Taking Home The Loot
By Pam Kufahl© Utility Business. December 1999.
Telecom executives must be doing something right. For the second year of the Utility Business magazine study on executive compensation, telecom chief executive officers top our list of highest paid executives. In fact, the top six executives are from telecom companies, led by last year's big winner, Bernard Ebbers, president and chief executive officer of MCI Worldcom.
Ebbers' 1998 salary and bonus totaled $8 million, $7.1 million of that in bonuses. While Ebbers' compensation tops the list, his income actually took a 55.19 percent nosedive in 1998. In 1997, the year WorldCom and MCI started its merger process; Ebbers received a $17 million bonus. Edward E. Whitacre, chairman and CEO of SBC Communications, came in second at $6.16 million in salary and bonus.
Telecom executives earn close to twice as much in salary and bonuses as executives at energy companies. Telecom executives earn a mean of $2.67 million while executives at diversified utilities and gas utilities earn a mean of $1.4 million, and electric executives earn a mean of $1.379 million. No water company executives made the list. The mean compensation for the three industries in 1998 was $1.87 million compared to $1.75 million in 1997.
The first non-telecommunications company on the list is Enron, whose chairman and CEO, Kenneth Lay, came in seventh with $2.61 million in 1998 compensation. That figure includes a $1.62 million bonus, which is much smaller than the bonuses of the telecom executives. Of the 17 telecom company executives on our list, 11 received more in bonuses than in base salary. Telecom executives had a bonus-only mean of $1.76 million, while the other industries had a bonus-only mean of $695,116.
"Telecom executives earn more because their companies generate more revenue."
-Charles Peck Compensation specialist with The Conference Board
Telecom executives earn more because their companies generate more revenue, says Charles Peck, the compensation specialist with The Conference Board, an industry research firm in New York City. The telecom industry's longer deregulated history also means that the telecom boards have learned how to motivate their CEO's with bonuses for meeting goals. Despite deregulation efforts in the electric and gas industries, these utilities are still largely regulated, Peck says. He expects the salaries and especially the bonuses in these industries to increase as deregulation takes hold.
But they will have a long way to go to catch up with the telecom industry. The telecom executives' salary-only mean was $908,686 while the other industries had a combined salary-only mean of $697,427. The top electric executive, James Broadhead, chairman, president, and CEO, FPL Group, made $2 million in total compensation compared to Ebbers' $8.05 million.
The third-ranked electric utility executive on the list was Richard Priory, chairman, president and chief executive officer at Duke Energy. According to Chris Rolfe, vice president corporate human resources at Duke Energy, Priory's compensation has increased significantly in the last few years because the company's size and revenues have grown and Priory's responsibilities have increased. In 1997, Duke Power merged with PanEnergy, moving Priory into the chairmanship of the $20 billion company. Proxy statements filed with the Securities and Exchange Commission show that Priory's salary increased proportionally. His 1994 base salary as president and chief operating officer of Duke Power was $384,425 plus a $63,078 bonus. The company's chairman and chief executive officer at that time, W.H. Grigg, made $558,500 base salary plus a $103,496 bonus. Four years later, Priory's base salary as CEO of the merged company was $810,000, and he received a $891,000 bonus.
Deep Pockets
In the past, utilities tried to control executive compensation, says Gary Kaplan, president of Gary Kaplan & Associates, a national executive search firm based in Pasadena, California. Kaplan spent many years in human resources at a utility prior to starting his recruitment firm.
"With deregulation, it is as if the rule book has been thrown out the window," he says. He credits loosening of compensation rules not only to deregulation but also to the tight labor market. Rolfe agrees. He says that while shareholders are demanding increased performance and share price, the number of executives who can deliver those results is small. In addition, Rolfe says the market is becoming global, and utilities from overseas are hiring away U.S. executives.
"In this labor market, it's about 'Show me the money."
- Gary Kaplan, president of Gary Kaplan & Associates
That means that utilities must lure executives from other utilities or hire from outside the industry, Kaplan says. To do this and to keep the executives they have, utilities are willing to dig deep into their pockets, Kaplan says.
A statement in MCI WorldCom's proxy statement for 1998 seems to bear this out. The statement says the company's practice "has been to establish base salaries for particular officers between the median and high end of the range of such salaries at comparable companies in order to attract and retain the best qualified management team available."
"In this labor market, it's about 'Show me the money'," Kaplan says. He says companies have to get creative in executive packages and offer incentives such as short and long-term stock options and bonuses. Companies use several forms of compensation, most of it revolving around stocks. Restricted stock requires CEOs to stay with a company for a certain number of years--generally three to five--to earn the full amount of the stock, Peck says. Of gas, water, and electric utilities, 34 percent use restricted stock, a Conference Board study found.
"That's a fairly high percentage," Peck says. Seven of the 27 telecommunications companies, or 26 percent, use restricted stock, according to the Conference Board study.
Companies also offer long-term share plans that reward CEOs with either cash or stock for hitting financial targets, usually over a three-year period. According to the Conference Board study, 34 of 103 utilities use long-term cash or stock option plans (34 percent) and eight of 27 telecommunications companies, or 30 percent, use long-term shares.
But bonus plans aren't just a way to keep executives; they are also a way to assure the best shareholder returns possible, according to SBC Communications, whose CEO earned $5 million in bonuses in 1998 and came in second on the list of top-paid executives.
"In order to align the financial interests of SBC's executives with those of SBC and its shareowners, a significant portion of executive compensation should be 'at risk' and tied to the achievement of...performance objectives of SBC," the company's definitive, proxy statement reads.
No End in Sight
Executive salaries will continue their upward climb, Kaplan says. "I don't see an end in the short-term because there's no indicator that the economy is anything but healthy," he says.
Rolfe also expects executive compensation to continue to increase, and he says these executives are worth their compensation. After all, if they didn't meet the goals set by the compensation boards, they wouldn't earn the large bonuses.
However, some consumer groups think utility executives are earning more than their fair share. The Utility Reform Network, A California consumer group, recently complained that utilities were keeping the profits generated from deregulation for themselves instead of passing them along to the consumers in the form of lower rates.
"Executives should pass some of the gravy of deregulation on to consumers," says Nettie Hoge, executive director of the consumer group. "While they collect huge salaries, bonuses, stock options and other perks, consumers are struggling under the weight of the utilities' previous mistakes."
But the driving force at utilities is shareholder returns, and, so far, shareholders seem to think they are getting a fair return. Should shareholders believe executive salaries are too high, they can object, says Mike Gunter, chairman of the employee benefits group at Womble, Caryle, Sandridge and Rice law firm in Winston-Salem, N.C. The firm works with the compensation committees to design and implement executive compensation packages.
"That compensation committee is not going to approve an increase (in executive compensation) unless they can look the shareholders in the eyes," Gunter says.
Note: The information for this report was obtained from the proxy statements filed with the Securities and Exchange Commission. The companies on the list included 17 telecommunications companies, 15 electric utilities, 11 diversified utilities, seven gas companies and no water companies.
