The Association of U S West Retirees



 Adding It All Up
Using a tool called "tally sheets," boards are discovering how much their CEOs are really making.  The numbers are shocking directors -- and changing pay practices.
By Joann S. Lublin
The Wall Street Journal
Monday, April 10, 2006

When board members at Conseco Co. sat down last May to draw up a new contract for William S. Kirsch, their fifth chief executive in almost five years, they wanted to avoid mistakes of the past. Investors had long criticized the Carmel, Ind., insurance-holding concern for specializing in big executive paydays.

"The history of this company was excessive pay not based on performance," says Michael Shannon, chairman of the board's compensation committee.

This time around, Conseco directors may have accomplished their goal. And they did it with help from a simple tool that's increasingly popular among corporate boards concerned about out-of-control executive pay: a tally sheet.

Nicknamed "holy cow" sheets for the way they often expose the immense worth of current and potential payouts, tally sheets can help a board gain a fuller picture of a chief's entire compensation. For years, board pay panels have been faulted for failing to do the math when it comes to grasping the true value -- and possible future cost -- of CEO packages. But tally sheets make it easier to keep score, allowing boards to project payouts under different scenarios for everything from salary and perquisites to equity grants, deferred compensation, severance and supplemental pensions.

The use of tally sheets -- and their impact -- could be significant, especially once the Securities and Exchange Commission adopts sweeping proposed rules to widen what companies must divulge about management compensation. Already, certain boards are sharing portions of their tally sheets with investors by enhancing pay disclosures. Some others are using them to justify curbing certain compensation practices. The hottest targets: pensions, severance, perks and long-term awards without tough performance hurdles.

"Tally sheets have the ability to impact both the form and the level of the CEO's compensation" once directors realize how tiny a portion of the rewards typically depend on corporate performance, says Jannice Koors, a managing director at New York-based Pearl Meyer & Partners, the pay consultancy that helped Conseco put together the Kirsch tally sheet.

Tally, Ha

To be sure, there are plenty of skeptics who say it's wishful thinking to believe that tally-sheet revelations can stem the tide of rising CEO pay. "More disclosure won't drive total CEO pay levels down," says Patrick McGurn, an executive vice president of proxy advisers Institutional Shareholder Services in Rockville, Md. "It will just change the currency used."

Certainly, tally sheets had no measurable impact on the overall numbers in the annual CEO compensation survey by Mercer Human Resource Consulting for The Wall Street Journal. The median salary and bonus for chief executives last year increased 7.1% to $2,408,665, according to a proxy analysis of 350 major U.S. corporations by Mercer. The climb in cash compensation compares with a record 14.5% surge a year earlier to a median of $2,470,600. (The 2004 figures come from a somewhat different sample of 350 companies. While the median dollar figures are based on all companies in the sample for a given year, the percentage changes are based only on companies and CEOs that remained in the sample from one year to the next.)

Median base bay for CEOs in 2005 rose 3.6%, compared with 3.7% in 2004. Raises for the highest bosses matched those granted to their white-collar lieutenants. Paychecks of nonunion salaried employees pulled ahead 3.6% following a year in which they only rose 3.4%, the slowest pace since the 1989 debut of the study by New York-based Mercer. (Overall U.S. wages and benefits increased 3.2% last year, down from 3.5% in 2004.)

In the wake of a 13% improvement in company profits, surveyed chiefs saw their bonuses expand 8.4% to a median of $1,437,150. Bonuses escalated 20% to a median of $1.5 million the previous year.

Total direct compensation for chiefs grew 15.8% to a median of $6,049,504, Mercer found. Besides salaries and bonuses, this figure covers the value of restricted stock at the time it was granted, gains from stock-option exercises and other long-term incentive payouts. In 2004, the median leaped 40.9% to $5,920,388, the biggest increase in the study's history, largely due to huge gains in corporate profits and option exercises.

Total direct compensation for those running the 10 businesses with the highest shareholder returns zoomed 51.3% to $10,229,218 according to Mercer. The heads of the 10 concerns with the poorest returns experienced a harsh 72.5% drop to $1,551,495. The median total shareholder return, which equals the stock-price change plus reinvested dividends, was 6.8% for surveyed companies.

Overall, CEOs reaped a median realized gain of $3,493,440 from option exercises, compared with $3,229,072 in 2004. Capital One Financial Corp. leader Richard D. Fairbank snared an especially sizable sum: $249.3 million from exercising options to buy about 3.6 million shares.

