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Sun, Apr 06, 2003 - Page 12 News List

US executives' pay drops second consecutive year

Investors have lost patience with company chiefs who continue to thrive even when stocks tank, so packages have slimmed some

BLOOMBERG , NEW YORK

Sidney Taurel, chairman and chief executive of drugmaker Eli Lilly & Co, earned a salary of US$1 last year and got no bonus, a pay cut of US$1,865,365.

"If shareholders suffer, executives should suffer too," said Taurel. Lilly's stock fell 19 percent last year as sales of its antidepressant Prozac declined. "In the case of Lilly executives, we suffered more than the shareholders last year," Taurel said.

A three-year stock market slump that has erased US$7.7 trillion of investor wealth is taking a bite out of executives' compensation. Pay for chiefs of companies in the Standard & Poor's 500 Index fell for a second year, dropping almost 50 percent last year to an average of US$4.4 million, according to Aon Consulting Inc's compensation database unit.

Pressured by angry shareholders, boards tied pay to performance, forced executives to buy more company stock and required them to hold shares for longer periods. The pay cuts mark an effort to reverse excesses exemplified by executives such as Global Crossing Ltd's Gary Winnick. He sold shares worth US$578 million before the telecommunications company sought Chapter 11 bankruptcy protection in January last year.

Gary Winnick effect

"There's an effort to counter the Gary Winnick effect," said Daniel Ryterband, managing director at Frederic W. Cook & Co, an executive pay consultant. "The idea is to force someone who is thinking of bailing out to say instead `How can I fix this?'" Ryterband said.

Billionaire investor Warren Buffett told a conference on corporate governance last month in Charlotte, North Carolina that until they begin to share more of the financial pain with their shareholders, executives won't regain investors' trust.

"What really gets the public is when CEOs get very rich and stay very rich and they get very poor," Buffett said.

According to the data from Aon, a unit of the second-biggest insurance brokerage, executives' average salary and bonus slipped to US$2.05 million from US$2.1 million. Their average gain from exercising stock options plunged to US$2.3 million from US$6 million.

The figures are based on about 290 companies in the S&P 500 that have filed last year's proxy statements. They don't include items such as restricted stock, unexercised options, retirement pay and perquisites ranging from life insurance to travel on the corporate jet.

"No matter how you calculate it, CEOs took another billion dollar hit last year," said Ira Kay, national director of compensation consulting at Watson Wyatt & Co.

In addition to Taurel, chief executives who received no bonus last year included Sanford Weill at Citigroup Inc, John Chambers at Cisco Systems Inc, Philip Humann at SunTrust Banks Inc, Michael Eisner at Walt Disney Co and Charles Gifford at FleetBoston Financial Corp.

Diminishing profits from stock options together with a push from accounting rule makers to force options to be treated as compensation expense are driving companies to reduce the role options play in compensation plans, board experts say.

"Options are substantially underwater," said J. Michael Cook, former chief executive of accounting firm Deloitte & Touche LLP, who now sits on compensation committees at Dow Chemical Co and HCA Inc, the biggest US hospital company. "The question we are starting to hear is `Are we at risk of losing people we thought we had compensated well but have in fact not been able to put that much into their pockets?"' he said.

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