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Executive compensation: 2006 annual report

  • Article by: John J. Oslund and Patrick Kennedy
  • July 31, 2006 - 11:37 AM

Two out of every three CEOs in the Star Tribune's annual survey of Minnesota's 100 highest-paid executives enjoyed paydays of seven digits or higher in 2005.

For the second consecutive year, average total compensation for Minnesota CEOs climbed well over $1 million. Median total compensation jumped 59.3 percent to $1.791 million -- the highest since 1997, when the newspaper began tracking total compensation using the same methodology.

The gain in median pay for Minnesota CEOs was nearly four times the 15.8 percent gain found in April's national survey of 350 CEOs conducted by the Wall Street Journal and Mercer Human Resources Consulting.

While the median total CEO pay package in the Journal's national sample is far higher ($6 million), Gopher state CEOs are certainly playing catch-up. In 1999, at the peak of the tech bubble, just 46 Minnesota CEOs were making $1 million or more.

Surveyed CEOs paid at least $1 million:

1999
46

2000
36

2001
43

2002
45

2003
47

2004
55

Total pay for Minnesota CEOs declined in 2002, reflecting the recession and falling stock markets in 2000 and 2001. But by 2003, executive pay recovered its upward trajectory.

Last year, it went vertical.

Even after excluding the unusually large 2004 payday of UnitedHealth Group CEO William McGuire, total pay for the other 99 CEOs still jumped 45 percent in 2005 to $431 million from $297 million in 2004. The lowest-paid CEO on our list took home $379,000 last year, about 11 percent higher than 2004.

Total compensation includes salary, bonus, restricted stock grants and gains from previously issued stock options and other compensation. McGuire, who ranked No. 1 on our list in 2004, did not exercise any stock options last year, which explains his 2005 ranking of No. 11.

The across-the-board surge in all categories of CEO pay comes despite modest stock-market performance by Minnesota firms. Nearly half -- 48 of 99 -- had negative one-year returns.

Total return for the Standard & Poor's 500 index rose just 4.9 percent in 2005, while the Bloomberg-Star Tribune index of Minnesota's 100 largest companies turned in an even more anemic 2.9 percent total return.

Among companies employing the 10 highest-paid CEOs, the one-year total return to shareholders was negative at four: Polaris, TCF, 3M and Digital River.

HIGHEST TOTAL PAY
Bob Ulrich, Target
$45 million

HIGHEST SALARY
William McGuire, UnitedHealth
$2.2 million

BIGGEST BONUS
Bob Ulrich, Target
$6.5 million

BIGGEST GAIN FROM STOCK-OPTION EXERCISE
Bahram Akradi, Life Time Fitness
$37.4 million

HIGHEST CURRENT VALUE OF NEW OPTIONS
William McGuire
$48.9 million

A three-year look at total return, however, reveals double-digit gains by all 10. And among the 88 companies with comparable data, three-year total returns were positive at 74 companies and negative at 14. (All company returns are calculated based on the year or years for which the CEO is compensated.)

Still, mega-salaries accompanied by last year's meager returns raise the perennial question about CEO compensation: Are they worth the money?

"I represent executives and even I find it hard to explain a few of the numbers in the survey," said V. John Ella, a Minneapolis employment attorney.

"People who want to make the pay-for-performance argument are finding it harder and harder," said Robert Kennedy, professor of ethics and business law at the University of St. Thomas College of Business.

In recent months, media scrutiny of CEO pay has intensified. The outsize pay and compensation practices of McGuire and the board at UnitedHealth Group have attracted national attention and an informal inquiry from the Securities and Exchange Commission.

Other forces are coming to bear, too. Stricter accountability for chief executives is a cornerstone of the Sarbanes-Oxley Act passed in 2002 after the Enron scandal. Key provisions of the act are only now taking effect.

And after a decade-long debate, accounting rules are taking effect this year that require public companies to account for expenses associated with issuing stock options to employees. Stock options, in particular, have fueled the huge windfalls in executive pay since the early 1990s.

Separately, the SEC has said it will require far more extensive disclosure of executive perquisites beginning in 2007.