Bigger bucks may lie ahead. Many CEOs remain perched atop piles of unexercised options. Median unrealized gains vested and unvested options of CEOs in the survey totaled $10,202,971 last year, compared with $11.8 million in 2004. The 2.5 million options Oracle Corp. bestowed on Larry Ellison, its billionaire chief and co-founder, pushed his total to 70.1 million options, valued at $474.47 million when Oracle's fiscal year ended last May 31.

Nevertheless, it shouldn't be overlooked that fewer companies awarded options last year. Of the 350 businesses surveyed, leaders of 265 companies got options, down from 273 in 2004. And 192 CEOs cashed in a median of 149,046 options, down from 197 who exercised a median of 140,442 options in 2004.

One reason for the decline: new accounting rules that require employers to count stock options as expenses in their annual financial results.

But in some cases, there was another reason as well: tally sheets. For example, while Aetna Inc. last year awarded options to its then-CEO John W. Rowe, his successor, Ronald Williams, received no options -- thanks in part to the board's use of a tally sheet. According to Aetna's latest proxy, directors of the Hartford, Conn., health-benefits concern based their decision in part on a review of tally sheets and "evolving practices" at other major public corporations.

Similarly, Michel Mayer, chief executive of Freescale Semiconductor Inc., is likely to receive fewer options this year than the 254,295 awarded to him last year, partly because the Austin, Texas, chip maker intends to also give him restricted stock units tied to performance. The shift marks the first time that equity granted to Mr. Mayer will come with strings attached since Freescale's 2004 spinoff from Motorola Inc., and it resulted from a review of detailed tally sheets "for all the top officers," says B. Kenneth West, chairman of the Freescale board pay panel.

Yet Mr. West remains cautious about tally sheets' overall impact. "They give you a better perspective," he says. "But I can't say that pay ratcheting is going to stop as a result."

Whatever skeptics and the overall numbers from this year's survey say about how much CEOs are paid, it's clear that tally sheets have the potential to at least change how they earn their pay.

This much was evident in the latest deal that Conseco's directors negotiated with Mr. Kirsch.

"We all agreed it should not be 'show-up' pay," recalls Mr. Shannon, referring to the way some corporate boards enrich chiefs just for coming to work. Mr. Shannon was part of the board that took over at Conseco after the company emerged in September 2003 from nine months in bankruptcy protection. Except for the CEO, every board member was new.

Mr. Kirsch, who declined to comment for this article, took the helm in August 2004 when the chief at that time suddenly retired. The former Conseco general counsel and executive vice president had been negotiating for the job of president, and he went to work as CEO under those pay terms -- with an agreement that his pay package would be brought up to CEO levels in 2005.

Last summer, the board gave Mr. Kirsch a nearly 22% raise in salary, to $975,000 from $800,000. His maximum potential bonus jumped to about $2.4 million from $1.6 million a year, though his actual bonus last year was $1.47 million.

But directors rejected Mr. Kirsch's request for a supplemental executive retirement pension, or SERP. Such pensions usually are based on a CEO's compensation in the last few years of his or her career, and so can be hugely expensive -- a point that Conseco board members recognized thanks to the tally sheet. The sheet suggested that a typical SERP could cost the company more than $17 million over Mr. Kirsch's lifetime.

Something else the tally sheet showed, however, was that SERPs were widely used by Conseco's rivals -- and that without a supplemental pension, Mr. Kirsch's proposed overall package was modest compared with those of other insurance industry chiefs. So, the board instead agreed to consider a deferred-compensation plan this year that would be tied to performance measures, such as return on equity.

Pfizer Adds It Up

Fifty of the 350 corporations tracked by Mercer disclosed tally-sheet usage in their latest proxy statements, with several spelling out the CEO's hefty accumulated wealth and likely future riches for the first time. Pfizer Inc., the world's biggest drug maker, supplied among the fullest disclosures. Its proxy says that CEO Henry A. McKinnell could have pocketed a lump sum of $83 million if he retired last Dec. 31 -- and will receive $6.5 million a year for life when he does. (The 63-year-old executive will retire in 2008.)

The annual figure represents the biggest pension benefit for a chief executive of any company in Standard & Poor's 500-stock index, reports Corporate Library, a research firm in Portland, Maine. Last fall, Pfizer withdrew earnings projections for 2006 and 2007. Its share price hit an eight-year low in December.

