SHARING THE PAIN

  • Article by: JOHN OSLUND and PATRICK KENNEDY , Star Tribune s taff w riters
  • Updated: May 21, 2009 - 2:21 PM

This recession hasn't spared payouts among Minnesota's top executives.

Seems a high price to pay, but apparently it takes a global recession to rein in executive compensation.

In Minnesota and across the country, CEOs took serious pay cuts in 2008.

Cash compensation (salary plus bonus) fell 9.7 percent among Minnesota's 100 highest-paid CEOs in 2008; the comparable figure for 200 national executives surveyed by the Wall Street Journal was down 8.5 percent.

Among Minnesota CEOs, gains from the sale of stock options (called equity-based compensation) fell 60 percent from 2007. And gains from restricted stock (another form of stock-based pay) fell 27 percent.

Add it all up and median total compensation for Minnesota's 100 highest-paid CEOs -- the point at which half the packages are more and half are less -- fell 38.5 percent last year to $938,385. That's the lowest figure since 2002, when CEO pay got trimmed as the economy crawled back from the last recession and the Sept. 11, 2001, terrorist attacks.

Stock-based pay -- and particularly stock options -- fuel big executive paydays. So a big reason compensation was down is explained by the fact that among the 100 companies, only 17 saw their share prices rise.

"Those are fascinating numbers, and these are fascinating times,'' said V. John Ella, an attorney with the Minneapolis firm of Jackson Lewis who focuses on compensation issues. "The economic recession has spared few, even top executives in the gilded corner offices.''

With share prices depressed, it's obvious that stock-based pay would decline as well. But Ella thinks there might be more going on.

"The past six months have been unprecedented, not just for the steep decline in pay but for the spike in interest by the general public and the media in executive pay issues, especially related to financial institutions receiving federal bailout money,'' Ella said. "I predict this intense scrutiny will have a legacy that outlasts the actual recession.''

Don Lindner, manager of executive compensation for the World- atWork, a global association of human resources professionals in Scottsdale, Ariz., was happy to see the big comp drop.

"I really like what's happened in Minnesota. ... This is the way it's supposed to work,'' Lindner said. On average, about 60 to 70 percent of an executive's pay is "at risk,'' he said. If the compensation plans are designed appropriately, then you can expect that as the company performance suffers "compensation will fall dramatically. This is a great message that should be out there today.''

Those lower on the corporate food chain will shed no tears over the boss' smaller paycheck. Average salaries for rank-and-file hourly and salaried workers in the Midwest rose about 3 percent in 2008, the smallest raises since 2001, according to a survey of about 1,300 employers by WorldatWork.

But those figures represent workers who have jobs. Unemployment has risen sharply nationwide since September, when the financial crisis came to a head. Meanwhile, personal income, measured monthly by the U.S. Bureau of Economic Analysis, has declined for five of the past six months, starting in October.

Fewer options

Gains on stock options typically boost executives into the highest-paid ranks, and this year is no exception: Seven of the top 10 CEOs got there by exercising options. Joining the ranks of the top 10 highest-paid CEOs are Paul Finkelstein of hair-salon company Regis, at No. 9, up from No. 35 a year ago; William Cook of filter maker Donaldson Co. at No. 7, up from No. 25 last year; Stephen Hemsley at No. 5, up from No. 22 last year, and Travelers CEO Jay Fishman, who jumped 10 places from last year to the No. 2 spot.

Still, given depressed share prices, there was less stock-option money to be made. In 1999 -- the last full year of the 1990s bull market -- gains from stock options accounted for 70 percent of total compensation for Minnesota's highest-paid CEOs. Last year, option gains contributed 34 percent.

Here's another measure: 47 Minnesota executives took home $1 million or more in total 2008 pay, compared with 60 in 2007, 58 in 2006 and a record 66 in 2005. Total compensation includes salary, bonus and other sources of income, such as gains from the exercise of previously issued stock options and restricted shares vesting during the year.

