Gulf Between Top, Bottom Gets Wider

A Times survey of the state's largest companies shows that CEOs' pay is growing at a much faster pace than that of rank-and-file employees.

May 31, 2005|Kathy M. Kristof | Times Staff Writer

Everyone knows that the top dog makes a lot more than the rest of the pack. But the big pay hikes awarded to chief executives are leaving the pack even further behind each year, The Times' annual executive compensation survey shows.

CEOs at California's largest 100 public companies took home a collective $1.1 billion in 2004, up almost 20% from 2003. That compares with the 2.9% raise that the average California worker saw last year, according to the Economic Policy Institute in Washington.

The difference is even sharper at the top rungs of the ladder. The 10 highest-paid executives on this year's list earned 36.7% more than last year's top 10 -- garnering a collective $467.5 million. That's enough to buy about 275 homes in Malibu or 1.5 million sets of golf clubs or two 747 jumbo jets.

Although limited to California companies, the survey reflects a national trend: a widening chasm between the pay of chief executives and rank-and-file employees.

"The average CEO made 42 times the average worker's pay in 1980. That increased to 85 times in 1990 and is now over 300 times," said Brandon Rees, a research analyst with the AFL-CIO's office of investment, a group that tracks, and is critical of, executive pay policies. "That is clearly not a sustainable rate of growth."

Compensation consultants counter that high salaries are driven by competition for the best bosses.

"There's a different market for executive-level jobs," said Nadine Winter, a compensation consultant with Watson Wyatt Worldwide in Los Angeles. "If one company pays more than the market rate and others feel that they have to compete to get top talent, that's what they do. The market has its own momentum."

Yahoo Inc. Chief Executive Terry Semel tops The Times' pay list with a $145-million compensation package -- nearly double the $74 million that put Apple Computer Inc.'s Steve Jobs in the lead last year.

Semel illustrates one reason that executive pay is skyrocketing: Companies make lucrative deals to recruit executives, then have a tough time scaling those deals back, said Patrick S. McGurn, executive vice president of Institutional Shareholder Services Inc. in Rockville, Md.

Semel, who previously co-led the Warner Bros. movie studio, was drafted by Yahoo in 2001 to reinvigorate a company that some analysts said was in a "death spiral." Impressed by Semel's solid credentials in the entertainment industry, Yahoo's board agreed to give him 11 million stock options.

Options are rights to buy company shares at a set price in the future. Five million of those optioned shares were tied to the current market price, meaning any rise in share value would go into his pocket. But the rest were linked to higher prices staggered at different price points, making them effectively worthless unless Semel really moved the company's needle.

That he did. Yahoo's revenue doubled and profit rose 237% last year, according to The Times survey.

Yahoo shares, which traded at about $9 before he took over, have quadrupled in value, closing Friday at $37.27. That boosted the fortunes of Yahoo's shareholders and its chief executive.

In 2004, Semel earned $600,000 in salary. But the company's board gave him 7.2 million additional stock options, worth an estimated $144.3 million. Total 2004 pay: $145 million, up nearly 24,000%.

Last year, Semel reaped $230 million when he exercised 10.1 million in stock rights that were granted to him in previous years. Gains from the sale of stock options are excluded from The Times' calculation of "total direct compensation" because the money, although realized in 2004, was earned in previous years.

Total direct compensation in The Times' survey is made up of 2004 salary, bonus and the present value of stock given to the executive either outright or through stock options. It also includes the reported value of perks, such as personal use of company planes, cars and apartments, as well as financial and tax-planning services, that the executive received during the year.

The data were mined from the companies' most recent proxy statements and compiled by Aon Consulting's EComp Data Services.

Compensation critics say they don't begrudge Semel the $230 million he realized by exercising his past options, but they're critical of the board's decision to continue giving him additional stock options year after year.

"Initially, what the board did at Yahoo was really smart. They awarded him a huge grant of options, but some of them were at a premium price," said Paul Hodgson, research analyst with the Corporate Library, a company watchdog group. "Subsequent decisions by the compensation committee have not been as inspired. They keep feeding him stock options, in enormous quantity, and they're all at market prices. They need to find a new tool."

Semel holds rights to buy an additional 22.5 million shares, which were worth about $395 million when Yahoo put out its last statement to shareholders.

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