Forget the gold watch.
Consider the farewell bestowed upon Vernon R. Loucks Jr. last year. He stepped down after 18 years of heading Baxter International Inc., the giant health-care company based in north suburban Deerfield. The company had a good year, but its profits rose modestly.
Loucks received a 9 percent salary increase, bringing his pay up to $900,000 a year, and another $324,646 in company-covered expenses. He got a $1.46 million bonus.
Then, company officials said, in order to recognize his past and future services and to “motivate” him to smoothly hand over his job to his successor, Loucks received stock option grants worth an estimated $17.6 million.
Loucks could not be reached for comment. Company officials defended his stock option grant, explaining he will remain on as chairman of the board and that stock options “further align Mr. Loucks’ interest with the interest of all Baxter stockholders.”
Loucks’ compensation in 1998 is symbolic of two issues at the heart of the controversy over CEO pay.
First, the pay stubs of the nation’s chief executives continue to significantly outpace the raises of the broader workforce. And, secondly, some experts and even chief executives themselves point to a growing decoupling of the link between CEO pay and company performance.
Loucks was not alone among Chicago-area CEOs in seeing his compensation rise significantly.
The average total compensation last year for CEOs in the Chicago area’s top 100 publicly traded companies–salaries, bonuses, other cash payments and the estimated value of stock option grants– climbed to nearly $4.2 million, according to a study by the Tribune and Bridge News.
That was a 23 percent increase to the study.
The average base salary and bonus for these CEOs increased by 15 percent, reaching $1.5 million last year, the study shows.
Among the 100 largest Midwest companies, according to figures compiled by William M. Mercer Inc., a management consulting firm, the average total compensation for executives in the region was $4.9 million.
Most of the nation’s best-paid CEOs make their livings at high-tech, entertainment and banking giants. Michael Eisner, Walt Disney Co.’s CEO, had the highest total 1998 income at $575.6 million, including stock options he exercised, according to Business Week.
A question of performance
Experts say there are at least two factors contributing to the rise in CEO pay. First is the expectation, built over several years of ever higher pay packages and a bullish stock market, that chief executives automatically deserve stellar increases. Secondly, experts say that fierce bidding wars for hot CEOs has bumped up pay packages for those in high demand, and for everyone else as well.
The highest-compensated CEO among Chicago’s biggest companies says his package is in line with the strong performance of his company.
McDonald’s CEO Jack Greenberg, who topped the Tribune/ Bridge survey with his $25.7 million package last year, said he’s embarrassed about the publicity. But he also believes he earns it.
“I believe in pay for performance,” Greenberg said in an interview in his Oak Brook office. “If you’ve had a good year, your pay should show that, and if you have a worse than expected year, your pay should reflect that, too.”
Many McDonald’s franchise holders, he added, made more than he did.
Indeed, Greenberg said, when his wife heard about Eisner’s salary, she quipped that the Disney CEO’s bundle of money made him “look like a pauper.”
Yet while Greenberg believes he earned his money, critics say that is not true of an increasing number of CEOs.
“You see many people earning huge amounts of money who have underperformed the market,” said veteran compensation expert Graef “Bud” Crystal of San Rafael, Calif., basing his view on a study of 429 firms’ payrolls last year. “You continually find companies that will grudgingly cut a bonus a little bit back, but then they turn around and give a great big stock option.”
A growing number of companies are handing out so-called mega-grants, stock options valued at more than $10 million. Nearly half of the companies in one survey gave away mega-grants last year, nearly twice as many as in 1997 and almost three times as many as in 1996, according to Pearl Meyer & Partners Inc., a management consulting firm in New York City.
Among those Chicago CEOs who received stock options last year, the average grant weighed in at an estimated $4 million, and the options accounted for 55 percent of the CEO’s overall pay.
Making comparisons
To a chorus of critics, CEO pay is simply out of kilter.
