Who Gets the Most: PAY : Compensation for Executives Reflects Turbulence in the Corporate World

Millard S. Drexler joined the Gap Inc. in 1983 with a clear mission: revitalize the retailer’s floundering Gap Stores division. He proceeded to do just that, engineering what some analysts call one of the most remarkable turnarounds in retailing history.

In return, Drexler has been richly rewarded. The Gap’s president earned $7.7 million in total compensation for fiscal 1986. That made him California’s highest-paid executive last year, based on a survey of executive compensation at 198 of the state’s largest publicly held companies. The survey was conducted for the Los Angeles Times by the human-resources consulting firm of William M. Mercer-Meidinger-Hansen.

Drexler’s compensation, while comfortable enough, still puts him far behind Chrysler Corp. Chairman Lee A. Iacocca, whose earnings of $20.5 million last year made him the nation’s highest-paid executive.

Considerable Company

Following Drexler in the top five in California were MCA President Sidney J. Sheinberg at $6.1 million, Maxicare Health Plans Senior Vice President David M. Hallis ($5.8 million), Advanced Micro Devices Chairman W. J. Sanders III ($4.6 million) and Columbia Savings & Loan Chief Executive Thomas Spiegel ($3.9 million.)

They had considerable company in the Million-Dollar Plus Club; 56 executives in the state topped the $1-million mark. It took a minimum total compensation of just over $739,000--including salary, bonuses and long-term compensation such as stock options exercised--to make the California Top 100 in executive pay. Average compensation for that elite group totaled $1.4 million.

“The trends in California reflect those in the rest of the country. More and more, the $1-million mark is less and less a benchmark to get into the top group,” said Fred E. Whittlesey, compensation consultant at the Los Angeles office of Mercer-Meidinger-Hansen.

But the survey shows more than which executives raked in the biggest bucks. It also illustrates how tax reform, the threat of takeovers, high management turnover and incentives to produce long-term results are profoundly affecting executive compensation practices--and in some cases raising the ire of shareholders, employees and outsiders.

Golden parachutes, under which executives are given generous payments if their companies are taken over, continue to grow in use. In some cases, entire groups of executives are being granted parachutes, with payments totaling as much as four times their annual base salaries if a change of corporate control occurs.

Employment agreements--under which executives are guaranteed certain base salaries, bonuses or other payments--also continue to be popular and controversial. In some cases, these agreements include generous severance payments even if an executive leaves his company rather than accepting a new position or place of work.

The trend that had the greatest effect on the rankings was the growing use of long-term incentive compensation plans, such as stock options, stock grants and stock appreciation rights.

Such “pay for performance” plans, tied to longer-term performance or strategic goals, stem from companies’ efforts to reduce executives’ focus on short-term profit goals at the expense of long-term results. They also allow firms to better reward top achievers and hold down the pay of lackluster producers.

Link to Performance

Stock grants and stock options--which allow executives to buy a certain number of shares at a certain price in the future--also link executives’ compensation directly with how well the company’s shareholders are faring. If the stock price goes up, so does the value of the options and grants. Options and grants also are usually contingent on an executive staying at the firm for several years, thus providing an incentive for top achievers to stick around.

Studies show that such long-term compensation, as a proportion of total earnings, has been growing in recent years, while annual bonuses have been shrinking in proportion. For many executives, long-term compensation far exceeded annual salary and bonuses and made for some hefty gains in overall compensation.

The Gap’s Drexler, for example, pulled in $6.8 million of his $7.7 million in the form of stock grants. Maxicare’s Hallis earned his No. 3 ranking despite a cash compensation of only $255,000; he made up the slack with $5.5 million from exercising stock options and from a one-time payment based on tax benefits the company received because Hallis agreed to change terms on the options.

Such hefty long-term compensation reduced the effect of cuts in annual salary and bonuses. Advanced Micro Devices Chairman Sanders and Executive Vice President Anthony B. Holbrook, for example, both took large cuts in annual cash compensation. But their total compensation increased dramatically when they exercised a large number of stock options.

Some Decide to Wait

This overwhelming influence of long-term compensation will subject rankings to wild swings year to year. Executives choosing to postpone exercising stock options until 1987 or 1988, possibly because tax reform will lower tax rates in those years, fell far down in the rankings.

