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It's Still a Golden State

Compensation growth eased in 2003, but experts don't see any big pullback

June 06, 2004|Kathy M. Kristof | Times Staff Writer

The returns investors reaped during the bull market of 2003 were small change compared with what chief executives at some of California's biggest companies pocketed.

Take Meg Whitman, CEO and president of EBay Inc.

Investors enjoyed a 77% rise in the value of their EBay shares last year, while Whitman saw her compensation swell 163%. Her $42.7-million package equaled nearly 10% of the Internet auctioneer's profit.

Or consider Wilfred J. Corrigan, CEO of LSI Logic Corp., where profit dropped 6% and sales fell 7%. Corrigan's raise was 560%. At Countrywide Financial Corp., Angelo R. Mozilo's pay doubled to $35.2 million. Robert D. Glynn Jr. of PG&E Corp. took home 131% more. And Computer Sciences Corp.'s Van B. Honeycutt collected 120% more in 2003 than the year before, according to the Los Angeles Times' annual survey of CEO compensation.

The median boost, meaning half were larger and half smaller, for the 102 chief executives in the survey was 5%, compared with a median raise of 11.4% the year before. For 11 of the CEOs in the latest survey, pay more than doubled; 12 received raises of 50% or more.

But for 45 of the chief executives, total compensation in 2003 was less than in 2002, the survey found. CEO pay across the country rose at a more modest pace in 2003 -- 7.2%, compared with 10% for the previous year, according to an annual survey of 350 big U.S. companies conducted by Mercer Human Resources Consulting.

Smaller increases in CEO compensation, or in some cases actual declines in pay, reflect last year's shift from stock options in favor of more hard cash and grants of actual stock. The shift can lower the face value of compensation packages -- but it also turns pay into a sure thing from something merely speculative. Although stock options can prove lucrative if the company's stock price rises, they are worthless when stock values fall -- as was the case for the first three years of the decade.

What's more, executive compensation experts don't foresee any big pullback in CEO pay, even though an estimated one-third of shareholder resolutions on this year's proxies are demanding just that.

"It is really hard for pay to go down," said Jack Marsteller, compensation consultant with Towers Perrin in Los Angeles. He cites competition for good CEOs as one reason. Others blame complacent boards of directors.

"There is not going to be a tremendous reduction in CEO pay -- probably ever," Marsteller said.

The Times study examined CEO compensation at the 100 largest publicly traded companies in California -- a break from past years, when the focus was limited to Southern California. The survey, conducted by Aon Consulting's EComp Data Services, covered 102 executives, because two of the companies have co-chief executives.

In the accompanying chart, executives are ranked by their total compensation for the latest fiscal year. That figure includes salary, bonus and perquisites such as company cars, stock awards and the present value of stock options granted in 2003.

Among CEOs who lost money, some of the reductions can be tied to a decline in the company's stock value, which made the present value of stock option grants less valuable. Stock options are rights to buy shares at a set price in the future and become valuable if the stock price rises.

In some cases, however, what appears to be a drop in compensation could prove to be just the opposite.

One example is H. Raymond Bingham, chief executive of San Jose-based software firm Cadence Design Systems Inc. Bingham, whose company went from a profit to a loss on 13% less revenue, missed out on his bonus in 2003. But the biggest reason his pay declined 36% was that the stock options his company gave him were worth about $2.4 million less than options granted a year earlier.

Did he get fewer options? No. He got 50% more -- 750,000 shares, compared with 500,000 in 2002. The present value of those options, determined by using a complicated formula that looks at the company's stock price, performance and volatility, was vastly lower.

Should the stock rebound, however, the larger number of shares potentially will translate into a bigger payoff for Bingham.

Similar situations occurred at Qualcomm Inc., Charles Schwab Corp. and Wells Fargo & Co. At all three companies, the chief executives incurred cuts in total compensation but received more options than they did the year before.

In other cases where chief executives saw smaller paychecks, the company replaced a large number of stock options with more cash or a smaller grant of restricted stock.

Restricted stock is an outright gift of shares. Where stock options are valuable only if the stock's price rises, restricted shares have an immediate value (as does cash, obviously).

Of the 45 executives who took a cut in total pay, two received additional restricted shares and 26 saw increases in cash pay. In many cases, the added cash was substantial.

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