“We think it is more and more out of control,” said Richard Trumka, the secretary-treasurer for the AFL-CIO in Washington. “In 1980, a CEO made 42 times the average factory worker’s salary. In 1990, it was 85 times. In 1997, it was 326 times. If the trend continues, in 2050, it will be 150,000. In Germany, a CEO makes 25 times the wages of an average working person.”
The nation’s salaried workers last year averaged a 1.8 percent pay hike, when adjusted for inflation. The median salary last year for all American workers was $33,000, government statistics show.
More than ever, the debate over explosive CEO pay packages centers on stock options that companies have increasingly heaped upon their top leaders.
Among the nation’s Fortune 500 firms, the median value of annual stock options granted to a CEO was $697,500 in 1996, according to Executive Compensation Advisory Services of Springfield, Va. By 1998, the median amount had more than doubled, hitting nearly $1.6 million, said the suburban Washington consulting firm.
The way many CEOs’ wealth grows is through stockpiling their grants and then cashing them in at a good price.
John H. Bryan, the CEO of Sara Lee Corp., last year cashed some options that he had accumulated over the last decade. The result: They were worth $16.9 million.
Setting the bar
From what was once considered an added incentive, stock options have turned into the meat and potatoes of many pay packages.
That is good, many CEOs argue, because it links their financial fate to that of their shareholders. It makes them more accountable.
“If the system works on the downside (of the market) as well as on the upside, it is hard to complain,” said John Rau, the CEO of Chicago Title Co.
Since taking over his company in 1996, Rau said he has stripped out some procedures that automatically generated cash bonuses, replacing them with stocks that “put real leverage” in his firm’s pay structure for executives.
Yet relying so heavily on stock options has a downside.
To begin with, stock options without any strings are not a good reward, some experts say.
“Theoretically, you could have a situation where the company underperforms the market, yet the management makes a killing on the market,” said Nicholas Pontikes, CEO of Rosemont-based Comdisco Inc.
One solution, experts suggest, is to set high strike prices for the stock options, or to link their options to the performance of competing companies, so that the CEOs can only cash in when their companies do well.
So far, only a small percentage of firms have shifted toward more rigorous guidelines for giving out their options, experts say. They added, however, that the trend appears to be growing.
With CEOs constantly watching how their stock performs, there is a danger that they will focus only “on short term gains and meeting analysts’ earnings targets,” said James Knight, an official in the Chicago office of SCA Consulting.
“You can sell out today at a premium as Amoco did (in its sale last year to British Petroleum Co), and a bunch of people got an awful lot of money,” Knight said, referring to the $53.8 billion deal last year in which BP took over Amoco Corp. and shifted the headquarters to London. “But was that the right decision for the long term? Maybe yes. Maybe no.”
Because they have granted more and more options to their executives, some companies have run into another problem. Some shareholders are furious over an explosion of shares that has watered down the value of the ones they currently hold.
“Companies are going out to borrow money, or they are drawing down on cash reserves simply because they are trying to offset the dilution,” said Patrick McGurn, an official with Institutional Shareholder Services, a proxy advisory firm in Rockville, Md.
Executive headhunters have run into another problem with CEOs who have options stockpiled.
“The difficulty is dislodging people from their options,” said Andrea Redmond, the head of the Chicago office for Russell Reynolds Associates, Inc., an executive search firm. “I just went through a horrendous deal where a client had to buy them out with more cash. And they had to give them even more grants.”
Added complexity
So, too, how companies reward their CEOs is not always easy to figure out nowadays, because of the greater complexity of CEOs’ pay packages.
For example, Howard Bernick, the CEO of Melrose Park-based beauty products firm Alberto-Culver Co., saw his salary and bonus drop last year by 8 percent. That was because the company’s performance was down, so Bernick, the son-in-law of the founder, took a pay cut, company officials said. But he also received $2.7 million worth of stock options, a 91 percent one-year hike.
The discrepancy?
