April 7, 2004; Page E01
By Ben White
Washington Post Staff Writer

NEW YORK, April 6 -- Despite rising public outrage and continuing complaints from shareholder groups and politicians, executive pay continues to rise. But while total compensation is up, the content of chief executives' pay envelopes is changing.

A review of dozens of proxy forms filed over the past several weeks indicates that stock options, reviled by some as a chief inflator of the late 1990s market bubble, may be at least temporarily on the wane.

This is in part, experts say, because companies soon may be required to count option grants as an expense against earnings. And it is in part because options are less attractive to employees now than when stock prices -- even of marginal companies with no earnings -- soared ever higher during the bull market.

But even with smaller options grants, companies are finding many ways to pump up pay, according to the review done by Aon Consulting Worldwide's eComp database for The Washington Post.

According to compensation consultant Alan Johnson of Johnson Associates, companies continue to pay what they need to attract talent despite criticism from shareholder advocacy groups and institutional investors. "I have very few clients anymore who even intellectually entertain the notion that there are limits on executive pay," Johnson said.

Favored methods for adding on to corporate officers' annual paychecks include enormous restricted stock grants to top executives and big long-term incentive plan payouts.

In many cases, the big stock grants have no restrictions on them other than that executives live long enough to cash in. And it is often difficult, if not impossible, to tell exactly what executives must do to earn their long-term incentive plan payments.

At Altria Group Inc., parent company of cigarette maker Philip Morris, chief executive Louis C. Camilleri received a restricted stock grant worth nearly $13 million in 2003. Camilleri also received $4.2 million in salary and bonus and a long-term incentive plan payout of $6.35 million. A long-term incentive plan provides deferred payment, generally based on meeting goals over a period of years instead of quarter by quarter.

According to the firm's proxy statement, which details executive pay, half of Camilleri's restricted stock vests, or becomes available for sale, in three years; the rest in eight years.

The proxy lists no other performance requirements and says the award was based on the compensation committee's "assessment of Mr. Camilleri's performance against key strategic objectives." The objectives are not described.

Altria spokesman Timothy Kellogg said Camilleri's award does not require him to hit performance targets. But he said the restricted stock is still preferable to options.

"The use of restricted stock results in lower share utilization, is more transparent and is reflected as an expense immediately," he said.

Share utilization refers to the diluting impact stock options have on other investors. When an executive exercises options, the value of all other outstanding shares in a company goes down.

At Apple Computer Inc., chief executive Steve Jobs voluntarily canceled all his options in 2003 and in turn received a restricted stock grant valued at $74.75 million that vests in three years. Canceling the options represented no loss to Jobs since the company's share price had fallen below the price he would have had to pay to exercise them. Wall Street firms also embraced restricted shares. Goldman Sachs Group Inc. chief executive Henry M. Paulson Jr. received $20.75 million in restricted stock in 2003, up from $2.6 million in 2002, while chief executives at Merrill Lynch & Co., Bear Stearns & Co. and Lehman Brothers Holdings Inc. also received large restricted grants.

Credit card giant MBNA Corp. paid co-founder Charles M. Cawley $45.5 million in 2003, including $27.29 million in restricted stock. Cawley retired as chief executive on Dec. 30 after a dispute with board members about executive compensation at the company.

Overall, Aon Consulting's study found that the median restricted stock award for chief executives at large companies jumped 97 percent, to $891,103, in 2003 from $452,933 in 2002. The average award jumped 40 percent, from $1.6 million to $2.3 million.

According to Aon, the median long-term incentive plan payout jumped 53 percent, from $480,000 to $732,000, while the average payout rose 63 percent, from $1.2 million to $1.9 million.

For the study, Aon analyzed 181 companies with at least $1 billion in revenue that awarded either restricted stock or made long-term incentive plan payouts in either of the past two years and had filed their proxy form by March 18.

Many shareholder advocates -- and even some compensation consultants -- view shares restricted only by time as an even worse compensation tool than options.

"Restricted stock is a full-value grant earned only for not getting fired," said Matt Ward, a pay consultant at Aon Consulting. "I think restricted stock is having a honeymoon that will come to an end very soon."

Ward said some companies shy away from "performance shares" -- stock restricted both by time and by performance targets -- because they receive unfavorable accounting treatment under current rules.

Unlike time-restricted shares, which are expensed based on the price of company stock when the award vests, companies must estimate the value of performance shares each quarter based on the assumption that targets will be met, Ward said.

Ira Kay, a pay consultant at Watson Wyatt Worldwide, lamented the move away from options, saying they had forced executives with large amounts of money at stake to make tough decisions on cost-cutting and other measures in the past few years, for their benefits as well as the shareholders'.

"Options made the recession much less deep than it would have been and made the recovery come sooner," he said .

Options allow executives to buy shares in the future at a price fixed on the day of the grant. If a company's share price drops below the level fixed on the grant date, the options are worthless.

Critics of options say that in addition to diluting the stake of other shareholders, options can encourage accounting sleight of hand to boost short-term stock price performance, making them more valuable.

As options give way to direct grants of restricted stock, a question that sometimes remains unanswered is how they are earned.

At Dow Chemical Co., for instance, chief executive William S. Stavropoulos received a $6.5 million restricted stock award in 2003. Dow's proxy statement says "more than half" the shares are dependent upon "specific performance measures." Those measures are not disclosed.

Greg Comeaux, global director of compensation and benefits at Dow, said the performance target includes sales volume growth, return on capital and other measures. "In our view there is true pay for performance here," he said.

But Comeaux declined to give specifics. "When you begin to speak of those sorts of goals, it's competitive intelligence that would be very useful" to others in the industry.

Some companies are forthcoming about performance targets. At Verizon Communications Inc., chief executive Ivan G. Seidenberg received a $4.2 million restricted stock grant in 2003. The proxy says the grant vests in three years, subject to "certain performance measures."

Company spokesman Peter Thonis said the award depends on Verizon's total shareholder return compared with companies in the Standard & Poor's 500-stock index and a peer group of other telecommunications companies.

If Verizon performs better than half the companies in those groups, Seidenberg receives the full $4.2 million award; if Verizon performs better than 80 percent of the other companies, he receives double the award.

In addition to restricted stock awards, 2004 proxies show many big long-term incentive plan payouts to executives in 2003.

In some cases, these payouts are clearly tied to increasing shareholder value, often measured as a combination of stock price performance and dividends paid. In other cases, it is all but impossible to tell how executives earned their money.

At Black & Decker Corp., for example, chief executive Nolan D. Archibald received a long-term incentive payout of $7.3 million in 2003, covering a three-year performance period. The company's proxy statement says Archibald earned the money "based on the achievement of the performance goal set at the beginning of the period."

What was that goal? The proxy does not say. Company spokesman Paul F. McBride said it is corporate policy not to disclose performance targets for long-term incentive plans. "That's just standard procedure," he said.


© 2004 The Washington Post Company

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