With less lift from stock-option gains, executive pay in the
state lost a bit of altitude last year -- a trend that could
By John J. Oslund and Patrick Kennedy, Staff Writers
Minneapolis Star Tribune
Monday, May 21, 2007
With one glaring exception, Minnesota's 100 highest-paid CEOs
cashed in fewer stock options in 2006 than they did in 2005.
The exception was UnitedHealth Group's former CEO, William
McGuire, whose large stock-option gains ($124 million in 2006
alone) have come at a great cost both to him and his company.
UnitedHealth is Minnesota's biggest contribution to the
options-backdating scandal, which led to McGuire's forced
departure last fall.
Excluding McGuire, Minnesota's highest-paid CEOs took home 8
percent less in total compensation than the same group did last
year, with the fall-off in gains from stock options responsible
for much of the decline. Options gains were off 20 percent year
Compensation committees also granted fewer new options to
Minnesota CEOs in 2006 than in 2005.
With less lift from stock-option gains, median total
compensation for Minnesota's 100 highest-paid CEOs -- the point
at which half the packages are higher and half lower -- dropped
23 percent last year to $1.373 million. However, that median
figure now has topped the $1 million mark for the third
All together, 58 Minnesota executives took home $1 million or
more in total pay last year, compared with 66 in 2005. Total
compensation includes salary, bonus and other sources of income,
including gains from the exercise of previously issued stock
No one is predicting that stock options will disappear. But
after elevating the paydays of both deserving CEOs and those who
were simply lucky enough to reign during bull markets, stock
options appear to be on the wane as the cornerstone of executive
Options lose their luster
Always controversial, stock options have also become expensive,
thanks to an accounting-rule change in 2006 that requires
companies to record a charge against earnings when new options
are granted. Previously, only a footnote disclosing the
estimated value of option grants was required.
"People still expect there will be an options element in
executive-level jobs," said V. John Ella, an attorney with
Jackson Lewis in Minneapolis who specializes in executive
compensation. "It may be a decreasing portion of total
compensation, but it is not going to disappear as a tool."
Critics of options -- ranging from business-school scholars to
big-name investors like Warren Buffett -- point out that they're
based on what at best is a crude measure of a company's
success: its stock price at a certain point in time. At worst,
they say, options are an incentive to manage for short-term
profits and, in some cases, to cheat.
(Options entitle the holder, after a vesting period, to buy a
share of the company's stock for a predesignated lower price.
Options have value only if the company's stock price achieves a
higher target level called the strike price. The difference is
In 1999 -- the last full year of the 1990s bull market before
the tech bubble burst -- options gains accounted for 70 percent
of total compensation for Minnesota's highest-paid CEOs. Last
year the figure was 41 percent. (Comparisons exclude McGuire's
stock-option sales. In February 2006, he exercised $124 million
worth of options before the backdating controversy surfaced.)
In theory, options reward executives who increase the market
value of their companies. In practice, however, those who are
merely along for the ride can be richly rewarded, too.
"It is difficult to show there is a correlation between high
levels of pay and consistent, superior company performance,"
said Robert Kennedy, professor of ethics and business law at the
University of St. Thomas. In other words, Kennedy added, "It
was hard to be punished for poor performance."
Cozy relations between CEOs and their board members also make it
easy to game the system, he said.
The options backdating scandal, which has snared about 140
public companies ranging from UnitedHealth to Apple, Home Depot
to the Cheesecake Factory, underscores the point. Backdating
effectively takes the risk out of risk-based incentives, because
grant dates for the shares are chosen through hindsight,
ensuring a profit.
Defenders of stock options say for that for executives at
high-risk, start-up firms short on cash but long on potential,
options still offer a powerful incentive. But the recent
changes in the way companies must account for options make them
As a result, said Thomas Martin, an attorney with the Dorsey &
Whitney law firm in Minneapolis, the use of stock-option grants
has declined from about three of every four executive pay
packages at public companies early in the decade to about 40
percent last year.
"Stock options are expensive and difficult and are gradually
being phased out," he said.
At many companies, grants of restricted stock have replaced
options as the preferred way for rewarding top managers. Those
outright grants of stock typically vest over time and can be
forfeited if the manager is fired or leaves the company. Some
restricted stock grants are tied to performance goals, although
most are tied to the "passage of time," Martin said.