Payday highlights

•For the second consecutive year, 3M's George Buckley pulled down the biggest salary, $1.72 million in 2008. Second in the base salary sweepstakes, at nearly $1.35 million, was Gregg Steinhafel, Target's CEO. Meanwhile, Cheri Podzimek, CEO of fiber-optics firm Clearfield Inc., got the lowest salary at $175,000 among those taking salary.

•Of the 100 CEOs, 82 got raises, 11 got the same salary as in 2007 and five took salary cuts. (Comparable figures were unavailable for two executives.)

•Jay Fishman of the Travelers Companies Inc. (formerly St. Paul Travelers) got the biggest bonus -- $5 million, down from his 2007 bonus of $7.5 million.

•Overall, 76 of the 100 CEOs got a bonus last year, including 17 who got $1 million or more. Twenty-four received no bonus, up from 17 in 2007. (Bonuses of $350 for Imation's Frank Russomanno and $150 for HMN Financial's Michael McNeil were so small that they rounded to zero on the master chart on Page D6.

•Of the 27 chief executives who sold stock options last year, the biggest exerciser was Daniel Starks of St. Jude Medical ($29.8 million), followed by retired CEO Tom Tiller of Polaris Industries ($9 million) and Best Buy's Brad Anderson ($6.6 million).

•Fifty-four Minnesota executives received new stock options in 2008, about the same as last year (55).

Female CEOs

Five female CEOs made our list, up from four a year ago. Sally Smith, CEO at Buffalo Wild Wings, ranked highest at No. 39, with $1.64 million in total compensation. Laura Hamilton, CEO of MTS Systems, comes in at No. 51, with $931,000 in total compensation. Departed Caribou Coffee CEO Rosalyn Mallet ranks No. 73 at $539,000.

Clearfield's Podzimek joins the list at No. 96, with $301,000 in total pay. Kathleen Iverson, CEO of manufacturing technology firm CyberOptics, ranked No. 98 with $291,000 in total pay.

Notable pay packages

The unprecedented scrutiny focused on CEO pay, combined with the deep budget cuts and layoffs required to deal with the economic downturn, have caused some CEOs to reflect on fairness, said Robert Kennedy, a professor of ethics and business law at the Opus School of Business at the University of St. Thomas. He said he's seeing a "heightened sensitivity on the part of companies. [Some] high-paid executive are accepting their fair share ... and that may be a much bigger percentage [drop] than the lower-paid workers.'' Indeed, a review of the proxy statements shows some executives are lying low, forgoing salary bumps and bonus pay -- even parking stipends. U.S. Bancorp

CEO Richard Davis and CFO Andrew Cecere declined partial cash bonuses to which they were entitled for 2008, and they also declined to accept 2009 stock-option awards, citing the company's financial results and the overall economic environment.

Piper Jaffray

At Piper Jaffray, base salaries for CEO Andrew Duff and other top executives were not increased for 2009 and none received an annual incentive award for 2008 performance. Duff's other compensation includes a cash payment dating back to Piper's spinoff from U.S. Bancorp in 2003. The company also discontinued its $2,880 per year parking stipend for Duff and others.

Ameriprise Financial Inc.

At Ameriprise Financial Inc., James Cracchiolo, CEO of the financial planning, investment and insurance giant, took home 67 percent less in total compensation than he did a year ago. Cracchiolo and other named executives will not receive salary increases for 2009; they did not receive cash incentive awards or restricted stock awards for 2008 performance. Cracchiolo and others did receive cash incentives under a long-term incentive program that looks at three-year performance. Cracchiolo's $1.4 million award under that program was 55 percent less than last year.

Best Buy

At Best Buy, shortly after the Richfield-based electronics retailer announced an employee buyout program in December, CEO Brad Anderson said he would retire as CEO at the company's annual meeting in June. Anderson and the rest of the senior managers did not receive bonuses because Best Buy failed to meet its primary short-term incentive target. The bonus is based on an "economic value added" (EVA) target that was $476 million last year; the actual EVA performance was $323 million.

