Executive Comp in a Time of Downturns
It's still too soon to be sure, but tough financial times may be slowing down the meteoric rise in executive compensation seen during the 1990s. If so, it may lend support to those who claim that stock options and other strategies are successfully linking executive pay with performance. If not, the debate surrounding executive compensation may grow more heated in the spring, when companies publish their proxy statements.
So far, most of the evidence for a compensation slowdown is based on anecdotes and preliminary studies. Consultants William M. Mercer Inc. reported that 13% of the executives at 350 of the biggest U.S. companies didn't get bonuses in 2000, and 22% took salary cuts, although the depth of those cuts isn't clear. In 2001, declines may be even more widespread, suggested Ira Kay recently in BusinessWeek magazine. As national practice director for compensation consulting at Watson Wyatt Worldwide, he predicts that in the face of the economic downturn, 2001 total executive pay may plummet by as much as a third for CEOs at some of the 1,000 largest U.S. companies. That's largely because stock option grants comprise 65% of the total CEO compensation package in the U.S., up from 63% in 1999 and 55% in 1995.
And there have been specific reports of companies taking steps to limit compensation costs. Chairman and chief executive of Siebel Systems Thomas M. Siebel, for example, volunteered to give up $1 million in salary. When hired recently as the new CEO, James L. Payne requested that he be paid entirely in Nuevo Energy stock. And the entire executive committee at Wall Street firm Bear Stearns took just half of their 2001 bonuses, reportedly representing a 70% cut in pay from the previous year. Meanwhile, Campbell Soup Inc. decided not to reprice and reissue all of its underwater executive stock options. Instead, it allowed execs to exchange their worthless options for far fewer shares of stock with longer vesting periods.
But there's also evidence that executive compensation may continue to rise quickly, at least in some sectors, even during hard times. History shows that executive compensation has a lot of upward momentum. For example, although 2000 saw the smallest increase in total executive compensation in five years, the numbers still rose high into the plus column, with such compensation up 10% to 18%. Even in the beaten- down Internet sector, there are signs that compensation will be kept high. Fully 71% of the top executives at Internet companies surveyed in the Unifi Network's Internet Compensation Survey 2001 reported that they had gotten more in base salaries and bonuses in 2001 than they had in 2000 - the median increase in bonus value was 82%.
Some experts maintain that 2001 compensation levels, whatever they turn out to be, will not resolve the question of whether or not executives are paid "what they're worth." On one side are those who argue that there's simply no way to justify the exorbitant salaries of execs. In 2000, chief executives at the top 200 U.S. companies received an average of $10.89 million, according to executive compensation consultants Pearl Meyer & Partners. On the other side are those who claim that executive compensation is more a reflection of the "war for talent" and the extreme difficulty associated with being a corporate boss these days. Management thinker Peter Drucker notes the high failure and turnover rate of chief executives. It's possible they're being paid so much because their jobs have become virtually impossible to perform in today's complex business environment.
So what is the link between pay and performance for executives? Jack Dolmat-Connell, an expert in linking business objectives and compensation strategies, writes that research does in fact show a correlation between executive pay and company performance. But, he notes, there isn't empirical evidence showing exactly how the level of executive compensation affects company performance, and it isn't clear that offering higher salaries to lure and keep talent pays off. It's not even clear whether or not tradeoffs in the potential risks and returns of pay-for-performance schemes truly attract the kind of people who will take appropriate risks. In short, there are still many unknowns in this area. As long as this remains true, there will always be some controversy surrounding the subject of executive compensation.
A news release about the Unifi Network Study can be found at
http://www.i4cp.com/RyjSQF
The AFL-CIO has created the Internet site "Executive PayWatch". It includes information about the complete compensation packages of a number of CEOs.
http://www.i4cp.com/kQ6awZ
A fine piece on executive compensation is Jack Dolmat- Connell's "Executive Pay for Performance: The 'Gulf' War Rages On," in the WorldatWork Journal, First Quarter 2001, pp. 19-27. The WorldatWork Web site can be located at
http://www.i4cp.com/N19WR1.
