While Bank One Corp. shareholders saw the value of their stock erode by 35 percent last year, the company’s chief executive officer saw his cash compensation increase by 65 percent.
But John B. McCoy’s cash pay spiked not because the company thought he had done a great job in 1999. Instead, he was paid for leaving, which he did in late December amid pressure from the board of directors and investors after problems at Bank One’s huge credit card operation hurt earnings. His severance pay came to $10.3 million, a package two consultants that advised the bank said was in keeping with the going rate.
While McCoy’s circumstances are unique, the disparity between pay and performance is not. Indeed, the well-insulated world of CEO pay has proven resistant to long-running shareholder efforts to better link pay with corporate performance.
“We find little connection between cash compensation and stock performance,” said Ann Yerger, director of research for the Council of Institutional Investors, a Washington, D.C., organization that represents pension funds.
“The problem is the spiral effect,” she said. “Most companies want to pay their executives at the median or in the 75th percentile for their peer groups–and that has nothing to do with performance.”
An analysis conducted for the Tribune by compensation consultant William M. Mercer Inc. found significant disparities between pay and performance among some of the region’s most notable corporate chieftains.
At one end of the list were chief executives who enjoyed hefty increases in cash compensation while their companies’ stock prices tanked or stagnated.
This list was topped by McCoy, followed by John F. Fiedler of Borg Warner Automotive Inc.; Arthur C. Martinez of Sears, Roebuck and Co.; Mark C. Vonnahme of CNA Surety Corp.; and James P. Roemer of Bell & Howell Co.
At the other end of the spectrum were executives whose pay packages shrunk, even as their companies’ stock prices soared.
Robert F. Bernard, CEO of MarchFirst Inc., formerly Whittman-Hart, led that pack, followed by Floyd L. English of Andrew Corp., Frederick A. Krehbiel of Molex Inc., James C. Smith of First Health Group Corp. and Richard L. Keyser of W.W. Grainger Inc.
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A simple comparison of one-year changes in cash pay and stock return is not the only way to measure performance, but it offers a snapshot of which CEOs provided the best bargain for shareholders.
The disparity that occurs when cash pay rises sharply while a stock sinks does not necessarily mean a pay hike was unjustified, said Rene King, a principal with Mercer in Chicago. “The increase in pay may have been a result of factors such as previously below-market levels of pay, a shift in the pay package from equity to cash or non-standard items, such as relocation expense reimbursement,” he said.
But it also can be a case of a board of directors trying to keep a CEO happy if stock-based compensation–the lion’s share of most CEO pay packages–is lagging because of poor performance of company stock.
“A board will say, `The stock price performance has been rotten, so we need to give “Bill” more value, so we’ll boost his salary,'” said Patrick McGurn, director of corporate programs at Institutional Shareholder Services, a Rockville, Md., firm that advises large institutional investors.
In some cases, this is justified, he acknowledged. The stock market last year overlooked many old-economy firms that met or beat earnings targets as investors flocked to unproven Internet companies.
But in many cases, there is more to the story, he said.
“If you start to scratch away at why the market didn’t realize `how good we were,’ it’s often because the market didn’t think the company did that well,” he said.
The circumstances surrounding instances of big raises for CEOs whose stock sank are as varied as the companies themselves.
At auto supplier Borg Warner, Fiedler reaped a 90 percent increase in total cash pay, largely from a bonus worth more than $1 million that was paid because the company improved its financial results significantly last year over 1998, a spokeswoman said.
But company officials point out that other long-term stock awards fell drastically in 1999 because of the company’s 27 percent stock price decline for the period.
At Sears, the big jump in Martinez’s pay came from a $2.2 million bonus, which was more than double the bonus he received in 1998.
The bonuses of Sears’ top executives are based solely on the growth in earnings per share, not stock price, explained Sears spokeswoman Peggy Palter.
Martinez received his large bonus because Sears’ earnings per share rose 17 percent in 1999, excluding one-time items. “But as often happens, the stock market didn’t give Sears immediate credit for the increase,” Palter said.
Of course, it helped that Sears’ earnings per share declined in 1998, giving Martinez an easy comparison year.
At CNA Surety, a major chunk of Vonnahme’s pay increase came from his annual bonus, which rose 68 percent, to $275,000 in 1999 from $163,200 in 1998. “Mr. Vonnahme’s bonus was based on performance and profitability, not stock price,” said Clark Walter, a spokesman for CNA Financial Corp., which owns 62 percent of CNA Surety and in March offered to buy the remaining shares.
At Bell & Howell, a good portion of Roemer’s cash pay increase was due to reimbursement for relocation expenses, noted Bob Rook, vice president of human resources operations.
At the other end of the pay-for-performance spectrum are CEOs whose pay stagnated or dropped as their companies’ stock fared well, making the CEOs look like good bargains for shareholders. And in one sense, they are–but frequently, the stories are more complex.
For instance, the stock of many high-tech firms enjoyed huge run-ups last year, but that didn’t mean their management teams necessarily met internal financial goals.
At Andrew Corp., a telecommunications infrastructure equipment firm whose stock price soared, chief executive English’s cash compensation dropped because he received no bonus. Bonuses are tied to growth in earnings per share, and there was no growth.
“No growth, no bonus. It’s that simple,” English said.
At Molex, which makes electronic and photonic equipment, Krehbiel saw his bonus slide because sales performance was not as strong as in 1998. “We try to tie compensation to results,” he said.
Similar dynamics also showed up in other sectors.
At First Health Group, which provides health benefits services to employers, Smith’s cash package dropped because he was not awarded a bonus. For Smith to receive a bonus, he had to achieve a minimum 10 percent “year-over-year growth and that didn’t happen between 1998 and 1999,” said chief financial officer Joe Whitters.
And at W.W. Grainger, a distributor of maintenance and repair supplies, Keyser’s cash pay fell because he did not meet key performance targets, a spokesman said.
Still, cash pay is a relatively small part of a CEO’s total compensation these days.
“It’s the tail of the dog, frankly,” said McGurn of Institutional Shareholder Services. “Most pay is delivered by equity at this point.”
In fact, Bernard, of technology consultant MarchFirst, wasn’t paid a salary in 1999, but he received 200,000 stock options. In 1999, Bernard, who founded predecessor firm Whittman-Hart, had a salary of $130,152 and received 102,000 stock options. As of March 31, he had a 9 percent stake in MarchFirst.
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The company did not respond to requests for comment on his compensation package.
But generally speaking, founders of companies hold significant stock positions, and if those stocks soar, so do the fortunes of the founders–all other pay considerations aside.