Some firms in Southland are tying CEO pay to performance

Two years of layoffs, sagging profits and falling stock prices took a toll on executive pay at big Southland companies last year, a sign that at some firms pay-for-performance plans finally are doing what they’re designed to do--cut executive compensation when times are bad.

More than a third of the chief executives included in a compensation study of 100 large Southern California-based companies took a cut in their cash pay last year; 10 received no increase in salary or bonus. Almost half saw their overall pay package shrink as the tumbling stock market prevented executives from exercising lucrative stock options.

“We are seeing less pay for less performance,” said Don Sagolla, compensation consultant with Mercer Human Resource Consulting in Los Angeles, whose firm compiled the compensation study. “There were a lot of pay cuts and a lot of shutouts where the executive got no increase in salary or bonus.”

The Southland survey tracked what Mercer found in a recent national study that examined executive pay at 350 large companies. The median salary increase nationally last year was 4.7%, compared with 5.3% in 2000. The median bonus was down 13% and total direct compensation--which includes realized stock option gains--was down 0.9%.

But the average pay cut wasn’t exactly draconian. In Mercer’s Southern California study, the median cash compensation--meaning half of the CEOs in the study were paid more and half less--actually rose 0.2% to $987,500. Total direct compensation--which was weighed down by worthless stock options--declined 2%.

By some measures, corporate performance was far worse. More than half of the companies--52--in this year’s survey either saw a decline in net profits or an increase in net losses during 2001. One-third of the companies also saw a decline in net sales. Dozens laid off workers.

Moreover, executive pay remains generous. The median pay for these 100 executives was $1.36 million. That includes salary, bonus, the value of restricted stock awards received during the year, plus the net value of stock options exercised in 2001. Fifteen executives earned more than $5 million for the year. Thirty-two earned more than $2million.

Bruce Karatz, chief executive of L.A.-based home builder KB Home, was at the top of the pay ranking. Karatz got $895,833 in salary and a $6.6-million bonus, but that wasn’t what made him No. 1. Like many executives on the list, the key for Karatz was stock. He exercised stock options, which had a market value that was $23.4 million more than his exercise price, and he received restricted stock and stock grants worth an additional $13.4 million, Mercer said.

Karatz’s total pay: $44.4 million. Assuming a grueling 80-hour workweek, that comes to almost $11,000 an hour.

With KB Home’s stock up 19% in 2001--and almost 105% over the last 12 months--KB Home maintains Karatz has provided great value to shareholders.

Broadcom Corp. CEO Henry T. Nicholas III was the second-most-highly paid executive in the survey because he exercised $25 million in Broadcom stock options. Although his cash pay was just $111,000, he went home with a total package worth $25.6 million.

By at least one measure, Nicholas counts as one of the region’s shutouts. He received no raise or bonus during 2001, possibly because his company’s sales declined 12.3%. The Irvine-based firm lost $2.7 billion during the year, and the company’s stock plummeted 51%.

Gemstar-TV Guide International Inc. Chief Executive Henry C. Yuen was third-best paid, earning $19.2 million, which included $4.6 million in salary and more than $14 million in stock options, plus other compensation. But his pay really reflects 2000 data because the Pasadena-based company holds mid-summer annual meetings and has not yet published a proxy for 2001. In 2000, Yuen’s firm lost $213.1million versus a loss of $599.6 million in 2001.

Louis R. Tomasetta, chief executive of Camarillo-based Vitesse Semiconductor Corp., was fourth-highest paid, with total direct compensation of $15.9 million. Included in that figure was $955,000 in cash compensation--a 40% increase from the year before--and $14 million in stock gains.

However, the company indicates in its proxy statement that the pay was affected by a lag factor. The $638,663 bonus Tomasetta was paid last year actually was earned in 2000, when the company reported a profit of $27.9 million, contrasted with a net loss of $111.9million in 2001. None of Vitesse’s top executives earned a bonus for their fiscal 2001 performance.

Although Vitesse and other companies in the 2001 pay survey provide evidence of moderation, the fairly modest decrease in total compensation did little to cool industry and investor furor over what many believe is runaway executive pay.

“Ignoring these little statistical blips, the trend is up, up and away,” said Charles T. Munger, co-chairman of Berkshire Hathaway Corp., CEO of Pasadena-based Wesco Financial Corp. and the lowest-paid executive on The Times listing. “Executive pay is way out of whack on the upside and desperately needs reining in.”

Critics say companies are finding increasingly hard-to-track ways to pay their executives--putting millions into their supplemental pensions, paying the interest on their loans and paying their barbers, financial planners and pilots, for example.

“There are these surreptitious forms of executive compensation--like company loans and massive contributions to pension plans--that we think are even worse than excessive pay because they add even more to investor skepticism,” said Bill Patterson, director of the AFL/CIO office of investment.

Companies concerned that stock options are falling victim to the bear market are finding ways to cushion executives from dramatic drops in the share price.

At Broadcom, executives who received stock options when the company’s shares were trading at $118 suffered with shareholders when Broadcom’s stock plunged to less than $40, rendering their options worthless.

At least, they did until April 2001, when the company’s board of directors decided that the old options no longer provided a sufficient incentive for managers, according to documents Broadcom filed with the Securities and Exchange Commission.

The board canceled the old options and issued new ones--at the lower market price--six months and a day later. (By using this formula rather than “repricing” the options, as is often the practice, Broadcom avoided running afoul of new accounting rules that would require the firm to recognize the expense of this deal on the company’s income statement.)

In a news release on the eve of the exchange to explain the company’s motives, Broadcom CEO Nicholas said, “With the current economic slowdown and the recent drop in the market price of many technology stocks, including Broadcom’s, we believe that this is the best way to continue to retain and motivate our most important asset, our employees.”

That may be, but such deals also are motivating critics of corporate pay packages.

“The tolerance for runaway executive pay is diminishing,” Patterson said.