The decision to hand out the options was made at the end of the prior fiscal year, when the company had been on a financial roll, explained Bernick and company officials. “We are going to sit down and see if we can’t present this more clearly within SEC rules,” Bernick added.
As Bank One Corp., the product of last year’s merger between Banc One and First Chicago NBD Corp., laid out the reasoning in its proxy statement for the pay for John B. McCoy, its president and CEO, it said he did not receive a restricted stock award because the company fell short of meeting certain earnings per share and return on assets requirements in 1997 set by Banc One.
Still, he was granted $3.5 million in deferred compensation for leadership that “was not reflected in Banc One’s earnings,” the company said. He also received a $2.2 million bonus and $2.7 million in stock option grants.
“The size of my job only increased 60 percent this year. You can’t just take the averages. I’ve not had a salary increase for four years,” McCoy said.
As for his deferred compensation, he noted that it was not linked to his options. “It’s a way of keeping me at the company. If I’m not here, I can’t get it.”
Yet while McCoy and others justify their pay packages, shareholder activists, institutional investors and a group of unions increasingly do not.
Their basic strategy has been to challenge the makeup of companies’ compensation committees and to either stop companies from repricing their options or to force them to require shareholders to vote on repricing decisions.
To compensation expert Crystal, one of the sharpest critics of CEOs’ pay packages, the activists have “been utter failures” in bringing about change and exerting controls over executives’ pay.
Ann Yerger, an official with the Council of Institutional Investors in Washington, which represents major pension funds, concedes that there have been few of the reforms she would like to see when it comes to CEO compensation. That’s because, she said, there are too few voices raised like that of her group’s.
“Most of our energies are focused on a handful of companies,” she explained. “A handful will get the backlash, and the rest will coast.”
CEO compensation in the Top 100.
The CEOs are ranked by total 1998 compensation, including salary, bonus, other cash compensation and the estimated value of stock options granted in 1998. The ranking comprises the CEOs who headed up the Top 100 Chicago-area publicly held companies on Dec. 31, 1998.
Rank Name, Company
Total 1998 1998 salary, Estimated Total % Long-term
compensation bonus and value of 1997 increase compensa-
other pay stock options compen- 1997-98 tion: Gains
(1) granted in 1998 sation on options
(2) exercised
in 1998
1. Jack M. Greenberg, McDonald’s
$25,680,253 $2,505,603 $23,174,650 $7,438,655 245% $3,368,460
2. John H. Bryan, Sara Lee
$22,509,521 $3,153,773 $19,355,748 $6,349,740 254% $16,927,561
3. Vernon R. Loucks Jr., Baxter International
$20,353,254 $2,685,246 $17,668,008 $5,807,632 250% $3,880,209
4. Duane L. Burnham, Abbott Laboratories
$18,392,890 $3,267,974 $15,124,916 $12,881,987 43% $38,322,467
5. John Rau, Chicago Title
$15,397,986 $12,158,868 $3,239,118 $2,383,379 546% $0
6. William F. Aldinger, Household International
$14,958,319 $3,422,034 $11,536,285 $13,690,362 9% $0
7. Timothy H. Callahan, Equity Office
$13,486,600 $1,759,600 $11,727,000 $9,489,100 42% $0
8. Robert S. Morrison, Quaker Oats
$13,208,914 $2,496,094 $10,712,820 $33,589,476 -61% $0
9. Christopher B. Galvin, Motorola
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$10,286,655 $1,821,655 $8,465,000 $3,797,476 171% $0