So far, most of the evidence for a compensation slowdown is based on anecdotes and preliminary studies. Consultants William M. Mercer Inc. reported that 13% of the executives at 350 of the biggest U.S. companies didn't get bonuses in 2000, and 22% took salary cuts, although the depth of those cuts isn't clear. In 2001, declines may be even more widespread, suggested Ira Kay recently in BusinessWeek magazine. As national practice director for compensation consulting at Watson Wyatt Worldwide, he predicts that in the face of the economic downturn, 2001 total executive pay may plummet by as much as a third for CEOs at some of the 1,000 largest U.S. companies. That's largely because stock option grants comprise 65% of the total CEO compensation package in the U.S., up from 63% in 1999 and 55% in 1995.
And there have been specific reports of companies taking steps to limit compensation costs. Chairman and chief executive of Siebel Systems Thomas M. Siebel, for example, volunteered to give up $1 million in salary. When hired recently as the new CEO, James L. Payne requested that he be paid entirely in Nuevo Energy stock. And the entire executive committee at Wall Street firm Bear Stearns took just half of their 2001 bonuses, reportedly representing a 70% cut in pay from the previous year. Meanwhile, Campbell Soup Inc. decided not to reprice and reissue all of its underwater executive stock options. Instead, it allowed execs to exchange their worthless options for far fewer shares of stock with longer vesting periods.
But there's also evidence that executive compensation may continue to rise quickly, at least in some sectors, even during hard times. History shows that executive compensation has a lot of upward momentum. For example, although 2000 saw the smallest increase in total executive compensation in five years, the numbers still rose high into the plus column, with such compensation up 10% to 18%. Even in the beaten- down Internet sector, there are signs that compensation will be kept high. Fully 71% of the top executives at Internet companies surveyed in the Unifi Network's Internet Compensation Survey 2001 reported that they had gotten more in base salaries and bonuses in 2001 than they had in 2000 - the median increase in bonus value was 82%.
Some experts maintain that 2001 compensation levels, whatever they turn out to be, will not resolve the question of whether or not executives are paid "what they're worth." On one side are those who argue that there's simply no way to justify the exorbitant salaries of execs. In 2000, chief executives at the top 200 U.S. companies received an average of $10.89 million, according to executive compensation consultants Pearl Meyer & Partners. On the other side are those who claim that executive compensation is more a reflection of the "war for talent" and the extreme difficulty associated with being a corporate boss these days. Management thinker Peter Drucker notes the high failure and turnover rate of chief executives. It's possible they're being paid so much because their jobs have become virtually impossible to perform in today's complex business environment.
So what is the link between pay and performance for executives? Jack Dolmat-Connell, an expert in linking business objectives and compensation strategies, writes that research does in fact show a correlation between executive pay and company performance. But, he notes, there isn't empirical evidence showing exactly how the level of executive compensation affects company performance, and it isn't clear that offering higher salaries to lure and keep talent pays off. It's not even clear whether or not tradeoffs in the potential risks and returns of pay-for-performance schemes truly attract the kind of people who will take appropriate risks. In short, there are still many unknowns in this area. As long as this remains true, there will always be some controversy surrounding the subject of executive compensation.
A news release about the Unifi Network Study can be found at
http://www.i4cp.com/RyjSQF
The AFL-CIO has created the Internet site "Executive PayWatch". It includes information about the complete compensation packages of a number of CEOs.
http://www.i4cp.com/kQ6awZ
A fine piece on executive compensation is Jack Dolmat- Connell's "Executive Pay for Performance: The 'Gulf' War Rages On," in the WorldatWork Journal, First Quarter 2001, pp. 19-27. The WorldatWork Web site can be located at
http://www.i4cp.com/N19WR1.