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Here's How Survey Was Done

May 26, 1996|MARTHA GROVES

Compensation Resource Group Inc., a Pasadena firm that consults on executive pay packages, examined the pay of the top executives at California's 300 biggest publicly held companies, as ranked by 1995 sales. The numbers used were from the most recent proxy statements, with a filing cutoff date of May 1.

At each company, CRG looked at the five principal executives whose pay packages must be reported under Securities and Exchange Commission rules. The research doesn't cover California executives who work for privately held firms or companies based in other states.

That universe of 1,500 individuals was narrowed to the 100 executives who had the highest combinations of salary and bonus. The list includes only those who were working for the companies at the end of the fiscal years covered by the proxy statements.

Company financial data were researched electronically on the Disclosure and Bloomberg databases or, in cases where such information was not yet available electronically, were taken from corporate proxies. Every effort was made to ensure accuracy and thoroughness, but some companies might have been inadvertently omitted.

Executive pay packages come in many forms that go beyond straight cash--most of which carry a fair amount of controversy. To give an idea of the growing importance of stock options, the most noteworthy of these "extras," CRG also compiled a list of the 25 individuals whose stock option grants had the highest values in 1995.

Either the company or CRG relied on the so-called Black-Scholes pricing model, a complex but widely used valuation method that attempts to assign a present--or current--value to those options.

Option grants give executives the right to buy company stock at specified prices over stated periods. The true worth of such options cannot be known until they are exercised. Some prove worthless.

Another controversial component that can skew the compensation picture is gains from options that have been exercised in a given year. Some executives maintain that such profits should not be included as part of annual compensation, because they represent rewards earned over several years.

CRG computed the list of top 25 profits from options exercised. Such gains exist only on paper unless the executive actually sold the stock on the open market after exercising the options and pocketed the profit. For stockholders, of course, the most appealing scenario is that an executive exercises the options, then holds on to the shares. But often executives are forced, for tax purposes, to cash in at least a portion of the stock.

Separately for The Times, CRG evaluated executives' total direct compensation--the sum of base salary, bonus and total long-term compensation. Long-term compensation consists of "restricted stock," which cannot be sold until a specified time but reflects the shares' full value, and stock option grants. Again, in the case of the option grants, the Black-Scholes pricing model was used to compute a current value. That list does not appear here but was used as a basis for some of the accompanying report.

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