“You’re going to see some big numbers showing up in 1987 and 1988,” Whittlesey said.

The importance of long-term compensation also allowed many lower-ranking executives to earn more than their superiors. Indeed, the three top-ranking executives--Drexler, Sheinberg and Hallis--earned more than their bosses. At National Medical Enterprises, Senior Executive Vice President John C. Bedrosian and Executive Vice President Taylor R. Jenson pulled in more than their boss, Chairman and Chief Executive Richard K. Eamer.

To be sure, annual bonuses based on short-term profit goals are still commonplace. Walt Disney Chairman Michael D. Eisner, for example, earned a $2.6-million bonus on top of his $750,000 base pay last year, thanks to an incentive clause that gave him 2% of the company’s net income exceeding a 9% return on equity. The firm’s return on equity was 19%.

But experts say the use of bonuses based on one year’s results could be detrimental. “Any manager can boost earnings in one year” through accounting gimmicks or by taking measures that hurt the company in the long run, such as cutting research and development expenditures, reducing product quality or running up debt, consultant Whittlesey said.

Also, reliance on a single measure of performance often results in managers giving short shrift to other yardsticks, argues Barry D. Leskin, chairman of the management and organization department at the USC School of Business Administration. One alternative, Leskin argues, is to base compensation on how well an executive fulfills his company’s strategic goals.

Debate Over Parachutes

Some companies, indeed, are beginning to do that. At Micropolis, a Chatsworth-based firm making computer disk drives, the compensation of one key sales executive has been tied to such strategic factors as revenue growth, new product development and product distribution, Whittlesey said.

Perhaps the most controversial trends in executive compensation involve the growing use of employment agreements and golden parachutes.

Employment agreements, which provide executives with anything from guaranteed pensions and bonuses to guaranteed base pay, are increasingly popular, partly because takeovers and other corporate turmoil make executive job changes more frequent, Whittlesey said. Thus, executives want more stability in their pay structure, he said.

Forty-seven of the 100 top-paid executives have employment agreements. Potlatch Chairman Richard B. Madden, for example, has one that guarantees him $450,000 in annual base pay as long as he remains with the company, until age 65. The agreement also includes severance payments in case he leaves the firm for any of a number of reasons, including dissatisfaction with a new job assignment or if he resigns at the company’s request.

Shareholders and analysts are ambivalent on such agreements.

They are fine “if they encourage executives to take a long-term view in running the business,” said Bruce W. Calvert, director of research for Alliance Capital Management, a major New York money management firm and shareholder of many California companies listed in the survey, including Potlatch. But the agreements are questionable “if they give excessive rewards to an executive no matter what he does.”

Twenty-six of the 100 top-paid executives have golden parachutes. They include Advanced Micro Devices’ Sanders, Great American First Savings Bank Chairman Gordon C. Luce, Convergent Technologies Chairman Paul C. Ely Jr., Great Western Financial Chairman James F. Montgomery and H. F. Ahmanson Chief Executive Richard H. Deihl.

These parachutes are no longer just for chief executives, however. Such companies as Fireman’s Fund, Consolidated Freightways, Caesars World, Watkins-Johnson, Community Psychiatric Centers and National Education Corp. are extending parachutes to several executives.

“Companies are positioning themselves to protect as many executives as possible in case of a takeover,” said Whittlesey, who dubs such plans “group golden parachutes.”

At Consolidated Freightways, for example, all five of the executives listed in the firm’s proxy statement have golden parachutes giving them one-time payments equal to four times their annual base pay in case of a change in control. They will receive other payments as well, such as a certain percentage of their annual bonuses.

Sharply Criticizes Plans

Many institutional shareholders are livid at the proliferation of golden parachutes. They say they are simply schemes to entrench incumbent management.

“I think it’s criminal,” said Roland M. Machold, New Jersey’s state investment director and an official of the Council of Institutional Investors, a group of state government and labor pension funds.

Such debate over golden parachutes often leads into a debate about whether executives are simply paid too much overall.

USC’s Leskin doesn’t take a position on the issue, but said it is interesting to note that chief executives of major U.S. firms typically earn between 50 and 100 times the pay of the lowest-paid employees of their firms. By contrast, top executives in Japan and Western Europe typically earn only 12 to 15 times the pay of their lowest-paid employees, he said.

Many shareholders and analysts applaud corporations’ moves toward long-term incentive plans, particularly stock options and stock grants. They argue that executives will have greater incentive to produce better results if they own more stock.

But the increased use of stock options and stock grants has not offset a general decline in ownership of company stock by executives, some consultants and researchers say.

A study by professors Michael C. Jensen and Kevin J. Murphy of the University of Rochester in New York shows that although executives’ stock ownership was the greatest incentive for improved performance, such ownership had actually fallen between 1974 and 1984, both in terms of dollar value and percentage of stock holdings.

Jensen and Murphy also did a separate study showing that pay carries little correlation to performance. The study, conducted on about 1,500 chief executives in 1,000 of the nation’s largest companies between 1974 and 1984, showed that the executives on average received raises of less than 2 cents for each $1,000 increase in shareholder value.

Investors Speaking Up

“The relationship between pay and performance, although certainly positive, is small,” Murphy said.

Some institutional shareholders say they plan to be more vigilant about executive compensation issues in the future. Until now, these investors rarely challenged companies in cases where they felt that managements were overpaid for producing lackluster results, taking the easier approach of simply selling their shares.

“If they perform, they should be compensated accordingly,” said Raymond J. Sweeney, general counsel of the $1-billion national pension fund of the Sheet Metal Workers union and a co-chair of the Council of Institutional Investors.

But if managements don’t perform, Sweeney said, institutional investors should send representatives to annual meetings to challenge managements and even seek seats on boards of directors.

“The key question,” Sweeney said, “is one of accountability.”

Data for the executive compensation survey was compiled by the human-resources consulting firm of Mercer-Meidinger-Hansen, which reviewed the proxy statements of 198 of California’s largest publicly held companies.

Cash compensation generally includes base salary and annual bonuses earned for services rendered in the latest fiscal year, regardless of whether receipt was deferred to future years. Long-term compensation includes any income from cash-based or stock-based compensation plans or other sources that are paid that year but based on several prior years’ performance. Other includes special one-time bonuses or payments, company contributions to 401(k) plans and cash profit-sharing plans, and other miscellaneous forms of compensation.

Compensation totals did not include: income from pensions; supplemental executive benefits or supplemental executive retirement plans; cash value of executive perquisites such as company cars, and retirement-oriented plans offered to all employees.