10. John B. McCoy, Bank One
$10,045,084 $7,269,316 $2,775,768 $7,755,648 30% $0
11. Richard C. Notebaert, Ameritech
$9,637,916 $3,361,602 $6,276,314 $8,665,806 11% $2,578,732
12. Miles L. Marsh, Fort James
$8,433,129 $2,576,548 $5,856,581 $2,708,777 211% $0
13. Jerry D. Choate, Allstate
$8,182,522 $3,124,353 $5,058,169 $5,949,164 37% $6,600,988
14. Patrick G. Ryan, Aon
$7,153,264 $3,613,867 $3,539,397 $4,574,483 56% $0
15. Douglas Crocker II, Equity Residential
$6,539,800 $1,284,600 $5,255,200 $13,110,444 -50% $164,375
16. John W. Rowe, Unicom
$5,708,075 $4,154,325 $1,553,750 na na $0
17. Peter N. Larson, Brunswick
$5,537,747 $3,656,959 $1,880,788 $5,563,888 0% $0
18. Howard M. Dean, Dean Foods
$5,531,364 $1,585,662 $3,945,702 $2,350,642 135% $681,233
19. James P. Roemer, Bell & Howell
$5,363,548 $1,138,162 $4,225,386 $739,739 625% $0
20. William A. Osborn, Northern Trust
$5,355,092 $2,091,718 $3,263,374 $4,396,538 22% $196,799
21. Wendel H. Province, Midas
$5,101,024 $1,590,624 $3,510,400 na na $0
22. James E. Barlett, Galileo International
$5,064,201 $1,339,780 $3,724,421 $2,983,044 70% $0
23. J. Campbell Carruth, USFreightways
$5,021,244 $1,100,400 $3,920,844 $3,106,295 62% $0
24. L. Daniel Jorndt, Walgreen
$4,892,588 $1,839,728 $3,052,860 $1,587,077 208% $4,360,841
25. Arthur C. Martinez, Sears, Roebuck
$4,412,796 $2,383,075 $2,029,721 $8,172,672 -46% $0
26. Howard B. Bernick, Alberto-Culver
$4,406,596 $1,688,798 $2,717,798 $3,259,372 35% $2,872,092
27. Gerald Greenwald, UAL
$4,329,666 $1,707,674 $2,621,992 $3,252,377 33% $0
28. Jack Slevin, Comdisco
$4,171,593 $1,031,909 $3,139,684 $1,609,001 159% $5,670,283
29. John W. Madigan, Tribune
$4,084,341 $1,773,216 $2,311,125 $3,597,814 14% $8,711,893
30. Konrad Schlatter, Corn Products International
$4,048,312 $675,000 $3,373,312 $1,282,006 216% $943,110
31. Edward J. Mooney, Nalco Chemical
$4,019,774 $717,536 $3,302,238 $3,206,933 25% $0
32. Sam K. Reed, Keebler Foods
$4,018,368 $1,888,000 $2,130,368 $1,753,250 129% $0
33. Richard J. Almeida, Heller Financial
$3,936,127 $1,320,367 $2,615,760 na na $0
34. A.C.Zucaro, Old Republic International
$3,617,838 $1,559,628 $2,058,210 $2,898,785 25% $1,708,093
35. Robert E. Fowler, IMC Global
$3,603,534 $1,509,534 $2,094,000 $2,323,081 55% $0
36. Timothy R. Schwertfeger, John Nuveen
$3,567,908 $2,817,895 $750,013 $2,558,836 39% $0
37. David P. Storch, AAR
$3,543,754 $1,326,900 $2,216,854 $3,480,778 2% $0
38. Robert N. Burt, FMC
$3,529,110 $1,320,918 $2,208,192 $2,922,053 21% $0
39. John F. Fiedler, Borg-Warner Automotive
$3,422,325 $854,666 $2,567,659 $1,267,776 170% $0
40. James M. Ringler, Premark International
$3,263,944 $1,780,270 $1,483,674 $2,470,421 32% $0
41. W. James Farrell, Illinois Tool Works
$3,191,435 $1,520,435 $1,671,000 $2,729,942 17% $793,882
42. James R. Boris, Everen Capital
$3,028,204 $1,582,719 $1,445,485 $5,501,007 -45% $0
43. Melvin J. Gordon, Tootsie Roll Industries
$2,821,595 $2,821,595 $0 $2,575,852 10% $0
