Firms Cut Director Pay, But CEO Salaries Soar

More companies pay directors in stock rather than cash

AS President Clinton and Republicans Pat Buchanan and Sen. Bob Dole criticize "corporate greed" on the presidential campaign trail, a number of American corporations appear to be listening.

Kellogg Company, joining a budding corporate movement, is the latest to eliminate retirement pay for outside directors. Until now, non-employee directors were entitled to an annual benefit equal to their annual retainer while on the board - for as many as 10 years after leaving the board. The cereal company's outside directors are paid a $25,000 retainer plus expenses and fees for attending meetings and monitoring the corporation's overall strategies and policies.

No explanation was given for eliminating the benefit, but such perks have come under fire from shareholders and others who contend they are excessive and may make outside directors less independent.

Going even further is the Campbell Soup Company, which has abolished director pensions, all benefits, and even the cash retainers of its outside directors. Campbell will henceforth pay them almost entirely in stock and stock options.

"Many companies are jumping on the bandwagon on this issue," says John England, a compensation specialist at Towers-Perrin, a benefits-consulting firm based in Valhalla, N.Y. "More and more companies are tightening up on directors' pay and perks."

Leading the fight on this issue is a small shareholders advocacy group called the Investors' Rights Association of America (IRAA). Last proxy season, the group filed 60 shareholder resolutions on matters of corporate governance. Since the beginning of the year, at least 20 companies have done away with retirement plans for outside directors.

"What we try to do is to get companies to pay their outside directors at least 50 percent in stock," says William Steiner, the founder of the two-year-old IRAA, based in Great Neck, N.Y. "Tying directors much more directly to the fortunes of outside shareholders has real merit."

The National Association of Corporate Directors agrees. A commission appointed by the group has called for the end of all perks for directors and substituting stock for cash in their compensation. As a result, other Fortune 500 companies are beginning to pay attention. B.F Goodrich, Digital Equipment, and Johnson & Johnson have all cut back on various perks given to outside directors.

"Everyone's happy when directors are paid in stock," says Dennis Carey, head of board recruiting at SpencerStuart, a recruiting firm in New York. "Directors are still being compensated for their work, and shareholders feel the companies are not just throwing around money."

Indeed, paying directors in stock and cutting their perks may cause directors to think more like owners, rather than caretakers. As for retirement plans, more and more companies are reevaluating the logic of paying outside directors for life.

In this spring's proxy season, the IRAA is filing at least 120 shareholder resolutions - double last year's number. Their proposals will call not only for the elimination of outside directors' pensions but also for at least half of outside directors' pay to be in common stock. H.J. Heinz, Westinghouse, and GTE are among the 30 companies targeted.

THE belt-tightening has yet to reach the top offices of corporate America. A survey of a few dozen large companies by the consulting firm Pearl Meyer & Partners recently found the average compensation for chief executive officers jumped 23 percent in 1996 - to $4.37 million. But salaries made up less than a quarter of the chief executive officers' total earnings. The major increase came in compensation tied by intention to performance - bonuses and stock option grants - which totaled 77 percent of the CEOs' pay.

"Despite the reforms being made by companies on the corporate director issue, CEOs have yet to look in the mirror and evaluate their own salaries," says Graef Crystal, a pay expert at the University of California at Berkeley. Soaring executive pay has spawned vociferous complaints from shareholders, politicians, and social critics.

New research by Mr. Crystal shows no real link between a CEO's paycheck and the company's performance and only a slender one to the company's size.

For example, Investment Technology Group paid its CEO, Raymond Killian, $15.5 million in salary, bonus and stock options in 1994 - though the company employs only 125 people, posted just $72 million in revenues and lost $7.9 million. That compensation puts him right up there with CEOs of mid-sized companies such as Octel Communications, which paid its chief executive, Robert Cohn, $10.4 million in total compensation.

"It's a table of random numbers, like throwing a darts against a wall," Mr. Crystal says. "Rather than being based on a formula, or on performance, how much chief executives get paid is almost totally at the discretion of the board."

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