Either compensation gains will begin to moderate, Ella said, "or it will never change, because executives will always be able to game the system to their advantage. I happen to think we are on the cusp of change."

Others aren't so sure.

"If you are one of the players, then you can begin to demand certain benefits," Kennedy said. But "there is a certain lack of self-consciousness about this. Some people should be just be embarrassed that they are taking home this amount of money."

Brian Shapiro, a professor of accounting at St. Thomas whose research includes executive accountability, said that outsize executive compensation "violates people's basic sense of fairness. ... It bothers us to know people make this much money only because they have so much economic power."

Option mania

As usual, stock-option gains accounted for the largest piece (46 percent) of total compensation. Forty-three Minnesota CEOs exercised $202.5 million in options last year.

In 2004, 50 CEOs had option gains totaling $261 million. But UnitedHealth's McGuire alone accounted for $114 million of the 2004 total. Excluding him from the year-to-year comparison reveals that option gains by the other 99 soared by 37.5 percent in 2005.

Of the 43 CEOs who sold stock last year, the biggest exerciser, appropriately enough, was Bahram Akradi, founder and CEO of Life Time Fitness, the chain of health clubs that went public in June 2004. Akradi benched $37.4 million in gains on his way to a $41.3 million payday.

Target's Bob Ulrich redeemed $34.9 million in the retailer's shares -- enough to make him No. 1 on our overall list with total pay of $45 million. Polaris CEO Tom Tiller zoomed into third place overall, with $29.4 million worth of options and total pay of $33.4 million.

Cash compensation

Actual cash compensation grew briskly, too. Median salary-plus-bonus for the 100 highest-paid Minnesota CEOs jumped nearly 17 percent to $775,883.

That compares with a salary-and-bonus dip last year of about 2.5 percent, the Wall Street Journal found in its April survey of 350 chief executives.

Among Minnesota CEOs in 2005, UnitedHealth's McGuire pulled down the biggest salary ($2.2 million) while Target CEO Ulrich's $1.558 million placed second.

But Ulrich got the biggest bonus: $6.5 million. McGuire came next at $5.8 million. Two financial-services executives-- Jerry Grundhofer at U.S. Bancorp and James Cracchiolo of Ameriprise -- tied for third place in the bonus derby at $5 million each.

Overall, 81 of the 100 CEOs got year-over-year salary increases; 13 got the same amount in both years.

In the bonus department, nine out of every 10 CEOs got a bonus last year. Of those, 50 got bigger bonuses in 2005 than 2004 while 31 saw their bonuses trimmed. Ten CEOs didn't get a bonus in 2005, among them Doug Steenland at struggling Northwest Airlines.

'Other compensation'

In 2002, a bear year for most stocks, "other" kinds of compensation totaled $43 million for Minnesota's 100 highest-paid CEOs. "Other" included restricted stock awards, payouts for meeting long-term goals, 401(k) contributions, payments to supplemental executive retirement plans, life insurance and other perks.

After dipping to $38.4 million for the group in 2003, this pay category rebounded to $48 million in 2004, then doubled to $99 million in 2005. Put another way, "other compensation" accounted for 22 cents of every dollar in CEO pay last year.

Of that, $70 million came from grants of restricted stock -- a fourfold increase in such grants compared with 2003.

3M's new CEO, George Buckley, was attracted from Brunswick Corp. in late 2005 in part with $16 million in 3M restricted shares. William Cooper, longtime CEO of TCF Financial, got $8.6 million in restricted stock to remain as chairman after retiring as CEO in January.

In all, 39 Minnesota CEOs got restricted stock last year, up from 26 in 2004. Of those, 18 got grants of $1 million or more.

Female CEOs

Five female CEOs made our 2005 list, one fewer than last year. Janet Dolan, the retiring CEO of Tennant Co., ranked highest at No. 41.

Sally Smith, president and CEO of Buffalo Wild Wings, ranked No. 58. Susan Engel of Lenox Group Inc. (formerly Department 56) was No. 57. Marti Morfitt of CNS ranked 62nd. Karen Gilles Larson, president and CEO of Synovis Life Technologies, was 91st.

John J. Oslund • oslund@startribune.com Patrick Kennedy • pkennedy@startribune.com

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