44. LeRoy T. Carlson Jr., Telephone and Data
$2,783,020 $598,287 $2,184,733 $945,074 194% $238,961
45. Richard C. Vie, Unitrin
$2,632,336 $899,349 $1,732,987 $1,478,455 78% $1,715,038
46. Bruce S. Chelberg, Whitman
$2,584,887 $2,584,887 $0 $3,108,725 -17% $4,809,669
47. Floyd L. English, Andrew Corp.
$2,572,466 $1,496,136 $1,076,330 $2,101,198 22% $453,043
48. King Harris, Pittway Corp.
$2,423,822 $1,375,256 $1,048,566 $1,699,695 43% $2,385,071
49. Robert W. Grubbs, Anixter
$2,418,915 $773,970 $1,644,945 $1,674,683 44% $0
50. Ronald H. Zech, GATX
$2,391,452 $1,092,547 $1,298,905 $2,283,027 5% $685,316
51. William C. Foote, USG
$2,354,121 $1,288,371 $1,065,750 $2,070,956 14% $0
52. Richard L. Keyser, W. W. Grainger
$2,326,117 $1,576,087 $750,030 $1,888,878 23% $838,256
53. Bruce Mason, True North
$2,314,851 $1,804,267 $510,584 $2,332,115 -1% $0
54. Roger W. Stone, Smurfit’Stone Container
$2,305,000 $105,000 $2,200,000 $2,037,467 13% $0
55. Howard B. Witt, Littelfuse
$2,215,600 $581,035 $1,634,565 $1,885,801 17% $770,648
56. Randall W. Larrimore, United Stationers
$2,167,667 $1,138,638 $1,029,029 $4,079,615 -47% $0
57. John S. Gates Jr., CenterPoint Properties
$2,135,634 $399,800 $1,735,834 $1,407,908 52% $0
58. John R. Horne, Navistar International
$2,100,851 $1,637,801 $463,050 $1,465,063 43% $0
59. S. Jay Stewart, Morton International
$1,932,194 $736,450 $1,195,744 $5,719,120 -66% $0
60. William L. Davis, R.R. Donnelley & Sons
$1,897,998 $1,897,998 $0 $13,390,864 -86% $0
61. Donald N. Boyce, Idex
$1,811,069 $887,640 $923,429 $1,541,946 17% $0
62. Carlos H. Cantu, ServiceMaster
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$1,807,000 $1,045,000 $762,000 $1,971,021 -8% $0
63. Carl A. Siebel, AptarGroup
$1,742,362 $802,537 $939,825 $1,148,721 52% $0
64. Michael W. Brennan, First Industrial
$1,672,779 $711,929 $960,850 $744,462 125% $0
65. Dennis J. Keller, DeVry
$1,515,301 $1,047,951 $467,350 $1,367,412 11% $0
66. Michael P. Krasny, CDW Computer Centers
$1,475,530 $1,475,530 $0 $2,005,322 -26% $0
67. Robert F. Bernard, Whittman-Hart
$1,394,080 $130,152 $1,263,928 $870,870 60% $0
68. Conrad Black (3), Hollinger International
$1,350,503 $582,684 $767,819 $1,091,579 24% $0
69. Christopher C. Milliken, Boise Cascade
$1,206,622 $600,022 $606,600 $586,135 106% $0
70. James C. Smith, First Health Group
$1,190,950 $1,190,950 $0 $1,520,235 -22% $9,825,878
71. Gary L. Neale, NiSource
$1,159,027 $945,027 $214,000 $1,092,704 6% $1,266,871
72. Frederick A. Krehbiel, Molex
$1,115,520 $1,097,893 $17,627 $1,100,934 1% $195,287
73. Jeffrey P. Rhodenbaugh, Specialty Equipment
$1,102,881 $1,102,881 $0 $909,603 21% $0
74. Joseph J. Ross, Federal Signal
$1,054,939 $741,439 $313,500 $1,014,472 4% $0
75. H. Donald Nelson, US Cellular
$1,006,237 $643,377 $362,860 $1,090,669 -8% $0
76. Richard E. Terry, Peoples Energy
$994,428 $863,000 $131,428 $854,475 16% $0
77. Thomas L. Fisher, Nicor
$989,576 $872,056 $117,520 $1,005,608 -2% $1,408,163
78. J. Patrick Gallagher Jr., Arthur J. Gallagher
$988,000 $755,000 $233,000 $661,100 49% $130,000
79. Edward A. Burkhardt, Wisconsin Central
$959,262 $874,125 $85,137 $703,529 36% $0
80. Michael J. Birck, Tellabs
$937,170 $937,170 $0 $743,352 26% $0
81. Joseph C. Scully, St. Paul Bancorp
$927,351 $761,851 $165,500 $948,539 -2% $0
82. Lou Weisbach, Ha-Lo Industries
$868,097 $500,000 $368,097 $500,250 74% $0
83. Robert P. O’Meara, First Midwest Bancorp
$834,787 $631,815 $202,972 $693,006 20% $1,636,880
84. Robert J. Cronin, Wallace Computer Services
$829,801 $618,301 $211,500 $970,084 -14% $228,889
85. Mark C. Vonnahme, CAN Surety
$814,334 $509,159 $305,175 $719,675 13% $0
86. Lee Hillman, Bally Total Fitness
$803,635 $803,635 $0 $5,400,024 -85% $2,279,690
87. Allen H. Koranda, MAF Bancorp
$779,810 $501,406 $278,404 $669,747 16% $0
88. Matthew S. Dominski, Urban Shopping Centers
$777,038 $777,038 $0 $655,612 19% $0
89. Michael R. Moran, Spiegel
$744,282 $687,681 $56,601 $535,272 39% $48,125
90. Christie A. Hefner, Playboy Enterprises
$717,773 $717,773 $0 $1,143,831 -37% $0
91. Donald W. Warkentin, Aerial Communications
$573,683 $428,996 $144,687 $751,757 -24% $0
92. William Wrigley (the late), William Wrigley Jr.
$552,693 $552,693 $0 $506,860 9% $0
93. Howard Walker, Manufactured Home
$492,829 $324,600 $168,229 $281,508 75% $0
94. Edward L. Kaplan, Zebra Technologies
$473,197 $473,197 $0 $458,620 3% $0
95. Matthew Bucksbaum, General Growth
$200,000 $200,000 $0 $175,000 14% $0
96. Laurence A. Tisch (4), CNA Financial
$122,427 $122,427 $0 $122,427 0% $0
97. Andrew J. Filipowski, Platinum Technology
na $1,616,000 na $5,475,335 na $8,350,000
— Robert E. Fowler, Jr.(5), Phosphate Resource
$0 $0 $0 na na na
— Robert P. Maher, Metzler Group
na na na $686,847 na na
— Kevin J. Ryan, Wesley Jessen VisionCare
na na na $1,066,416 na na
(1) ”Other pay” is apart from salary and bonus, and can include such items as moving expenses, the use of corporate jets or reimbursement for tax liabilities.
(2) The estimated value was included in company proxies. `In most cases it was reported as the potential realizable value at an assumed annual rate of 5 percent for stock price appreciation for the option term. Some companies, however, only report figures using the Black-Scholes option-pricing model.
(3) Conrad Black also receives compensation from parent company Hollinger Inc., which he heads.
(4) The compensation for Laurence A. Tisch reflects only director fees and CNA’s reimbursement for his services to Loews Corp., which he co-chairs and also holds and 85.1 percent stake in CNA Financial.
(5) Phosphate Resource Partners has its own stock, but in all other respects is a part of IMC Global Inc. IMC Chief Executive Robert E. Fowler Jr. holds the same role at Phosphate Resource Partners, but his compensation is paid by IMC.
na = not available
Sources: Bridge News/Tribune staff.
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