Average CEO pay down, albeit with some spectacular exceptions

  • Article by: JOHN J. OSLUND and PATRICK KENNEDY , Star Tribune
  • Updated: May 12, 2001 - 11:00 PM

It should be reassuring that, in a year that saw steep stock market declines, total compensation for the average Minnesota-based CEO also dropped in 2000.

And it also should be no surprise that there are a couple of extraordinary exceptions to that rule.

William McGuire, CEO of UnitedHealth Group, and Ronald Zebeck, CEO of Metris Companies, are those exceptions. One a medical doctor who leads one of the nation's largest health care management companies, the other an up-through-the ranks consumer finance executive, both took home more than $50 million in compensation last year. The bulk of each man's compensation came from the exercise of stock options granted in previous years.

No. 3 on the list was William Cadogan, former chairman and CEO of ADC Telecommunications, who rang up nearly $46 million in total compensation in the last full year of his long tenure at Minnesota's biggest technology company.

Those are big numbers, no question. But at the mid-point -- where half the CEOs are paid more and half less -- it's a different story. In a year that saw double-digit declines in stock markets, median total compensation for the 100 highest-paid Minnesota CEOs dropped nearly 20 percent, to $656,655 from $818,073 in 1999.

There are other indicators of moderation. Among the 100 highest-paid Minnesota CEOs:

  • 36 got $1 million or more in total compensation in 2000, down from 46 in 1999.

  • 25 received no bonus last year, compared with 15 in 1999.

  • The median bonus declined to $176,600 in 2000 from $195,000 in 1999.

  • 34 CEOs exercised stock options last year compared with 44 a year earlier.

    These findings suggest that performance-based executive compensation is taking hold, at least among publicly held companies in Minnesota. Each year, the Star Tribune searches for the 100 highest-paid CEOs of Minnesota-based publicly held companies, relying on compensation data that all public firms must report annually to the Securities and Exchange Commission. We define total compensation as salary, bonus, long-term incentives and other compensation plus gains from the exercise of stock options.

    In the five years since we've been tracking executive compensation in this way, the median total compensation has declined twice -- in 1998 and again last year. (In 2000, the Standard & Poors Index declined 10 percent; in 1998, the S&P index gained about 26 percent, but that was after an unusually volatile trading year sparked by the Asian currency crisis.)

    'At-risk' pay

    What do the numbers mean? "If it's pay-for-performance ... and performance was down ... then compensation would follow," said John Stout, a partner with the Minneapolis law firm of Fredrikson & Byron. Stout specializes in advising corporate boards and compensation committees -- the people who set executive pay contracts.

    Bill Busch, a partner with the Minneapolis law firm of Faegre & Benson, also advises corporate board members on CEO hiring.

    "In a lot of discussions you hear, people tend to talk about executive compensation going up," Busch said. "But within that [median] range, the system does seem to work. There are a lot of compensation plans where some 40 to 50 percent of pay is designed to be at risk ... meaning that it is designed to be dependent on meeting annual earnings targets. When you discover an environment where company performance falls short, the CEOs will in fact have a drop in cash compensation. And this is the way that it's supposed to work."

    For an issue as explosive as executive pay, no one is willing to claim that no abuses exist. For example, while 25 Minnesota CEOs were denied a bonus last year 49 of the companies on our list saw their share prices decline.

    Huge executive pay packages, such as the $293 million awarded to New York City-based Citigroup's John Reed, ensure that the issue will remain a staple of the business press and the focus of criticism from shareholder rights groups.

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