Executive pay drops after rising for years

Last year wasn't just bad for big business. It was bad for big businessmen: Many chief executives at large publicly traded companies saw their annual pay shrink for the first time in more than a decade.

Top company officers of major corporations still raked in millions. But the salaries that spiraled ever higher from the early 1990s through 2000 edged up only slightly in 2001 as recession took hold, compensation experts say.

And there were sharp reductions in the huge year-end bonuses that business leaders customarily receive, causing a drop in overall cash compensation. Some bonuses were eliminated altogether because of poor company performance in a bad economy only made worse by the Sept. 11 attacks.

The compensation picture is emerging in yearend reports that companies are filing with the Securities and Exchange Commission.

It's the worst year in recent memory for chief executive compensation, according to experts who acknowledge that the executives are still well-rewarded.

"While pay is down, it's not as if pay is low," said Robin Ferracone, a partner and senior executive compensation consultant with William M. Mercer Inc. "CEOs aren't wondering where the next meal is coming from."

Salaries rose slightly but bonuses were reduced 13 percent at 100 of the nation's largest companies, meaning that the combined total annual compensation for chief executives dropped 2.9 percent in 2001, according to preliminary results of the annual Wall Street Journal/William M. Mercer CEO Compensation Survey.

The full survey, to be released in mid-month, is expected to show similar results. If so, it would be the first decline for chief executives since the survey began in 1990.

Some expect steeper fall

Other corporate compensation experts expect steeper declines. Pearl Meyer & Partners, for example, said cash compensation for executives at 200 well-known companies dropped 14 percent on average for companies that ended their fiscal year by Dec. 31.

Pearl Meyer said average compensation for chief executives came in at $12.5 million for 2001 after factoring in stock options they exercised during the year. That's down from $12.7 million for 2000.

Companies in industries particularly hard hit by the recession or other factors ended up reducing executive compensation the most.

FleetBoston Financial, which wrote off loans in Argentina, gave chief executive Charles Gifford a $992,200 salary, the same as in 2000. His bonus fell from $4.5 million to $2.25 million.

Cisco Systems, among the technology companies that suffered badly last year, paid chief executive John Chambers $268,000 -- down from $323,000 a year earlier. He got a $1 million bonus in 2000, but received no bonus in 2001.

Sun Microsystems, another tech giant, gave chief executive Scott McNealy a $100,000 salary and no bonus. In 2000, he was paid $104,000 plus a $4.7 million bonus.

But executives who didn't get a boost in their pay often received other forms of compensation in the form of stock options or restricted stock grants.

For example, International Business Machines Corp. chairman and former chief executive Louis V. Gerstner Jr. got the same $2 million salary and $8 million bonus he received in 2001.

But Gerstner, who stepped down as chief executive March 1, exercised options worth about $115 million in 2001. And he retained about 4.3 million exercisable options valued at $296 million.

'They still do fine'

Overall, however, executives took a hit in 2001 in their company stock holdings because so many saw the value of their shares fall substantially, said Joe Olsen, who runs the executive compensation practice for Towers Perrin.

"Most of these guys are paid very heavily with stock options, so when you look at the accumulated value of their holdings, that's obviously hit as well," he said. "They still do fine, but if you look at the accumulated value of what they've got, they take significant hits when their shareholders take hits."

And those executives who received generous stock options packages for 2001 will benefit only if the shares of their companies rise, said Jannice Koors, a vice president with Pearl Meyer.

"Executives' take-home pay went down, and the options they were granted look to the future and are only worth something to the executives if the stock price increases," she said.

While executive pay may seem out of whack to laymen, Koors and other compensation experts say corporate boards set management salaries with an eye toward improving company performance and retaining qualified leaders. That translates into hefty compensation packages because effective business executives are in high demand.

"There's still a perception and probably the reality that really good executive talent is in short supply," Ferracone said. "That's why we don't see CEOs going begging. They're still very highly valued."

To critics, the entire corporate compensation process is out of balance.

Even though executives took hits in their pay packages in 2001, they didn't suffer as much as the tens of thousands of workers who were laid off last year, said Diane Batcher, a spokeswoman for the Interfaith Center on Corporate Responsibility in New York.

"It's out of control, it's inappropriate and it's not necessary to pay people that amount of money to lead those companies," she said.

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On the Net

Pearl Meyer: www.execpay.com

William M. Mercer: www.mercerhr.com

Interfaith Center on Corporate Responsibility: www.iccr.org