instance, decided in September to offer veteran CEO Ronald L. Skates a $7 million retention bonus. The 55-year-old Mr. Skates, who has headed the Westborough, Mass., maker of computer servers and storage systems since 1989, must repay part of the award if he leaves before Oct. 1, 2000.
"The worst thing in the world that could happen to this company would be that we would lose Skates's leadership," says venture capitalist Fred Adler, chairman of the board's executive committee and a member of its compensation panel. In today's frenzied job market, he adds, "compensation committees realize their power can't be arbitrarily exercised."
Data General, which had higher fiscal 1997 profit after losses from 1992 to 1995, "is out of the woods," Mr. Adler says. But "a turnaround is never complete," and keeping Mr. Skates is worth the cost.
Shareholder advocates disagree. "Retainer bonuses really drive me nuts," says Nell Minow, a principal of Lens Inc., an activist investment fund in Washington. "Sticking-around money is never in shareholders' interest. Performing money is in shareholders' interest."
The company stirred further controversy by granting Mr. Skates a $10 million performance bonus last fall, based on a formula pegged to a brief upturn in its market capitalization. The value of Data General shares during the 30 trading days ended Sept. 27 more than doubled from the same period a year earlier. The stock price hit a 1997 high of $37.25 in late August. But the price generally slid during the fall, reaching a seasonal low of $16.31 on Dec. 12.
A 30-day measurement is too small to "reflect what happens when the window closes," argues Ms. Minow, the activist. "That's the definition of a 'no downside'" deal. Pay experts say that if Data General's pay panel tracked market-capitalization changes over a full year, Mr. Skates would more likely share investors' pain. Responds Mr. Adler: "Thirty days is a perfectly reasonable formula."
While sticking around may be lucrative, getting kicked out isn't so bad either -- as Dr. Amelio's $6.7 million severance package illustrates.
The deposed Apple leader defends his sizable exit pay by citing the risks he took to run the struggling computer maker. "I was walking away from an awful lot of money that I had accumulated over five years" as the head of National Semiconductor Corp., recollects Dr. Amelio, now a partner of equity buyout firm Parkside Group. Without such downside protections, he maintains, "you would not get good people to take difficult jobs."
Columbia/HCA Healthcare Corp., meanwhile, paid Chairman and Chief Executive Richard Scott about $10 million after ousting him last July amid a massive Medicare fraud investigation. The total includes a five-year consulting contract costing the Nashville, Tenn., hospital chain $950,000 a year. That's $50,000 more than Mr. Scott earned in annual salary in his final full year at the helm.
And when Clyde T. Turner resigned as chairman and CEO of Circus Circus Enterprises Inc. in late January, the Las Vegas casino company refunded the $2 million Mr. Turner had spent to acquire options on two million shares. The depressed share price had made those options worthless.
Why would the company step in and cancel his investment?
"That's why they are called CEOs," says Glenn Schaeffer, Circus president. "When a chief executive officer of a major corporation leaves, they have more negotiating room than people in the ranks."
Investor advocates say that's not a good enough reason. Bartlett C. Naylor, the Teamsters union's director of corporate affairs, has introduced a shareholder resolution urging AT&T directors to seek investor approval before they offer contracts providing more than $3 million of severance. AT&T opposes the measure. Similarly, New York insurance regulators last week ordered beleaguered Oxford Health Plans Inc. to suspend payments to former Chairman Stephen F. Wiggins under the $9 million severance package awarded when he stepped down in February.
Some institutional investors are challenging boards directly over what they see as CEO overpayment for underperformance. The nearly $10 billion Teachers' Retirement System of Louisiana sued Occidental Petroleum Corp. directors after they paid $95 million to buy out CEO Ray R. Irani's contract last fall. The pension fund, which owns 194,100 shares of Occidental, had seen its stake in the Los Angeles company lose much of its value in recent years. (Last year, Occidental posted a net loss of $390 million, following special charges.)
New Deal
Occidental made the huge payout to replace its longtime leader's employment agreement with one that cut his base salary, scaled back retirement benefits and linked his overall compensation to corporate performance for the first time. The old accord had included an automatic seven-year extension and guaranteed the 63-year-old Dr. Irani nearly $5 million in yearly salary, bonus and restricted-stock grants.
