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What economic slowdown?

Sunday, April 15, 2001

By KEVIN G. DeMARRAIS Staff Writer

Corporate earnings may be down, and most stock prices have slipped over the past year, but top executives of corporations in New Jersey and across the nation continue to rake in multimillion-dollar pay packages.

What seems to be changing is the makeup of the compensation packages, tying pay increasingly to performance.

Cendant Corp.'s Henry Silverman continued to benefit from the sort of generous stock option-heavy package that has been a feature in recent years, but Frederic Poses at American Standard Cos. received compensation more closely tied to the company's record earnings.

Still reeling from the effects of massive accounting fraud in 1998, Cendant, whose operations are based in Parsippany, had a dismal year, with its stock losing nearly two-thirds of its value between January and December.

But Silverman still took home $137.4 million, according to The Record's analysis of Cendant's filings with the Securities and Exchange Commission. That made Silverman, who is chairman, chief executive and president of the real estate, hotel, and travel services company, New Jersey's highest-paid executive and, by one measure, the fifth-highest in the nation, earning more than his counterparts at General Electric, Coca-Cola, or IBM.

As is the case with all but one of the nation's 20 highest-paid executives -- the exception being Apple Computer's Steve Jobs -- most of Silverman's money came from what has been the major source of CEO pay for years: cashing in on stock options awarded in previous years. (Jobs earned his entire $90 million in cash and bonus.)

Silverman made more than $129 million from stock options, and received an increase of more than 10 percent in direct compensation -- salary, bonus, and other perks -- to $8.3 million, even as company stock sank from $26.56 on the last trading day of 1999 to $6.63 a year later. It has rebounded this year, however, closing Thursday at $15.48.

Poses, the chairman and CEO of American Standard, a Piscataway air-conditioning and plumbing equipment manufacturer, earned $15.7 million last year to rank fourth among New Jersey executives. And he did it without receiving or cashing in any stock options.

But his pay package was significantly different from Silverman's and is the type of compensation experts say is becoming increasing popular: restricted company stock awards and performance-based bonuses.

Unlike stock options, which give executives an opportunity to purchase stock sometime in the future at a predetermined price, restricted stock grants are outright awards of stock that the executive is prohibited from trading or selling for a predetermined period, usually three to five years.

Until two years ago, Poses was considered the likely successor to Lawrence Bossidy as chairman and chief executive of Morris Township-based AlliedSignal Inc. But Allied merged with Honeywell Inc. to

form Honeywell International Inc., and Michael Bonsignore, Honeywell's top executive, got the job and Poses got the gate.

The former Peace Corps volunteer moved to American Standard, and a key part of his compensation package was 250,000 shares of restricted company stock, worth $11.5 million. His ownership in the stock vests in three equal and consecutive annual installments beginning Jan. 1, 2003.

Poses also received a salary of $1 million, which was in the 50th percentile of executives at comparable companies, a regular bonus of $1.2 million, and $542,000 in other compensation, the company reported.

But he also received a "special bonus" of $1.5 million "to recognize his superior leadership impact during a period of significant business and organization transition and the appreciable increase in shareholder value created since he became chairman and chief executive officer," the American Standard compensation committee said.

Compensation committees, composed of outside independent directors, determine compensation of senior executives at each company, weighing earnings and stock appreciation in setting rewards.

Poses had the numbers on his side.

On Oct. 6, 1999, the day before he was named to lead American Standard, the company's stock was selling at $38.13 a share. It ended 2000 at a 52-week high of $49.31 and has continued to climb, closing last week $59.70. In addition, the company reported revenues for the year up 6 percent to a record $7.6 billion.

Investors prefer senior executives to have a financial stake in the company, and restricted awards are a good way for them to have stock, said Peter Oppermann, a senior consultant at William M. Mercer Inc., a New York-based human resources consulting firm.

"Options have value only if the stock price goes up," he said. "No matter how many options have been granted, an executive doesn't have a stake in the company. Now Poses has a large stake in the game."

Initially restricted stock awards rewarded an executive merely for staying at the company -- "Stick around and you get the stock," Oppermann said -- but they are increasingly coming with performance hurdles, tying pay to performance. "It's not a giveaway by any means."

