CEO pay dips, but boards finding ways to make up for sagging stock compensation

  • Article by: JOHN J. OSLUND and PATRICK KENNEDY , Star Tribune
  • Updated: May 17, 2003 - 11:00 PM

The average total compensation package grew less than 1 percent among Minnesota CEOs in 2002, a year of unprecedented national outrage about sinking stocks, corporate misdeeds and inflated CEO pay and perks.

So corporate boards have gotten the message and ratcheted down pay to reflect company performance?

Not exactly.

Even as the bear market made it difficult, or in some cases impossible, for Minnesota CEOs to harvest the bounty of options they received in the go-go years, their compensation committees found ways to soften the blow through awards of restricted stock and other compensation.

In 2002, that "other" category -- which includes restricted stock awards, payouts for meeting long-term goals, 401(k) contributions, payments to supplemental executive retirement plans (SERPs), life insurance and other perks -- accounted for $43 million, or nearly 20 cents of every dollar collected by Minnesota CEOs. In 2000, the figure was 8.7 cents.

At the same time, gains from exercised stock options plummeted both in total dollars and as a percentage of total CEO pay. For each dollar of total 2002 compensation, option gains accounted for 38 cents -- down from 70 cents in 2000.

In other words, as pay linked directly to market performance declined, cash compensation and the use of restricted stock increased.

Coincidence?

Hardly, said Graef Crystal, a former compensation consultant and author who has followed executive pay trends for 44 years.

"Executives will not go quietly into this good night. They will find other ways" to be rewarded, he said.

Shareholders and others looking for more accountability must content themselves for now with the fact that executive compensation in Minnesota has at least moderated from the eye-popping levels reached in recent years.

The 1 percent growth in median, or middle, total 2002 compensation to $837,511 was accompanied by a less-than-1 percent gain in median cash compensation (salary plus bonus) to $590,741.

The year's top pay package among Minnesota's 100 highest-paid CEOs was just under $20 million, compared with $58 million in 2001 and $54 million the year before.

"That passes for progress in this field," Crystal said.

Each year, the Star Tribune ranks the 100 highest-paid executives from among the more than 150 Minnesota-based publicly held companies. Since the stock markets began sinking in 2000, total compensation for this group has fallen about 29 percent. Meanwhile, the Standard & Poor's 500 shed 40.4 percent for the three-year period ended last December. The Star Tribune-Bloomberg Index of Minnesota's 100-largest companies dropped a comparatively mild 4.7 percent.

Does the overall downward trend in compensation -- mirroring the findings of national surveys -- mean that Minnesota is at least moving toward "pay for performance" -- the holy grail sought by regulators and shareholders?

The answer is yes, but it's too soon to say if the movement has staying power.

"In the flattening out of compensation, you could draw the generalization that there is a linkage between [financial] results and compensation," said Minneapolis attorney John Stout, who specializes in corporate governance matters. "But, in the big picture, is it the kind of readjustment we were looking for? It's probably a little too early to conclude that. There is an awfully big gap to be resolved."

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