The pay panel justified Dr. Irani's 1997 bonus of $1.4 million -- up from $872,000 in 1996 -- by citing its "subjective assessment of his personal accomplishments." The bigger bonus more than offset his shrunken salary and restricted-stock awards last year. (In addition, Occidental directors awarded him options on one million shares, 800,000 of which vest if the share price achieves certain targets.)
But the pension fund's lawsuit, filed in state court in late January, contends that the $95 million payment "significantly reduced, if not eliminated" the performance-based incentives in Dr. Irani's new contract. "Why didn't they just buy him out and fire him?" asks James Hadley, director of the Louisiana teachers' fund. "Based on the performance of the company, I don't think it was warranted to try to retain" that CEO.
Occidental declines to comment on the suit. "Dr. Irani has proven to be an effective leader [with] a management team whose leadership and experience are an important asset to Occidental," the board compensation committee wrote in the latest proxy statement.
Investor advocates aren't the only ones who dislike risk-free compensation packages for CEOs. In some boardrooms, in fact, there's a quiet backlash against that trend. And even some chief executives have begun to accept packages with much harsher penalties for underperformance.
One telling sign: the wider use of performance-linked options awards, with higher strike prices and stricter time limits. Nearly 19% of 200 big U.S. businesses that have so far disclosed options grants made last year attached strings to them, up from 12% of 865 companies in 1996, says the newsletter Executive Compensation Reports.
John Lauer, president and CEO of Oglebay Norton Co., got 380,174 "premium" options for joining the Great Lakes shipper and maker of industrial sand last December. The options have an exercise price of $38 a share, $6 higher than the fair market value at the time of the grant. If investors approve the award at next month's annual meeting, he could end up with an 8% stake in the Cleveland concern. He can't exercise the options until January 2001.
"For me to get a payoff, I have to grow this company better than the market grows," says Mr. Lauer, 59, who retired as B.F. Goodrich Co.'s president in 1994 and next month will complete his Ph.D. dissertation on the consequences of lavish CEO pay. Yet with conventional options, "there is only upside potential," he notes. Most CEOs amass "municificent levels of compensation whether they perform or not."
At Oglebay Norton, Mr. Lauer also takes zero salary and initially bought $1 million of shares. The company matched his outlay with a $1 million grant of 25,744 restricted shares.
William H. Joyce, Union Carbide Corp.'s chairman and CEO, represents another example of the budding backlash against minimal pay risks. Mr. Joyce will forfeit a year's salary of $850,000 -- he already set aside a third of that last month -- if the chemical company doesn't earn at least $4 a share fully diluted in 2000.
Sixteen senior executives joined his pay gamble by agreeing to forsake 65% of their salaries for that year. Dr. Joyce and his colleagues could collect up to eight times their money at risk if per-share earnings hit $4.75 in 1999 and 2000.
The Union Carbide leader devised the plan last year after talking with investors such as Soros Fund Management, which wanted a concrete executive commitment to eliminate the effect of commodities cycles on earnings. In 1997, somewhat below the high point in that cycle, the company earned $4.53 a share, fully diluted.
"A program like this that has downsides in it when I don't perform is a good program," Dr. Joyce says. "Betting your money just like the shareholder bets his money is a thing that balances" the risk equation between management and investors, he continues. It shows the game is "not all stacked in your favor."
-- Ms. Lublin, The Wall Street Journal's deputy management editor, served as
contributing editor of this report.
The stampede of corporate leaders rushing to profit from the long bull market grew last year. A handful really struck pay dirt when they cashed in large numbers of stock options.
The list of highest-paid CEOs for 1997, based on William M. Mercer Inc.'s compensation survey, reflects the executives' gains from exercising options and other long-term incentive payouts as well as salary, bonus and the value of their restricted-stock grants.
For the first time, Mercer also tracked the value of shares owned by chiefs at the end of their companies' 1997 fiscal year plus each concern's 1997 total shareholder return -- the change in stock price plus declared dividend payments. The median value of CEOs' stakes was nearly $8 million, while the median total shareholder return, or TSR, equaled 29.7%.
Here's a look at last year's top earners: