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EXECUTIVE PAY REPORT: Working to Retire Overcompensation

Shareholders join others in calling for reductions in CEO packages


Shareholders and corporate activists have been complaining for years about runaway executive pay. But in 2002--the year of Enron, E-Trade and Ebbers--the voices for change finally are finding an audience.

Across corporate America this spring, company managers have been fighting shareholder resolutions seeking to put limits on how much the top bosses can be paid.

Financial leaders such as Federal Reserve Chairman Alan Greenspan are calling for accounting changes to staunch the flood of stock option giveaways to executives. And big institutional investors increasingly are asking tough questions when a company's stock price fails to keep up with its chief executive's paycheck.

Why the sudden outburst? Call it the "Enron effect."

The collapse late last year of energy trader Enron Corp. and the subsequent allegations of self-dealing, questionable accounting and self-enrichment--including the roughly $150 million that CEO Kenneth L. Lay raked in during 2000--provided a catalyst for critics of the state of corporate governance and its effect on the way America's top executives are compensated.

"Something fundamentally changed with Enron," said Scott Klinger, co-director of responsible wealth at Boston-based United for a Fair Economy, a group dedicated to narrowing the gap between the upper and lower classes.

"People are becoming skeptical about what's behind the numbers."

But Enron wasn't the only case that drew fire from compensation critics. News this spring that regulators are looking into millions of dollars in personal loans that Bernard J. Ebbers received while CEO of WorldCom Inc. drew a sharp response from investors, who have watched WorldCom's stock plunge 90% over the last year.

Menlo Park, Calif.-based E-Trade Group Inc. also created a furor a month ago when it revealed CEO Christos Cotsakos' $71million pay package for 2001--a year in which the online brokerage lost $24million. The criticism was so intense that Cotsakos agreed to return part of the pay package.

More broadly, critics such as Klinger contend that in the United States, CEO compensation outstrips the paycheck of the average worker by a much greater degree than in other industrialized nations such as Japan and Germany.

Ironically, the clamor over compensation comes amid a rare slump in executive pay.

In a study of 350 large U.S. companies, Mercer Human Resource Consulting found that the average chief executive's pay package fell almost 1% last year. The average salary increased 4.7%, but bonuses fell 13.5% and the plummeting stock market drastically reduced the value of many executives' stock option packages.

That provided ammunition for those who contend that executive pay reflects corporate performance, and that companies that hope to keep top-notch executive talent must pay the market rate.

"We are hitting an interesting tension," said Blair Jones, senior vice president at Sibson Consulting, an executive- pay advice arm of benefit-consulting firm Segal Co. "We have talked about pay-for-performance being really important, and it is. But you have to balance that against the driver of attracting top talent. That makes it tough for companies to toe the true pay-for-performance line."

Responded Klinger: "The people who have the skills to run a company deserve to be compensated. But there are limits."

But what are they? Trillium Asset Management Corp., a money management firm whose investments are determined in part by a set of social principles, has developed a straightforward yardstick for the companies whose shares it owns: The firm votes against any CEO compensation plan that exceeds a combined $5 million a year in cash and stock.

"These numbers are arbitrary," acknowledged Simon Billenness, senior analyst with Trillium in Boston. "But you have to ask yourself, how much more do you need?"

There's no right answer, of course.

"If you get the right leadership, it can be worth a lot of money," said Jones of Sibson Consulting. "I think where we have gone wrong is in thinking that everybody is worth that."

Changing that thinking won't be easy, as even critics of executive pay trends acknowledge.

"Because the problem is very gross doesn't mean it has an easy solution," said Charles T. Munger, vice chairman of Berkshire Hathaway Corp. and CEO of Pasadena-based Wesco Financial Corp.

"Every sign I see indicates that the situation is getting worse, and I think it's going to be very difficult to fix."

Shareholder activism has been the weapon of choice recently. Corporate annual meetings have produced a wave of shareholder resolutions, including initiatives at EMC Corp, Jones Apparel Group Inc. and Bank of America Corp., seeking to rein in executive pay.

Resolutions to force changes in corporate governance--almost always opposed by management--usually are easily defeated. But a proxy advisory service that tracks shareholder resolutions said last week that 39% have received a majority of shareholder votes this year--well ahead of the previous record of 25%.

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