Executive Pay: Not All Pain is the Same

Some critics wonder if CFOs should rake in millions while their company's shareholders take it in the teeth.

By one accounting, Gary Crittenden, CFO of American Express Co., last year earned more than $4.6 million, including almost $3 million in gains from exercised stock options. Yet the company’s stock price slid from $52 to $35.7 — a 31 percent decline.

Likewise, former Amazon.com Inc. CFO Warren Jenson reaped a cash bonus at the end of 2001 worth more than $1.5 million, despite a simultaneous 22 percent drop in the online retailer’s share price.

There are endless examples — including the well-documented cases at Enron and WorldCom — of executives getting rich while their companies go broke. And the large payouts for nonperformance have angered some shareholders.

“With the concept of pay for performance, when the market goes down pay should go down as well,” says Anne Yerger, research director for the Council of Institutional Investors. “But in many cases, companies are making up for the shortfall with other types of compensation,” she says, including options and corporate loans.

But Ed Archer, managing director at executive compensation consultants Pearl Meyer & Partners, warns against being fooled by anecdotal evidence. “The reality is that overall, cash bonuses are down about 20 to 25 percent.”

He says, too, that a higher percentage of CFOs are getting no bonus at all. Many of the well-publicized multi-million-dollar packages are from stock options awarded during the banner years.

Still, some compensation experts are cautioning against performance-based incentive plans that provide executives with windfalls during good times — but don’t punish them when returns are poor. Todd McGovern, Midwest director of compensation at Buck Consultants, says another problem is that many executive-performance systems don’t differentiate between the individual performance of top executives, but reward them equally. “There is a disconnect between pay and performance,” he says, “especially on the downside.”

What Drives Executive Pay?

  • Company or unit financial performance 64%
  • Individual executive performance 23%
  • Leadership competencies 10%

Source: Buck Consultants

Quote of the Day

“We aren’t doing it to get kudos, we’re doing it because we felt it was the right thing to do.”<
— Krispy Kreme Doughnuts Inc. CFO Randy Casstevens on the company’s stepping up of disclosure in its annual reports.

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