Time to say goodbye. More than a dozen Minnesota CEOs departed in 2007 -- some in triumph, some in defeat. However sorrowful the professional circumstances may have been for some of them, parting for most was sweet. Longtime Target Corp. CEO Robert Ulrich took a pay package worth nearly $116 million with him as he left the big discounter and headed into mandatory retirement, enough to earn him the top spot among the Star Tribune's list of the 100 highest-paid CEOs in 2007.

Veteran General Mills Inc. CEO Stephen Sanger retired from the thriving food company he's led for more than dozen years, taking with him $23 million in 2007 pay.

And Medtronic Inc. CEO Art Collins retired with $6.1 million from Minnesota's biggest medical technology company. During his six years as CEO, revenue more than doubled and product offerings expanded, although returns to shareholders were in the mid-single digits.

Former Fair Isaac Corp. CEO Thomas Grudnowski left in late 2006 after the influential consumer credit scoring firm stumbled badly. But with nearly $29 million in total compensation, most it from stock option gains, his credit is still good.

It wasn't all farewells. Joining the ranks of the top 10 highest-paid CEOs are Sean Casey, CEO of medical imaging start-up Virtual Radiologic Corp. ($22.9 million in total compensation) and Stephen Shank, CEO of online university Capella Education Co. ($11 million).

Both firms recently completed initial public offerings and have performed well in a tough economic environment.

Mixed signals

The unusually high turnover of CEOs at the top of the list helps explain some mixed signals coming from this year's analysis. Median total compensation for Minnesota's 100 highest-paid CEOs -- the point at which half the packages are more and half are less -- jumped 11 percent last year, to $1.526 million, marking the fourth consecutive year that the figure has topped the $1 million mark.

However, total cash compensation (defined as salary plus bonus) declined 14 percent in 2007. The median cash compensation for Minnesota executives fell to $679,152 in 2007, from $789,474 in 2006. (The comparable figure for 200 CEOs surveyed by the Wall Street Journal climbed 4.3 percent, to $2.94 million.)

The apparent contradiction is explained by the value realized from large stock-based incentives by this year's CEOs, many of whom departed after long tenures. Equity incentives accounted for about 60 percent of total compensation of $518.8 million for the 100 chief executives. Salary and bonus pay accounted for just 26 percent.

For the second year in a row, Minnesota's highest-paid executive took home more than 20 percent of the total compensation paid to all 100 CEOs. But excluding Ulrich from 2007 figures and former UnitedHealth Group Inc. CEO William McGuire, who topped our 2006 list with $127 million, Minnesota's highest-paid CEOs took home just 1.5 percent more in total compensation than they did in 2006.

Meanwhile, salaries for rank-and-file workers in the Midwest rose between 3.7 and 4 percent in 2007, a bit faster than in 2006, according to a survey of about 1,300 employers by World at Work, a salary-tracking firm.

Altogether, 60 Minnesota executives took home $1 million or more in total 2007 pay, compared with 58 in 2006 and a record 66 in 2005. Total compensation includes salary, bonus and other sources of income, including gains from the exercise of previously issued stock options and restricted shares vesting during the year.

V. John Ella, an attorney with the Minneapolis firm of Jackson Lewis, said that "2007 was definitely a historic year for CEO turnover at Minnesota's largest companies. But despite NWA's pending merger, we continue to enjoy a healthy concentration of Fortune 500 headquarters here, and thus a healthy population of executives, and hopefully these new leaders will oversee continued growth."

Ella, whose practice includes executive compensation, said that it's "possible that the decrease in cash compensation is partly a sign of general tightening in the economy, as well as steadily increasing pressure from shareholder advocates. The 1.5 percent increase overall [after subtracting Ulrich and McGuire] is statistically flat, which seems like a healthy market response in this environment."

Veteran executive recruiter Lee Artimovich, managing director of Korn/Ferry International's Minneapolis office, said that breaking down companies into three groups helps explain the dynamics of CEO longevity and turnover.

First are the big Fortune 500 companies where succession planning is a priority and the CEO typically is promoted from within the executive ranks, Artimovich said. In the last year, that no-surprises scenario has played out at Target, General Mills and Medtronic.

In the middle tier are high-growth-potential companies that tend to produce "a big hit or a big miss," he said. Think Fair Isaac, the credit-scoring firm that disappointed investors in 2006, which preceded Grudnowski's departure.

Or Vital Images, a medical imaging company. In May 2007, CEO Jay Miller rang the opening bell on the Nasdaq Stock Market to celebrate the firm's 10th anniversary as a public company. In July, Vital Images reported weaker-than-expected second-quarter earnings. The stock tanked, and by early January, Miller was gone.

"There is a shorter time horizon on these companies to get them fixed," Artimovich said.

Start-ups are the third group. Examples this year include Capella and Virtual Radiologic, where the CEO is a company founder who also succeeds at the helm of a public company. Capella's Shank, Virtual's Casey and Digital River's Joel Ronning (No. 3 with $32.7 million) fall into this group.

Stock options

More Minnesota executives received stock options in 2007 than in 2006. But collectively they got 2 percent fewer options than in 2006, and last year's grants were valued for accounting purposes at 20 percent below those received in 2006. In other words, although more executives were granted options (55 last year vs. 42 in 2006), the grants and their current values were less.

That's not surprising. Always controversial, stock options became expensive, thanks to a 2006 accounting-rule change that requires companies to record a charge against earnings over the period that an option vests. Previously, only a footnote disclosing the estimated value of option grants was required.