At Anderson's request, and consistent with his practice the past several years, the options to purchase shares that he would have received instead go to a discretionary award pool to be distributed to employees not otherwise eligible to get such awards.

Target Corp.

Target Corp. was hit hard by a downturn in consumer spending in 2008 and, as a result, the company failed to meet its financial goals. Executives, including new CEO Gregg Steinhafel (No. 29), did not receive non-equity incentive pay for fiscal 2008. But Steinhafel did get a bonus of $447,680 for 2008.

Target's board determined Steinhafel's bonus payment was based on "the additional responsibilities related to his promotion to chief executive officer, the strength of his leadership during a period of significant economic challenges and his focus on greater strategic alignment, transparency and clarity throughout the organization."

Bob Ulrich, who retired as Target CEO in May 2008 but remained chairman through January, took home $26.2 million. The bulk of that was $23 million in restricted stock awarded from 1993 to 1995 that vested when Ulrich turned 65. Last year, Ulrich ranked No. 1 on our list with total compensation of $116 million.

With Target's stock price around $40 to $43 per share, about one-third of the stock options Steinhafel and Ulrich own are underwater -- meaning the exercise price exceeds the current price.

UnitedHealth

Despite the fact that UnitedHealth's shares were down more than 50 percent last year, CEO Stephen Hemsley (No. 5) was able to exercise $6.2 million worth of options. Those options, awarded in 1999, are the main reason his total compensation went up 88 percent from 2007. Hemsley's salary remained the same, but his bonus was cut in half because the company failed to meet most of its targeted financial goals for revenue, operating income and cash flow. Hemsley received no new equity awards for the second year in a row.

3M Co.

The global recession caught up with 3M in the second half of 2008, as sales dropped across the big diversified manufacturer's product line. CEO George Buckley's total compensation of $5.47 million (No. 13) was down from his 2007 total of $7.5 million primarily because "3M failed to meet 100 percent of its financial incentive targets,'' according to the company's proxy statement. As a result, Buckley's incentive pay in 2008 was down 37.1 percent.

Tennant Co.

Tennant Co., which makes industrial floor-cleaning equipment, missed its short-term performance goals and executives didn't get bonuses for 2008. Also, with the stock price depressed, the value of restricted shares that vested was down as well. At the request of management, led by CEO Chris Killingstad, the Tennant compensation committee awarded no increases in annual base salary for top executives in 2009.

St. Jude Medical Inc.

St. Jude Medical Inc., a big medical-device maker, had a very good year, with sales up 13 percent and profits up 45.7 percent. But the company's market value slid along with slumping global markets. CEO Daniel Starks exercised 10-year-old options that were set to expire in December, netting a $29.8 million gain and putting him atop our list at No. 1. This was his biggest payday as CEO of St. Jude. Stark's base salary rate, annual incentive target and cash perquisite allowance have not increased since 2006.

Buffalo Wild Wings

Buffalo Wild Wings' stock price was up for the year -- a rarity in 2008 -- and the company exceeded revenue and net income targets, entitling senior managers, including CEO Sally Smith, to larger bonuses. Smith's bonus was up 35.9 percent but her total compensation was down from last year, mainly because she exercised no stock options in 2008.

C.H. Robinson Worldwide

C.H. Robinson Worldwide, a global provider of transportation and logistics services, performed well enough to allow CEO John Wiehoff to exercise some previously issued options. Since 2003, the company has relied on performance-based restricted stock for its long-term incentive compensation and has not issued new stock options. Fewer stock-option gains meant Wiehoff's total compensation was down from $9.5 million in 2007. Wiehoff's base salary has been the same for the past three years; his bonus pay went up 6 percent, to $1.3 million, as the company met adjusted earnings goals.

John J. Oslund • 612-673-7206 • oslund@startribune.com Patrick Kennedy • 612-673-7926 • pkennedy@startribune.com

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