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June 25, 2003
Huh?!?: CEO Pay Goes Up in 2002 While the Stock Market Goes Down
    by William Baue

The Corporate Library's report shows how CEO pay increased in 2002 despite the fact that the stock market declined significantly, a trend that does not sit well with investors.

Given that executive compensation is often linked to a company's performance, one would expect CEO pay to have reflected the stock market's downward trend in 2002. After all, the S&P 500 fell by 23.3 percent in 2002. Moreover, the corporate governance scandals of 2000 and 2001 at Enron, WorldCom, and the like were correlated to compensation abuses, so reigning in excessive executive pay seems an obvious part of the solution to these problems.

Nevertheless, the total annual compensation for CEOs of S&P 500 companies increased by 26.65 percent on average. This is according to a report released last week by The Corporate Library (TCL) entitled What Really Happened to CEO Pay in 2002. Total annual compensation includes not only base salary but also adds annual bonuses and any other annual compensation that is taxable. The average increase in S&P 500 CEOs' total compensation, which also takes into account restricted stock grants and stock option profits among other things, was even higher, at 63.24 percent.

"I have to admit to being extremely surprised by the results I came up with--I was expecting a flat year," said Paul Hodgson, a senior research analyst at TCL. TCL provides research that connects corporate governance to shareowner value and risk. "There seems to be a disconnection between the performance of companies and the movement of pay within those companies."

The report surveys CEO compensation packages at 1,019 companies whose CEOs were in post for all of 2001 and 2002. Mr. Hodgson analyzed the results with TCL's Board Analyst research tool, which provides information for the examination of CEO compensation policies and practices. The report presents aggregate results for S&P 500 as well as non S&P 500 companies. It also lists the top 10 companies in both categories on compensation factors such as annual bonuses, long-term incentive payouts, restricted stock grants, and stock option profits.

The report cites a few examples of altruism in which CEOs chose to forego salaries or compensation increases in recognition of the role excessive CEO pay plays in the current crisis in investor confidence. However, the report predominates on compensation increases, mentioning many egregious examples. For instance, Viacom (ticker: VIA) CEO Sumner Redstone received not only the highest base salary in the S&P 500 at more than $3.6 million, but also the highest annual bonus at $16.5 million. Equally excessive compensation packages were paid out by ExxonMobil (XOM), Cendant (CD), General Electric (GE), and SBC Communications (SBC), according to the report.

"It's a good report and a useful addition to the debate over executive compensation," said Scott Klinger, co-director of Responsible Wealth, a network of affluent Americans seeking greater corporate accountability and fairer taxes. Responsible Wealth filed shareowner resolutions addressing executive compensation at Bristol-Myers Squibb (BMY), Citigroup (C), Coca-Cola (KO), Disney (DIS), General Electric (GE), and Household International (HBC) this proxy season. Responsible Wealth also withdrew its resolution at EMC (EMC) when the company agreed to prepare a report that addresses such questions as freezing executive pay during downsizing periods and a maximum ration between highest and lowest paid worker.

"I wish the report would have looked a little more at pay-for-performance issues, though," Mr. Klinger told

Corporate compensation committees often specify performance targets linked to profits or other indicators in determining executive pay.

"The problem is that, because the level of disclosure around incentive targets is so poor, it's very difficult for myself as a compensation expert or stockholders to determine whether the targets are challenging and whether they've been satisfied or not," TCL's Mr. Hodgson told "There are companies, such as AT&T Wireless Services (AWE), that adjusted the targets halfway through the year, which I think is an appalling practice."

Mr. Hodgson recommended that investors demand a greater level of disclosure regarding targets as a first step to reigning in exorbitant CEO pay.

"What are the targets, are they internal or external measures, and how well did we perform against them?" are the questions Mr. Hodgson suggested. "If all CEOs need to do is increase EPS [earnings-per-share] by half a percentage point, then the board is not really setting challenging targets."

Mr. Hodgson also pointed out another power shareowners have to effect change.

"Stockholders have a chance to vote on annual incentive schemes and long-term incentives every five years," he said. "If they are unhappy with the targets, they should vote against them."


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