NAME TITLE 1. Millard S. Drexler President 2. Sidney J. Sheinberg President 3. David M. Hallis Sr. VP 4. W.J. Sanders III Chairman, CEO 5. Thomas Spiegel President, CEO 6. Anthony B. Holbrook Exec. VP 7. Michael D. Eisner Chairman, CEO 8. William M. McCormick President/Chairman 9. Richard B. Madden Chairman, CEO 10. John C. Bedrosian Sr. Exec. VP 11. Fred W. O’Green Chairman, CEO 12. Gordon C. Luce Chairman, CEO 13. Irving Azoff VP 14. Frank G. Wells President 15. Paul A. Miller Chairman, CEO 16. John Sculley Chairman, CEO 17. James B. Downey Sr. VP 18. Thomas Wertheimer Exec. VP 19. Fred L. Hartley Chairman, CEO 20. David A. Bossen President, CEO 21. Joseph J. Pinola Chairman, CEO 22. Sanford C. Sigoloff Chairman, CEO 23. George F. Moody President 24. Robert W. Bruce III Exec. VP 25. Fred Carr Chairman 26. David Banks President 27. John R. Woodhull President, CEO 28. Thomas C. Weir Chairman, CEO (subsidiary) 29. Stephen J. Zelencik Sr. VP 30. George M. Eltinge Chairman 31. Armand Hammer Chairman, CEO 32. George L. Graziadio Jr. Vice Chairman 33. Bram Goldsmith Chairman, CEO 34. Richard J. Flamson Chairman, CEO 35. David H. Murdock Chairman, CEO 36. Taylor R. Jenson Exec. VP 37. Carl E. Reichardt Chairman 38. Robert R. Dockson Chairman 39. Paul C. Ely Jr. Chairman, CEO 40. John A. Young Chairman, CEO 41. Thomas V. Jones Chairman, CEO 42. John C. Gingerich Exec. VP 43. Donald E. Guinn Chairman, CEO 44. Robert F. Erburu Chairman, CEO 45. James F. Montgomery Chairman, CEO 46. Michael D. Dingman Chairman, CEO 47. Alexander L. Kyman President 48. Richard H. Deihl President, CEO 49. Neil E. Harlan Chairman, CEO 50. Edward M. Carson President 51. Lawrence Weissberg Chairman 52. Edward A. Strobin Sr. VP 53. William M. Wright Exec. VP 54. Lodwrick M. Cook Chairman, CEO 55. J. Terrence Lanni President 56. Richard K. Eamer Chairman, CEO 57. Eugene R. White Chairman 58. George P. Rutland President, CEO 59. Ray R. Irani President 60. Roger W. Johnson Chairman, CEO 61. James W. Conte President, CEO 62. Donald G. Fisher Chairman, CEO 63. Dean A. Watkins Chairman 64. Robert E. Wycoff President 65. Raymond F. O’Brien Chairman, CEO 66. Bruce E. Karatz Exec. VP 67. William F. Ford Vice Chairman 68. Orion L. Hoch President 69. Philip R. Brinkerhoff President, CEO 70. George M. Keller Chairman, CEO 71. Charles D. Miller Chairman, CEO 72. Roderick M. Steele President 73. E.R. Hoffman Exec. VP 74. Lee Rich Chairman, CEO 75. James Del Guercio Exec. VP 76. James R. Harvey Chairman, CEO 77. Henry Gluck Chairman, CEO 78. Harry M. Conger Chairman 79. Paul Hazen President 80. Henry E. Singleton Chairman 81. Richard D. Wood Chairman 82. Lary R. Scott President 83. John C. Lewis President, CEO 84. Richard Previte Sr. VP 85. Richard J. Pearson President 86. Ray A. Burke Exec. VP 87. George A. Roberts President, CEO 88. Claude S. Brinegar Exec. VP 89. A.E. Svendson CEO 90. John W. Collins President 91. Robert Van Tuyle Chairman, CEO 92. Arthur Borie Exec. VP 93. Jerome F. Schulte Exec. VP 94. Philip M. Hawley Chairman, CEO 95. Kenneth J. Thygerson President, CEO 96. Joseph W. Brown Exec. VP 97. Leonard Cohen President 98. Sidney H. Sapsowitz Sr. Exec. VP 99. R.R. Foell President 100. Richard N. Congreve Group VP

