business

Minnesota CEOs still make less than their peers nationwide. But they're catching up -- fast.

Median pay for the 100 highest-paid CEOs in the state jumped 59.3 percent in 2005, to $1.79 million, far above the 15.8 percent gain in April's national survey of 350 CEOs conducted by the Wall Street Journal and Mercer Human Resource Consulting. The Minnesota figures, compiled by the Star Tribune based on securities filings made this year, include salary, bonus and long-term compensation.

The median total CEO pay package in the Journal's national sample is $6 million compared with $1.79 million in Minnesota, but Minnesota is gaining both in percentage terms and number of corporate heads pulling down seven figures or more. In 1999, at the peak of the tech bubble, 46 Minnesota CEOs were paid $1 million or more per year. As of last year, the figure was 66. Stock-option gains accounted for the biggest part of total compensation for the 100 Minnesota CEOs -- 46 percent -- which translated into $202.5 million worth of shares split among 43 company heads in 2005.

Tougher regulatory scrutiny and tax-law changes are making stock options less attractive. That was driven home this month when UnitedHealth Group CEO William McGuire, who earlier this year held unexercised options worth $1.6 billion, suddenly swore them off.

But the waning interest in options doesn't mean CEOs are about to take pay cuts. Instead, many companies have turned to a simpler yet still lucrative way of rewarding their top brass: restricted stock. The dollar value of restricted stock granted to Minnesota's 100 highest-paid executives jumped from $18.1 million in 2003 to $70 million in 2005, a 280 percent jump, according to a Star Tribune review of Securities and Exchange Commission documents. Thirty-nine Minnesota CEOs got restricted stock last year, up from 26 in 2004.

Few provisions attached

Despite the name, restricted stock typically carries few restrictions at all. Often the only requirement is that the executive stay put for a few years, a practice some consultants derisively call "rest and vest." Many of those executives receive dividends on the stock even before they've received it. Some companies also pay the taxes owed on the dividends, a practice known as "grossing up."

Paul Hodgson, senior research associate for the Corporate Library, a Maine-based organization that focuses on executive compensation and corporate governance issues, likens the regulatory changes that address a single item or category of compensation to squeezing one end of a balloon and watching the opposite end get bigger. As new rules made giving options more costly, companies just went in a different direction.

"As we move through this, there will be successive waves of, 'Oh, my goodness. I didn't realize that went on,' " Hodgson said.

He said forcing companies to reflect the expense of options grants was the right thing to do. However, increased use of restricted stock is "a step backwards," in his view, because the awards often are granted regardless of the company's performance, whereas stock options are worthless if the stock price doesn't increase beyond the set price at which an executive can acquire the shares.

Charles Elson, University of Delaware chair in corporate governance, disagreed, saying that restricted stock is a "better approach because it is less likely to be gamed and people are more measured when they give it." He cautioned, though, that the criteria for receiving restricted stock should be specific and tied to performance, not just years.

Matt Turner, senior executive compensation consultant for Mercer Human Resources Consulting, sees overall progress on regulation of compensation and expects issues such as paying dividends on stock that has not yet been earned will be addressed by regulators soon.

High-profile examination

Scrutiny of corporate pay in Minnesota probably never has been higher because of UnitedHealth and the attention focused on its stock-option program -- now the subject of an SEC inquiry.

"McGuire has become a national poster boy for excessive executive comp," said V. John Ella, a Minneapolis employment lawyer who represents executives. That "has made Minnesota ground zero for the debate."

Like most items of CEO pay, the use of restricted stock varies widely. Compensation consultant Turner said the latest trend is toward companies making restricted stock "performance stock" -- stock earned by hitting various financial targets rather than just through service. According to the 350-company survey, most CEOs who receive restricted stock are paid dividends before the shares have vested.

Minnesota examples include 3M Co., where CEO George Buckley was recruited last year from Brunswick Corp. with a pay package that included $16 million in restricted stock that he will earn after five years of service.

While waiting for those shares to vest, he will get more than $290,000 a year in dividends on the stock, based on a Star Tribune calculation of his total restricted shares and 3M's current annual dividend of $1.84 per share, estimates that 3M confirmed.