Critics of options point out that they're based on what is, at best, a crude measure of a company's success: its stock price at a certain point in time.

Options entitle the holder, after a vesting period, to buy a share of the company's stock for a predesignated price, normally the market price on the date the option is granted. Options have value only if the company's stock price increases after the grant date.

In 1999 -- the last full year of the 1990s bull market before the tech bubble burst -- option gains accounted for 70 percent of total compensation for Minnesota's highest-paid CEOs. Last year, the figure was 58 percent (or about 51 percent if Ulrich's $93 million options gain is excluded).

Gains on stock options typically boost executives into the highest-paid ranks, and this year is no exception: Eight of the top 10 CEOs got there by exercising options.

Defenders of stock options say that, for executives at high-risk, start-up firms short on cash but long on potential, options offer a powerful incentive.

"Options continue to be the most-used form of equity-based compensation," said Thomas Martin, an attorney with the Dorsey & Whitney law firm in Minneapolis. But Martin acknowledged that option grants have changed: "Many companies now grant options only to upper-level executives; have shortened the term of options so that they have less 'value' under the pricing formulas used for accounting, and now mix option grants with other equity incentives, such as restricted stock and performance awards, to try to limit cost."

Restricted stock is a grant of shares that typically vest over time and can be forfeited if the manager is fired or leaves the company. Martin said a recent compensation survey indicated that, in 2004, only 52 percent of the surveyed companies had incentive plans that authorized "full value" awards such as restricted stock. By 2008, 87 percent of the same companies had these plans, Martin said.

"With these alternative equity grants available, the average number of options granted, and the overall 'burn rate' of shares granted under equity plans annually, has declined. But options are far from dead," Martin said.

Because options provide more "upside" if a company performs well, they are the prevailing incentive used for start-up firms, he said.

Jack Militello, a professor of management at the University of St. Thomas, said that the high-risk, high-reward nature of start-ups tends to reinforce the compensation cycle in business just as it does in professional sports.

"We know you are going to succeed," Militello said of the typical CEO. "But we also know that you are not going to succeed for long. Maybe that's what we are paying for. ... The notion that they will not find another economic home."

Payday highlights

Highlights from this year's survey:

• 3M's George Buckley pulled down the biggest salary, $1.67 million. Target CEO Ulrich's $1.66 million placed second. John Morgan, CEO of Winmark Corp., got the lowest salary on our list, at $230,000.

• Of the 100 CEOs, 82 got raises, 13 got the same salary as the prior year, and four took salary cuts.

• For the second consecutive year, James Cracchiolo of Ameriprise Financial Inc. was the recipient of the biggest bonus: $12.56 million in 2007 ($9.5 million in 2006); Jay Fishman of the Travelers Companies Inc. (formerly St. Paul Travelers) got the second-biggest bonus last year, $7.5 million.

• The smallest bonus -- $13,860 -- went to Steve Wagenheim, CEO of Granite City Food & Brewery. Somebody buy Steve a beer.

• Overall, 83 of the 100 CEOs got a bonus last year, including 22 who got $1 million or more. Seventeen received no bonus, up from 15 in 2006.

• Of the 35 chief executives who sold stock options last year, the biggest exerciser was Ulrich ($93.5 million); followed by Best Buy's Brad Anderson ($46.1 million) and Ronning of Digital River ($31.7 million).

Best buys?

Among the 10 highest-paid CEOs, one-year returns were negative at four companies (Target, Best Buy, Digital River and Fair Isaac). The biggest one-year gainer among the top 10 was Capella, where CEO Shank delivered a 168.5 percent return.

Overall, one-year total returns for the 100 companies were positive at 54 firms and negative at 42. There were four new offerings during the year, including three initial public offerings -- Virtual Radiologic, Dolan Media and Compellent Technologies. Northwest Airlines also returned as a public company after emerging from Chapter 11 bankruptcy in May.

Total return for the Standard & Poor's 500 index was 5.5 percent in 2007, while the Bloomberg-Star Tribune index of Minnesota's 100 largest companies rose 6.4 percent.

But when it comes to CEO pay and company performance, you have to look lower on the list and consider a longer time period. The best three-year returns are at small and mid-cap stocks such as Rural Cellular (three year-return: 92 percent). Longtime CEO Richard Ekstrand (No. 36, at $2.3 million) presided over the sale of the Alexandria, Minn.-based company, which is being acquired by Verizon Wireless for $757 million.

At IntriCon, which makes the electronic brains and amplifiers for hearing-aid manufacturers, investors have enjoyed three-year total returns of 82.3 percent under CEO Mark Gorder (No. 91, with $402,000).

And at Angeion, which makes cardiorespiratory diagnostic systems, CEO Rodney Young (No. 63, with $963,000) has delivered three-year returns of 55.8 percent, despite having a down year in 2007.

Female CEOs

Four female CEOs made our list, down from five last year. Sally Smith, CEO at Buffalo Wild Wings, ranked highest, at No. 26, with $4.1 million in total compensation. Susan Engel, the departing CEO of troubled collectibles retailer Lenox Group Inc., left under pressure after presiding over a decadelong decline in the company's stock price.

Laura Hamilton, CEO of MTS Systems, joins the list at No. 67, with $698,000 in total compensation after succeeding longtime CEO Sid Emery at the testing and simulation-systems maker. Kathleen Iverson, CEO of manufacturing technology firm CyberOptics, ranked No. 99 in 2007, with $349,000 in total pay. She dropped 11 spots from last year.

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