April 7, 2002
Trailing the Chief in Pay, Too
By CLAUDIA H. DEUTSCH
hief executives are not the only ones who once appeared destined to become endlessly richer. Until a year or so ago, the pay for chief operating officers, chief financial officers, legal counsels and other members of the chief executive's cabinet seemed to know only one direction, too: straight up. For that entire well-heeled group, hefty increases were common, often de rigueur.
"The trend has always been for the pay of the chief staff functions to move up in lock step with the pay of the C.E.O.," said Frederic W. Cook, head of a compensation consulting firm that bears his name.
The numbers bear him out. According to Pearl Meyer & Partners, the total pay package, including stock options, for chief financial officers at 50 large companies averaged $2.92 million by the middle of 2001, up 50 percent from $1.95 million in 1997. Pay for top information technology executives, who are trying to play catch-up with their traditionally better-paid colleagues, rose nearly 50 percent, to $1.33 million from $889,000. Still, while none of those executive-suite occupants could justifiably cry poverty, their pay was far below the annual $10.63 million pay package that chief executives were receiving by last summer.
Kevin J. Murphy, a professor of finance and business economics at the University of Southern California's Marshall School of Business, studied salary trends of top executives as reported in corporate proxies from 1992 through 2000. He found that the chief executive gets twice as much salary, two to three times as much bonus, and twice as many stock options as the four next-highest-paid executives in the company.
"The ratio just didn't change much over those nine years," Professor Murphy said.
In fact, the rate of increase has slowed for everyone. The Pearl Meyer survey shows that total pay for top legal officers jumped 13 percent in 1999 and 25 percent in 2000, yet rose only 4 percent in 2001. Pay for chief operating officers climbed 18 percent in 1999 and 13 percent in 2000, but only 1 percent in 2001. The pattern was similar to that for chief executives themselves: their pay, the survey showed, jumped 24 percent in 1999 and 14 percent in 2000, only to drop 1 percent last year.
"C.E.O. salary increases have slowed down and bonuses have been puny, and that's been reflected all the way down the executive ranks," said Warren L. Batts, a management professor at the University of Chicago Graduate School of Business who serves on the boards of companies including Allstate (news/quote), Cooper Industries (news/quote). Sprint and Sears, Roebuck (news/quote).
Few if any compensation experts have definitive information about current pay packages for that second tier of executives. The recession, combined with disillusionment about the reliability of published profit numbers after accounting scandals at Enron (news/quote), Xerox (news/quote), Tyco and others, could have meant skimpier pay packages for everyone. And if the recession is ending, as many economists say, the pressure on salary and bonuses may have already eased.
But many experts believe that the pressure will stay on stock options for reasons that have little to do with the economy. Several expect that companies will soon be forced to take charges against earnings for stock option grants, which could spur boards to scale back the number of options handed out to even the highest-level executives. Even without new rules, several experts say, shareholders are no longer automatically buying the company line that stock options tie management's fortunes to those of investors. Instead, the experts say, many shareholders worry that options provide executives with incentives to manipulate the numbers in ways that lift the share price just long enough for them to exercise the options.
That will put a particularly strong damper on options for people with hands-on control over financial reports, said Robert M. Bushman, an accounting professor at the Kenan-Flagler Business School of the University of North Carolina. "Everyone's stock options will be under scrutiny," he said, "but options for the C.F.O.'s, who are most responsible for the accounting numbers, will be under really heavy pressure."
Still, for some second-tier executives, the pay packages may keep getting richer even if the board puts the clamps on the chief executive's pay. Executive recruiters say chief information officers, for example, are in huge demand as companies continue to grapple with ways to harness the power of the Internet. They say, too, that conservative chief financial officers with squeaky-clean records have gone way up in value in the wake of well-publicized accounting shenanigans.
"The rise of the information age has made chief information officers invaluable, and the Enron situation has put a huge premium on really good chief financial officers," said Thomas J. Neff, chairman of United States operations for Spencer Stuart, the executive recruiting firm. "There just aren't enough really good C.I.O.'s or C.F.O.'s out there, and market forces still affect compsation more than anything else."
Chief executives also tend to protect the pay of their favored aides. While directors, institutional investors and the news media evaluate chief executives' performance solely on the basis of financial results, chief executives are likely to include qualitative judgments when recommending pay adjustments for those who report directly to them. That alone offers the immediate subordinates a measure of pocketbook protection, consultants say.
"When the C.E.O. gets a big yearly increase, he makes sure that his staff does as well," said Jannice L. Koors, a Pearl Meyer vice president. "When his pay drops, his staff just sees somewhat less generosity."
Chief executives always make the proxy, and chief operating officers almost always do. Chief financial officers who make it to that top-five list are among the highest paid of their professional peers. Even the best-paid general counsels, technology officers and human-resources types rarely rate a mention in the proxy.
Where executives land in the compensation pecking order also varies widely by industry. For example, the operating heads of a diversified manufacturer's largest businesses are likely to be among the five best-paid executives, squeezing out support people at headquarters.
Even the limited surveys, however, can offer a relatively good snapshot of comparative pay. The Pearl Meyer firm checked the rise — and fall — of top executive pay at 50 large companies, from July 2000 to July 2001. During that year, total pay for top information executives rose 15 percent, it found, while the pay for chief executives and the members of their inner circle remained relatively flat.
But when it came to cash — bonuses that are supposed to be tied to performance — the difference between chief executives and their flocks was marked. Chief executives' cash pay fell 14 percent that year, while the cash part of pay for top financial, legal and human resources executives was almost flat. Cash compensation for information officers rose, by almost 8 percent.
Compensation specialists say that by making the cash part of pay the most volatile, companies are sending important messages to both executives and shareholders.
As Ms. Koors of Pearl Meyer put it, "Reducing or adding cash has a much greater psychological impact than dealing with some hypothetical present value of stock options."