Business

By Janice Castro

How's Your Pay? Probably munificent -- and nearly risk-free -- if you're a U.S. chief executive. While a few companies reward the boss sensibly, many enrich him regardless of results. For many workers, the opposite trend is taking hold: compensation tied to performance. If it makes sense for the troops -- and it often does -- then why not at the top? CEOs: No Pain, Just Gain

No wonder they say it's lonely at the top. Down here in the real world, as the country struggles to climb out of recession, profits are flat at most companies. Unemployment jumped to 6.8% last month (it was only 5.2% last June), and thousands more workers face layoffs. Most people lucky enough to get raises last year had to be content with 5% or less.

But few are pinching pennies up in the executive suite. As corporations begin to release their proxy statements and annual reports for 1990, many stockholders are getting steamed up reading about the fat raises and other payments their chief executives raked in. Already making 160 times what average blue-collar employees receive, chiefs of America's largest companies garnered pay hikes last year of 12% to 15% as the economy nose-dived. Some CEO pay packages are so large, says Stephen O'Byrne, a compensation expert at the consulting firm Towers Perrin, that they "represent investment decisions on the order of building a plant."

At a time when millions of American workers are being asked to share the risks in pay-for-performance schemes -- earning more when sales and profits rise and less when they do not -- economists and shareholders are beginning to ask why the boss should be immune to reality. Says Dale Hanson, chief executive of the California Public Employees Retirement System, one of the largest U.S. pension-fund managers: "Our CEOs are being treated like pharaohs. Shareholders are beginning to question who's minding the store."

Experts who study executive compensation say it's about time somebody asked those questions. CEO pay has been growing faster than sales and profits for years. The chiefs of the 200 largest U.S. companies received an average of $2.8 million in 1989, before those 1990 raises were handed out. Their counterparts in Canada, Europe and Japan made less than half as much, sometimes while beating the pants off them in the marketplace. Studies indicate that most American CEOs seem able to demand raises at will, regardless of how good or bad a job they do. In many cases they get raises just because a counterpart at another firm did. Says Donald Hambrick, professor of management and organization at Columbia University's Graduate School of Business: "They end up trying to outdo one another. So what you get is a circle of CEOs who propel one another's pay upward."

Blowing it by the board of directors is usually pretty easy. Often enough, bosses who get big raises return the favor by handing out higher fees and benefits to the board. Says Graef Crystal, a professor at the Haas School of Business at the University of California, Berkeley: "Wherever you find highly paid CEOs, you'll find highly paid directors. It's no accident." At Coca- Cola, CEO Roberto Goizueta earned $10.6 million in salary and stock in 1989, more than three times the average for CEOs of the 200 largest U.S. firms (his 1990 compensation: $11.2 million). His board members earned $75,000 in cash and benefits, a solid 70% above the $44,000 average. At ITT, chairman Rand Araskog earned $6.4 million in 1989, more than twice the average (his 1990 pay was $11.1 million), while his directors were paid $75,400.

Hanson's $60 billion pension fund is one of many large institutional shareholders that are vigorously challenging the way CEOs are compensated. Last November Hanson's group filed shareholder petitions demanding that ITT and W.R. Grace change their bylaws to increase the independence of the committees charged with setting compensation for the companies' chiefs.

Directors may lack the gumption to cut salaries and cash bonuses, but the luxuriant stock grants they hand out to top executives should provide strong incentives to improve a company's health. Sometimes it works. Walt Disney CEO Michael Eisner, for example, has become one of the world's highest paid executives partly through massive stock options. As Disney's share price has risen, from a split-adjusted value of $14 in 1984, when Eisner took over, to $120.75 recently, Eisner's wealth has exploded. But with stock appreciation like that, you won't hear many shareholders complaining.

The belief that stock incentives will inspire CEOs to drive companies to ; greater heights is widely held. Stock awards to CEOs fall into three broad categories. Stock options give the executive the right to buy shares at some future date for a fixed price, generally the share price on the day the stock is granted. Restricted stock is free and can be collected after the CEO stays in office for a certain period of time, typically five years, regardless of his results. Performance shares are similar to restricted stock, but the awards are linked to how well the company does rather than how long the CEO survives in power.

Unfortunately, recent evidence shows that these incentives generally don't work. Laudable in theory, their effect in practice is just the opposite of what's intended. Berkeley's Crystal, a top compensation consultant, has done a complex computer analysis of these stock grants. In 1989 the average annual return on investment at 38 large companies offering all three types of stock awards (including Bristol-Myers, Sara Lee, Unisys and Allied Signal) was 11.3%. But at 215 companies that offered only two kinds of treats (including Morgan Stanley and Paramount), the return was 12.7%, and firms offering only one (Disney and United Airlines) yielded 14.2%. Companies that offered none of these so-called incentives (Reebok and Leslie Fay) enjoyed the highest returns of all: 15.6%.

What went wrong? Many of these plans have no downside. Most people would agree that American Airlines chairman Robert Crandall has done a terrific job of building his carrier. He was awarded 355,000 shares of restricted stock in 1988, with a market value at the time of $33.50 per share (total value: $11.9 million). He will get the stock for free if he is still in office in 1996. But the board thinks so highly of him that it removed any hint of incentive from the award: if the stock price goes down, American will write Crandall a check to make up the difference.

The worst part about making a ton of money, of course, is that you have to pay taxes on it. But some boards try to cushion the blow of massive compensation by handing out extra checks to cover the taxes. In 1989 the Coca- Cola board awarded a large block of stock to chairman Goizueta, plus a check for the amount owed in taxes. At Georgia Pacific, the board went one step further. After all, T. Marshall Hahn Jr. would also have to pay taxes on his consolation check, so the board cut him another check to cover the tax on the tax.

As institutional investors and other large stakeholders begin to kick up a fuss about compensation extremes, more companies may look for a better way. At Disney, Eisner's base salary is $750,000, well below average. It has not increased since 1984, and will not rise during the employment contract that takes him to 1998 -- an extraordinary arrangement. His bonus, if any, is a proportion of profits above a certain level. The deal earned him $11.2 million in 1990. Or consider the new plan in place at Becton Dickinson, the New Jersey pharmaceutical firm. CEO Raymond Gilmartin last May received a stock grant of 30,000 shares at $63.13 apiece. But Gilmartin will make money only if Becton Dickinson's stock outperforms the Standard & Poor's 500 index. That's an unusually stringent condition, but it reflects the uncontroversial belief that outperforming the market is the ultimate test of managerial skill.

Could a modestly paid CEO possibly be any good? Conventional boardroom thinkers would scoff. Yet chief executives who make well below the average often turn in stellar results. In Charlotte, N.C., Nucor CEO F. Kenneth Iverson takes perverse pride in being one of the lowest paid chiefs of a FORTUNE 500 company. Iverson made about $525,000 in cash, bonus and stocks last year as head of America's seventh largest steel company. He gets no perks: no annuities, no company jet, no car, not even a personal parking spot. He eats his lunch most days at Phil's, a deli in the local mall. Nucor has been profitable for 25 years and has not laid off an employee since 1971. Maybe Iverson is underpaid. Certainly a growing number of shareholders in other firms would say that a lot of higher-paid CEOs, many of them laying off workers and watching the stock sag, are just blowing one past the board.

With reporting by Thomas McCarroll/New York