Pay and performance: The view from the top

The most dramatic recent critique of runaway CEO pay came in March on national TV. Gadfly U.S. Rep. Henry Waxman hauled in chief executive officers of three troubled financial companies and scolded them for taking millions as their companies lost billions.

"How can a few execs do so well when their companies are doing so poorly?" the California Democrat asked as cameras rolled.

Angelo Mozilo, CEO of Countrywide Financial Corp.; Charles Prince, former CEO of Citigroup Inc.; and E. Stanley O'Neal, former CEO at Merrill Lynch & Co. Inc., said multimillion-dollar pay (or exit) packages were based on years of good news before the credit crunch that led to massive losses. Each CEO's compensation committee director chimed in, saying that companies have to pay a lot to retain top bosses.

In the end, a lot of talk and not much action.

"The bottom line, they still went home to their mansions," said Steven Balsam, an accounting professor at Temple University and author of Executive Compensation: An Introduction to Practice & Theory.

Investors seem to have a fairly high tolerance for generous CEO pay. It's been rising for decades, after all, and doesn't seem likely to stop.

For the 100 largest Philadelphia-area companies, median CEO pay increased 10.9 percent in 2007, according to data newly compiled for The Inquirer by Equilar Inc., an executive-compensation research firm. Among the same companies, median annual revenue increased 2.7 percent. Chief executives at Philadelphia's largest companies fared better than their counterparts nationally. Median S&P 500 CEO pay increased 1.3 percent, according to Equilar.

"I don't think investors have an issue with higher pay, if performance is there," said Irv Becker, national practice leader for executive compensation at the Hay Group Inc., a Philadelphia-based management consultancy.

Still, concern that compensation committees may be overzealous and susceptible to influence from executives led the Securities and Exchange Commission to establish new disclosure rules in 2006 requiring committees to explain their objectives "in plain English," lay out the criteria by which top executives earn bonuses, and produce a simple table showing each top executive's total compensation and its components.

"Disclosures have forced compensation committees to step back and really look at their programs, and make sure they can rationalize and explain their programs," Becker said.

So is better disclosure making a difference in pay?

"There's more disclosure, for sure," Balsam said. "For the most part, pay has still gone up."

Like public firms across the nation, Philadelphia's big companies are trying to send out the message that their compensation committees are tethering CEO pay more tightly to measurable performance.

At Crown Holdings Inc., the Philadelphia-based can-maker, sales rose 7.9 percent in 2007 to $7.7 billion, net income was up 71 percent - and CEO John W. Conway's pay rose more than 300 percent.

Why the big difference? Conway got no bonus in 2006, then got a maxed-out bonus of $3.7 million for 2007. Crown's proxy explains that the bonus is linked to company performance (year-over-year income improvements). It's in plain English, more or less, but investors have to work hard to understand the math.

"What we have right now is better than before, but I'm not sure the common investor has a chance when they look at this," said Timothy Donahue, Crown's senior vice president of finance. "Like all of these things politicians force you to do, I'm not sure if it provides a whole lot to the investor. It lets the politician thump his chest when he's trying to get votes."

Toll Bros. Inc., the Horsham real estate developer, stood out for a different reason. Laid low by the mortgage crunch, the company's sales, profit and share price fell dramatically in fiscal 2007. For the first time in 16 years, CEO Robert I. Toll received no bonus. By Equilar's calculation, the CEO's pay dropped 93 percent last year.

Then this February, the company put a proposal up for shareholder vote to revamp its CEO bonus in a way that would have given Robert Toll at least $1.36 million if it had been in place in 2007. Shareholders, despite criticism by a labor group, approved the plan.

The new plan eliminates a minimum growth threshold to let Robert Toll receive a bonus in a slow year. But Joel Rassman, Toll's chief financial officer, says the plan also ties a bigger portion of the CEO's potential bonus to corporate goals each year, potentially ranging from reducing overhead to making a certain number of appearances at industry conferences.

"We could have gone to shareholders in 2007 asking them to change the plan, but we didn't want anyone to believe we wanted to give Bob Toll a bonus for 2007," Rassman said. "So we waited until 2008."

At Cephalon Inc. in 2007, a year in which the Frazer-based biotech reported a loss of $192 million and its stock close flat, CEO Frank Baldino Jr.'s total pay reached $15.9 million by Equilar's calculation, mostly in stock and options.

Cephalon calls this evidence of the compensation committee's vigilance: Baldino actually qualified for a larger bonus than what he got, but according to the Cephalon proxy the committee reduced his bonus payout in consideration of the $425 million paid in November to settle a government case involving improper off-label marketing of the drug Provigil.

Sheryl Williams, Cephalon vice president of public affairs, stressed that Cephalon exceeded its income target when removing the onetime legal settlement.

"The company's compensation philosophy is pay-for-performance," Williams said.

Disclosures may be a good start, but there is nothing like a proxy battle to force real change. In 2007 at the women's apparel retailer Charming Shoppes Inc., based in Bensalem, the company's stock fell because of lagging 2007 sales. Investment funds such as Myca Partners began buying shares and putting on pressure about company performance.

CEO Dorrit J. Bern's pay dropped 49 percent for 2007, according to Equilar. Then, under further pressure from dissident investors, the company in December reworked Bern's employment contract to eliminate $154,760 of annual perquisites, including a Philadelphia apartment and weekend flights to Chicago. The company tied more of Bern's equity grants to performance, and she survived a proxy battle in May.

At Comcast, growth slowed and shares hurtled down about 36 percent in 2007 - and CEO Brian Roberts' compensation fell 25 percent, as calculated by Equilar. D'Arcy Rudnay, Comcast's senior vice president of corporate communications, said that the top executives at Comcast voluntarily cut their bonuses 20 percent in light of the share drop. She said 68 percent of Roberts' pay is based on financial performance metrics.

Ultimately, disclosure is just a tool for shareholders and regulators concerned about CEO pay. The task now is to use it.

"The objective is to be transparent so shareholders can make a judgment," Hay Group's Becker said. "I think we're laying a foundation for much higher correlation between pay and performance."