At Supervalu, for example, CEO Jeffrey Noddle has a special
retention bonus of restricted stock tied to the company's
Albertson's acquisition, according to the company's latest proxy
filing. Noddle received 305,157 shares of restricted stock
valued at $9.5 million, 25 percent of which vests at the end of
year three, 25 percent at the end of year four, and 50 percent
at the end of year five. The grant also contains performance
criteria including stock price targets and the completion of a
CEO succession plan.
Measuring the use of restricted stock among the 100 CEOs in this
year's survey was complicated by the fact that the accounting
changes affecting options and restricted stock took effect in
January 2006. Many companies on our list closed their fiscal
years before then under the old accounting rules. The trends
should become clearer in the years to come.
Among the 100 highest-paid CEOs on our list, cash compensation
rose slightly in 2006. The median salary and bonus for
Minnesota executives rose 2 percent in 2006 to $789,474; the
comparable figure for 350 CEOs surveyed by the Wall Street
Journal climbed more than 7 percent to almost $2.6 million. In
both cases, the figures compare this year's sample with last
year's sample, and the population may be slightly different
because of executive turnover.
Meanwhile, salaries for rank-and-file workers in the Midwest
rose between 3.6 and 3.8 percent in 2006, a bit faster than in
2005, according to a survey of about 1,300 employers by World at
Work, a salary-tracking firm.
Payday highlights from this year's survey:
• UnitedHealth's McGuire pulled down the biggest salary, $2.1
million. Target CEO Ulrich's $1.66 million placed second.
Stratasys CEO S. Scott Crump was lowest at $190,000.
• Of the 100 CEOs, 78 got a raise, 13 got the same salary as
the prior year, and five took salary cuts.
• James Cracchiolo of Ameriprise Financial got the biggest
bonus: $9.46 million. 3M Co. CEO George Buckley came in second
at $7.4 million. Jay Fishman of the Travelers Companies Inc.
(formerly St. Paul Travelers) got the third-biggest bonus, $6.5
million. The smallest bonus -- $15,000 -- went to Karen Gilles
Larson, retired CEO of Synovis Life Technologies.
• Overall, 85 of the 100 CEOs got a bonus last year, including
19 who got $1 million or more. Fifteen received no bonus, up
from 12 in 2005.
• Of the 44 CEOs who sold stock options last year, the biggest
exerciser was McGuire ($124 million); followed by Target's
Robert Ulrich ($26.1 million) and Thomas Oland of Techne Corp.
Of the top five CEOs delivering the best three-year total
returns to shareholders, none is among the top 10 highest-paid
The overall best buy for shareholders by this measure was Rodney
Young of medical products firm Angeion Corp. Young ranked No.
82 in total pay but delivered the highest three-year total
return: 386 percent.
He was followed by David Goronkin (No. 56) of Famous Dave's (255
percent); Richard Braun (No. 36) of Medtox Scientific (236
percent); Marti Morfitt (No. 23) of CNS Inc. (229 percent), and
Brad Anderson (No. 16) of Best Buy (184 percent).
Among the 10 highest-paid CEOs, one-year returns were positive
at eight companies (UnitedHealth and St. Jude Medical were the
exceptions). The biggest one-year gainer among the top 10 was
H.B. Fuller, where CEO Al Stroucken delivered a 70 percent
return before leaving the adhesives maker in December to take
the CEO post at Owens-Illinois.
Overall, one-year total returns for the 100 companies were
positive at 62 and negative at 36 (there were two initial public
offerings -- Capella Education and U.S. BioEnergy Corp.).
Total return for the Standard & Poor's 500 index was 15.8
percent in 2006, while the Bloomberg-Star Tribune index of
Minnesota's 100 largest companies rose 8.9 percent.
Five female CEOs made our list, the same number as last year.
Morfitt, who sold tiny CNS to giant GlaxoSmithKline, got $3.99
million, to become the highest-ranking female CEO at No. 23.
Buffalo Wild Wings CEO Sally Smith came in at No. 40 with total
pay of $1.66 million. Gilles Larson ranked No. 74 with
The former CEO of struggling Lenox Group, Susan Engel, ranked
No. 76. She resigned under pressure in January. Kathleen
Iverson of manufacturing technology firm CyberOptics ranked No.
John J. Oslund •
Patrick Kennedy •