Moves afoot to curb CEO salaries

Steps by shareholders and the SEC affect pay, stock options, 'golden parachutes.'

At a recent Saturday soccer game, Scott Klinger noted that the watching dads weren't griping about referee calls but about the pay of their companies' chief executive officers.

In the wake of corporate scandals such as the Enron affair, American workers have become more conscious of the huge gap between CEO pay and their own, says Mr. Klinger, co-director of Responsible Wealth, a group that is pushing to change a system that, he says, "violates the American sense of fairness."

The soccer-game angst is part of a growing backlash against top-executive salaries that now stand, by one measure, at 282 times average worker pay. It's an issue that often makes magazine covers - generally because CEO pay is rising. Now, although massive pay cuts aren't necessarily in the offing, there are signs of a downshift in corner-office perks:

• Last year, the average compensation of 365 top CEOs fell 33 percent to $7.4 million, the same level as in 1996, a survey by Business Week found. That largely reflects the decline in the value of stock options because of the weak stock market.

• Shareholder resolutions aimed at curbing CEO pay have tripled in this corporate annual-meeting season to 324 this year, up from 106 last year.

• At aluminum company Alcoa, 65 percent of shareholders backed a resolution taking aim at "golden parachutes," urging the board to submit to a shareholder vote any future severance arrangements that provide for benefits exceeding 2.99 times an executive's salary plus bonus.

Corporate boards are not required by law to follow such resolutions. But they may nonetheless impact board decision.

Such moves reflect not just public outrage - and a slower stock market - but also a desire by many institutional investors, such as pension-fund managers, to bring some restraint to the cost of CEO compensation.

The upshot is not a revolt against big paychecks, but a tapping on the brakes by the committees of corporate directors who typically set compensation. "Directors who cannot say no to excessive pay are not adequately representing the interest of the shareholders," argues Paul Hodgson, an analyst at The Corporate Library in Portland, Maine, a research group serving institutional investors and others.

Regulators, too, are involved in the renewed salary vigilance. Recently, the US Securities and Exchange Commission (SEC) began considering a tougher new rule that shareholders must approve stock compensation for all employees, officers, and directors. This would affect any plan providing stock or stock options to employees. Any material repricing of existing options to benefit executives and others would also need shareholder approval if the rule is made final by the SEC.

Already, some 200 companies of the 9,000-plus publicly traded companies in the nation have begun to voluntarily add to their expenses the cost of stock options granted executives and other employees. Those options, are a key source of the extraordinary compensation packages won by some executives in the stock market boom of the 1990s.

This comes in advance of an expected ruling by next year of the Financial Accounting Standards Board - the body governing corporate accounting practices - to shift the cost of options from a mere footnote in annual reports into income statements, thereby affecting stated profits.

A further development that could restrain CEO pay over time is a proposal under consideration by the SEC to give shareholders a greater voice in the selection of company directors. The SEC staff is to report to the commission by July 15.

Reformers hope these changes will give them a greater chance to seat independent-minded directors on boards.

Another factor has apparently in several cases shrunk CEO pay - their own embarrassment. For example, Citigroup CEO Sandy Weill declined a bonus after his ties to Jack Grubman, a former star brokerage analyst charged with making falsely positive stock recommendations to attract underwriting business, were discussed in the press. And General Electric's famed Jack Welch turned back some lavish retirement benefits after his wife revealed their content in divorce proceedings.

Golden parachutes have been a hot issue this year, with shareholders at 11 firms voting to limit severance pay.

A survey by The Corporate Library last winter found that CEOs get paid an average of $16.5 million to leave. And while the CEO pay fell at the largest US companies, median compensation, including smaller-company CEOs, actually rose by 5.9 percent. The average CEO received 282 times the average worker's pay of $26,267 last year. In 2000, the ratio was 531 times the average pay, and in 1980, 42 times.

At present, corporations are "backing away" from heavy use of options in executive pay, notes Charles Peck, a compensation specialist at the Conference Board, a research group in New York. A blue-ribbon committee for the Conference Board said options tended to encourage executives to push for short-term measures rather than long-term activities that could solidly build a firm.

Scandals also damaged the reputation of CEOs in the public eye. "Corporate scandals got everyone's attention," says Mr. Peck.

Bountiful paydays for top CEOs

10 highest paid CEOs of S&P 500 companies in 2002. [Editor's note: This story includes a chart that understates the complete earnings of America's top-paid CEOs. The chart ranks the top-paid CEOs, but does so using a narrow measure (cash compensation). If noncash pay such as stock options had been included, the average pay levels would have been much higher and different CEOs would have been at the top of the ranking.]

Company name (CEO), Total annual compensation

Viacom Inc. (Sumner Redstone) $20,247,519

Cendant Corp. (Henry Silverman) $11,405,894

The Home Depot Inc. (Robert Nardelli) $11,153,668

KB Home (Bruce Karatz) $8,676,970

Wells Fargo & Co. (Richard Kovacevich) $8,000,256

WellPoint Health Networks Inc. (Leonard Schaeffer) $7,077,413

General Electric Co. (Jeffrey Immelt) $6,949,093

Bank of America Co. (Kenneth Lewis) $6,875,000

The Goldman Sachs Group Inc. (Henry Paulson Jr.) $6,853,500

Pulte Homes Inc. (Mark O'Brien) $6,700,000

Source: The Corporate Library

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