Acknowledging the recent decline in shareholder value, Pfizer directors told investors they're tightening links between pay and performance. Among the moves cited in the proxy: For benefits accrued since Jan. 1, 2006, they will seek stockholder approval before paying an annual pension that exceeds the executive's average salary and bonus in the five years in which they were the highest.

Thanks in part to their tally sheet, Pfizer directors also decided to limit severance in the event of a takeover, according to Margaret Foran, senior vice president for corporate governance. But even with those modest changes, Mr. McKinnell would walk away with nearly $46.6 million if Pfizer were acquired, the proxy says.

Controlling astronomical exit payments can be a key concern for companies under financial pressure. Take Symbol Technologies Inc., a Holtsville, N.Y., producer of bar-code readers and handheld computers that has struggled to recover from alleged accounting fraud and several years of restated earnings. Eight former company officials have been indicted on charges of accounting fraud. The board turned to a tally sheet last year to help it replace supplemental pensions with a deferred-compensation program in which corporate contributions depend on the company's earnings.

"I wouldn't accept a SERP," says Salvatore Iannuzzi, a former outside director who became Symbol's permanent chief executive in January 2006. The discarded pension plan "wasn't predicated on performance," Mr. Iannuzzi says. "If you were here and fogged the mirror, you were entitled to it."

At certain companies, tally sheets are helping merely to chip away at once-hidden executive perks with relatively little value. Exxon Mobil Corp.'s proxy, to be issued later this month, will show the company has stopped paying club dues for the top brass, people close to the situation report. Directors scrutinized tally sheets from shareholders' perspective and concluded it looked stupid to pay such costs when senior executives make enough money to foot those bills themselves, one such individual says.

Exxon Mobil covered $46,223 of club memberships in 2004 for Lee Raymond, who led the Irving, Texas, oil giant until he retired last Dec. 31. The 2005 proxy didn't describe dues paid for his successor, Rex Tillerson. An Exxon Mobil spokesman declines to comment.

Becton, Dickinson & Co. is shedding financial-planning services for its chief executive, Edward J. Ludwig. But the Franklin Lakes, N.J., medical technology concern partly made up the $9,000 canceled benefit by raising Mr. Ludwig's salary $4,000 to $994,000.

"Paying any money for CEO perks not related to specific job performance is crazy," says Mark M. Reilly, a partner at 3C Compensation Consulting Consortium in Chicago.

"No good deed goes unpunished," retorts John R. Considine, chief financial officer at Becton Dickinson.

More Activism

The use of tally sheets to enhance transparency for investors has failed to appease shareholder activists, however.

"No one is getting a pass for disclosing bad behavior voluntarily," says Brandon Rees, assistant director of the AFL-CIO's Office of Investment. The Washington-based labor federation submitted a Pfizer shareholder resolution seeking additional pension curbs. The SEC accepted Pfizer management's request to exclude the ballot measure from the proxy.

Nevertheless, union members plan to attend the drug maker's April 27 annual meeting, where they will demand "that Mr. McKinnell give back half his pension benefit," Mr. Rees says. Performance "has been horrible under his tenure."

Pfizer directors awarded their CEO retirement benefits "on the basis of many years of service to the company, including years in which the company significantly outperformed the market and its peers," replies Dana Mead, chairman of the compensation committee, in a statement.

Investors have submitted 143 executive-pay measures so far this year, says Carol Bowie, director of ISS's governance research service. Increasingly, disgruntled holders also target directors responsible for excessive rewards. ISS recommended that clients withhold support for the re-election of pay panel members at 77 companies last year, up from 24 in 2004.

The pending SEC overhaul of pay disclosure, expected to take effect in 2007, would force businesses to provide a total compensation figure for top executives along with extensive details about their perks, projected retirement payments, severance and deferred compensation.

The new rules will turn up the heat over stratospheric pay. "It will be easier for shareholders to ask chief executives, 'Why do you need so much?' " says Cornish Hitchcock, outside counsel for Amalgamated Bank's activist Long View Collective Investment Fund in New York.

On the other hand, heightened disclosure of king-size packages could intensify corporate kings' clamor for the same sweet deals. When CEOs discover the bigger numbers, they "may then say, 'Me, too,' " frets Jesse Brill, chairman of, a board advisory Web site. He favors requiring directors to inform investors about steps they take to fix excessive pay elements. Otherwise, he says, "we may well have more ratcheting and further loss of public trust."

--Ms. Lublin, the management news editor for The Wall Street Journal in New York, served as contributing editor for this report.

Write to Joann S. Lublin at