COMPANY 1. The Gap Inc. 2. MCA Inc. 3. Maxicare Health Plans Inc. 4. Advanced Micro Devices Inc. 5. Columbia Savings & Loan Assn. 6. Advanced Micro Devices Inc. 7. Walt Disney Co. 8. Fireman’s Fund Corp. 9. Potlatch Corp. 10. National Medical Enterprises Inc. 11. Litton Industries Inc. 12. Great American First Savings Bank 13. MCA Inc. 14. Walt Disney Co. 15. Pacific Lighting Corp. 16. Apple Computer Inc. 17. Advanced Micro Devices Inc. 18. MCA Inc. 19. Unocal Corp. 20. Measurex Corp. 21. First Interstate Bancorp 22. Wickes Cos. Inc. 23. Security Pacific Corp. 24. Fireman’s Fund Corp. 25. First Executive Corp. 26. Beverly Enterprises 27. Logicon Inc. 28. Great American First Savings Bank 29. Advanced Micro Devices Inc. 30. Imperial Bancorp 31. Occidental Petroleum Corp. 32. Imperial Bancorp 33. City National Corp. 34. Security Pacific Corp. 35. Castle & Cooke Inc. 36. National Medical Enterprises Inc. 37. Wells Fargo & Co. 38. CalFed Inc. 39. Convergent Technologies Inc. 40. Hewlett-Packard Co. 41. Northrop Corp. 42. Measurex Corp. 43. Pacific Telesis Group 44. Times Mirror Co. 45. Great Western Financial Corp. 46. Henley Group Inc. 47. City National Corp. 48. H.F. Ahmanson & Co. 49. McKesson Corp. 50. First Interstate Bancorp 51. Homestead Financial Corp. 52. The Gap Inc. 53. Beverly Enterprises 54. Atlantic Richfield Co. 55. Caesars World Inc. 56. National Medical Enterprises Inc. 57. Amdahl Corp. 58. CalFed Inc. 59. Occidental Petroleum Corp. 60. Western Digital Corp. 61. Community Psychiatric Centers 62. The Gap Inc. 63. Watkins-Johnson Co. 64. Atlantic Richfield Co. 65. Consolidated Freightways Inc. 66. Kaufman & Broad Inc. 67. Security Pacific Corp. 68. Litton Industries Inc. 69. Financial Corp. of Santa Barbara 70. Chevron Corp 71. Avery International Corp. 72. Potlatch Corp. 73. Great Western Financial Corp. 74. MGM/UA Communications Co. 75. City National Corp. 76. Transamerica Corp. 77. Caesars World Inc. 78. Homestake Mining Co. 79. Wells Fargo & Co. 80. Teledyne Inc. 81. Optical Radiation Corp. 82. Consolidated Freightways Inc. 83. Amdahl Corp. 84. Advanced Micro Devices Inc. 85. Avery International Corp. 86. Unocal Corp. 87. Teledyne Inc. 88. Unocal Corp. 89. Standard Pacific Corp. 90. Clorox Co. 91. Beverly Enterprises 92. Pic ‘N’ Save Corp. 93. City National Corp. 94. Carter Hawley Hale Stores Inc. 95. Imperial Corp. of America 96. Fireman’s Fund Corp. 97. National Medical Enterprises Inc. 98. MGM/UA Communications Co. 99. Standard Pacific Corp. 100. Potlatch Corp.