But they can mean a takeaway, because performance-based compensation can also lead to lower pay packages, as happened to Michael Armstrong, CEO of AT&T Corp., who received a $650,000 bonus after pulling down $2.3 million a year earlier.

AT&T's compensation committee voted Armstrong a $400,000 pay raise to $1.8 million in recognition of "the overall complexity involved in transforming AT&T to an any-distance company, unprecedented competition in the marketplace, and the leadership provided by Mr. Armstrong since joining the company."

At the same time, the committee "exercised its discretion" in setting Armstrong's bonus.

On the one hand, it recognized Armstrong for continuing "to demonstrate his vision and leadership at a time of unprecedented turmoil in the telecommunications industry."

But it also cited "the company's failure to achieve certain targeted performance against financial measures," and it awarded Armstrong $650,000, just 25 percent of his target bonus of $2.6 million.

AT&T stock, which opened the year 2000 at $53.38 a share, and peaked at $60.31 in March, closed at $16.94. It has since rebounded slightly, and ended last week at $21.78.

Bonsignore, who last year replaced Bossidy as CEO of Honeywell -- and will be out of a job if GE's takeover of Honeywell is approved by regulators -- also lost a big chunk of his bonus.

His contract set a target bonus of $1.5 million, matching his salary, but after the company's stock fell from $56.69 in January to $47.31 in December, he got only two-thirds of that, $975,000. In 1999, he received $2 million.

Even so, Bonsignore came out ahead. His salary increased from $1.1 million to $1.5 million, and he converted stock options for an additional $10.4 million, giving him a $2.7 million "raise" to $11.9 million for the year. That put him fifth among the 23 executives whose compensation packages The Record examined.

Six topped the $10 million mark, and 16 others earned at least $1 million. Total pay includes direct compensation, exercised stock options, restricted stock shares, and long-term incentive payments, but not the value of unexercised stock options.

Among the 23, only five earned more than the record national average of $10.9 million -- up 16 percent from 1999 -- earned by chief executives of the 200 biggest American companies, according to a survey by Pearl Meyer & Partners, a New York-based executive compensation consulting firm.

Best paid were the co-heads of Citigroup, John Reed, who retired in April, and Sanford Weill, according to a report in the April 16 edition of Business Week. Reed took home $293.7 million, all but $5.4 million in executed stock options, and Weill got $224.9 million, including $204.9 in options.

Gerald Levin of AOL Time Warner ($163.8 million) and John Chambers of Cisco Systems ($157.3 million) also earned more than Silverman, while GE's Jack Welch (seventh on the Business Week list at $91.7 million), and IBM's Louis Gerstner (17th at $73.6 million) got less.

Increases in core pay -- salary and bonus -- were closely tied to companies' earnings, Oppermann said.

"Income was up 9 percent and salaries and bonuses were up 10 percent," Oppermann said. "That's a pretty good relationship."

Salary and bonus were just the start for many senior executives, however, as stock awards and options led to the big paydays.

Even though the stock markets "soured" over the last nine months of 2000, executives cashed in on the big run-up in stock prices from the late 1990s and the start of last year, Oppermann said. As a result, options accounted for an average of $6.45 million of the compensation, an increase of 28 percent from 1999, the Pearl Meyer survey showed.

Not surprisingly, New Jersey's thriving pharmaceutical industry is well represented among the state's highest paid CEOs.

John Stafford of American Home Products Corp. is second to Silverman with $27 million in compensation, much of it from exercising options worth $22.6 million, and Richard Kogan of Schering-Plough Corp. is third with $21.8 million, even after having his bonus cut by $202,000.

Johnson & Johnson's Ralph Larsen ($7.6 million) is seventh, Pharmacia Corp.'s Fred Hassan is 10th ($3.5 million), and Merck & Co.'s Raymond Gilmartin is 12th ($1.7 million). Hassan and Gilmartin are close to their competitors in salary and bonus, but they trailed behind in total earnings because neither cashed in on stock options.

Larsen and Hassan were among nine of the 23 executive surveyed who made less money in 2000 than they did in 1999, but neither was performance-related. Larsen cashed in fewer options last year than he did a year earlier, and Hassan gained $12 million in stock in 1999 following a merger with Monsanto Co.

Staff Writer Kevin DeMarrais' e-mail address is demarrais@northjersey.com

-- K (infosurf@yahoo.com), April 15, 2001