*For fiscal year ending Dec. 31, 1985

NAME CASH LONG-TERM OTHER TOTAL 1. Millard S. Drexler 940,962 6,791,721 0 7,732,683 2. Sidney J. Sheinberg 559,000 5,519,531 30,000 6,108,531 3. David M. Hallis 255,000 5,498,550 0 5,753,550 4. W.J. Sanders III 447,118 4,158,267 20,060 4,625,445 5. Thomas Spiegel 3,860,000 0 0 3,860,000 6. Anthony B. Holbrook 427,812 3,112,843 13,882 3,554,537 7. Michael D. Eisner 3,377,740 0 13,462 3,391,202 8. William M. McCormick 707,308 2,464,047 0 3,171,355 9. Richard B. Madden 843,255 1,531,879 11,750 2,386,884 10. John C. Bedrosian 490,331 1,753,125 15,968 2,259,424 11. Fred W. O’Green 1,346,358 725,000 0 2,071,358 12. Gordon C. Luce 602,522 1,221,414 6,593 1,830,529 13. Irving Azoff 559,000 1,196,906 30,000 1,785,906 14. Frank G. Wells 1,713,870 0 7,692 1,721,562 15. Paul A. Miller 543,554 1,155,057 0 1,698,611 16. John Sculley 1,697,706 0 0 1,697,706 17. James B. Downey 326,265 1,344,300 10,792 1,681,357 18. Thomas Wertheimer 559,000 1,084,980 30,000 1,673,980 19. Fred L. Hartley 931,000 660,405 6,032 1,597,437 20. David A. Bossen 509,130 1,026,240 1,000 1,536,370 21. Joseph J. Pinola 984,541 502,751 7,118 1,494,410 22. Sanford C. Sigoloff 1,473,582 0 0 1,473,582 23. George F. Moody 808,600 537,556 13,200 1,359,356 24. Robert W. Bruce III 1,350,000 0 0 1,350,000 25. Fred Carr 1,347,372 0 0 1,347,372 26. David Banks 547,100 743,743 29,827 1,320,670 27. John R. Woodhull 316,888 654,635 308,742 1,280,265 28. Thomas C. Weir 586,702 675,191 14,207 1,276,100 29. Stephen J. Zelencik 282,730 952,714 8,218 1,243,662 30. George M. Eltinge 1,235,116 0 5,597 1,240,713 31. Armand Hammer 1,232,989 0 0 1,232,989 32. George L.Graziadio Jr. 1,229,468 0 0 1,229,468 33. Bram Goldsmith 763,749 0 459,536 1,223,285 34. Richard J. Flamson 1,105,600 87,268 17,000 1,209,868 35. David H. Murdock 1,204,261 0 0 1,204,261 36. Taylor R. Jenson 285,783 907,031 7,287 1,200,101 37. Carl E. Reichardt 1,200,004 0 0 1,200,004 38. Robert R. Dockson 975,000 202,626 15,466 1,193,092 39. Paul C. Ely Jr. 1,188,750 0 0 1,188,750 40. John A. Young 919,654 0 211,765 1,131,419 41. Thomas V. Jones 1,115,000 0 12,287 1,127,287 42. John C. Gingerich 336,000 787,320 1,000 1,124,320 43. Donald E. Guinn 430,429 664,981 78,113 1,173,523 44. Robert F. Erburu 1,109,230 0 0 1,109,230 45. James F. Montgomery 1,082,475 0 0 1,082,475 46. Michael D. Dingman 1,055,800 0 20,657 1,076,457 47. Alexander L. Kyman 264,000 14,080 792,395 1,070,475 48. Richard H. Deihl 780,000 237,281 50,000 1,067,281 49. Neil E. Harlan 1,042,000 0 0 1,042,000 50. Edward M. Carson 640,991 384,303 5,019 1,030,313 51. Lawrence Weissberg 1,027,511 0 0 1,027,511 52. Edward A. Strobin 322,887 704,533 0 1,027,420 53. William M. Wright 313,700 557,250 153,828 1,024,778 54. Lodwrick M. Cook 989,879 0 31,086 1,020,965 55. J. Terrence Lanni 497,523 515,264 0 1,012,787 56. Richard K. Eamer 971,990 0 30,000 1,001,990 57. Eugene R. White 628,046 346,500 7,754 982,300 58. George P. Rutland 850,000 116,270 14,000 980,270 59. Ray R. Irani 977,752 0 0 977,752 60. Roger W. Johnson 440,154 526,325 0 966,479 61. James W. Conte 700,000 0 263,914 963,914 62. Donald G. Fisher 963,077 0 0 963,077 63. Dean A. Watkins 408,930 535,325 0 944,255 64. Robert E. Wycoff 798,643 118,250 25,894 942,787 65. Raymond F. O’Brien 743,442 196,680 0 940,122 66. Bruce E. Karatz 795,465 117,596 16,600 929,661 67. William F. Ford 503,500 409,199 8,200 920,899 68. Orion L. Hoch 920,809 0 0 920,809 69. Philip R. Brinkerhoff 645,477 248,570 15,000 909,047 70. George M. Keller .777,500 98,044 30,457 906,001 71. Charles D. Miller 746,092 159,842 0 905,934 72. Roderick M. Steele 550,780 328,599 8,619 887,998 73. E.R. Hoffman 498,403 386,813 0 885,216 74. Lee Rich 879,394 0 0 879,394 75. James Del Guercio 216,000 0 650,910 866,910 76. James R. Harvey 807,600 49,612 7,110 864,322 77. Henry Gluck 861,502 0 0 861,502 78. Harry M. Conger 427,542 427,600 0 855,142 79. Paul Hazen 850,004 0 0 850,004 80. Henry E. Singleton 850,000 0 0 850,000 81. Richard D. Wood 231,000 609,000 0 840,000 82. Lary R. Scott 453,653 377,438 0 831,091 83. John C. Lewis 830,963 0 0 830,963 84. Richard Previte 242,652 575,216 7,188 825,056 85. Richard J. Pearson 499,502 311,090 0 810,592 86. Ray A. Burke 490,500 306,398 3,539 800,437 87. George A. Roberts 800,000 0 0 800,000 88. Claude S. Brinegar 476,750 306,398 3,452 786,600 89. A.E. Svendson 786,286 0 0 786,286* 90. John W. Collins 370,235 390,886 20,825 781,946 91. Robert Van Tuyle 746,200 0 30,000 776,200 92. Arthur Borie 410,000 335,000 30,000 775,000 93. Jerome F. Schulte 248,400 0 514,185 762,585 94. Philip M. Hawley 645,000 108,750 1,979 755,729 95. Kenneth J. Thygerson 750,000 0 0 750,000 96. Joseph W. Brown 387,986 355,915 422 744,323 97. Leonard Cohen 719,426 0 24,656 744,082 98. Sidney H. Sapsowitz 743,840 0 0 743,840 99. R.R. Foell 739,444 0 0 739,444* 100. Richard N. Congreve 380,920 352,686 5,528 739,134

*For fiscal year ending Dec. 31, 1985