No Right, Wrong In Assessing CEO Salary, Value
By Rodney Tanaka Staff Writer© Pasadena Star-News, March 31, 2007
Everyone from President Bush to the U.S. Securities and Exchange Commissioner has executive compensation on their radar amid a seemingly constant barrage of reports that another CEO received millions in stock options or severance pay.
The San Gabriel Valley has several major companies that pay their executives millions in salary and stock options.
Determining whether they earn that money requires analysis of a company's size and purpose - and the CEO's value to that organization, according to compensation and recruiting experts.
"CEOs once earned 15 to 20 times more than the lowest-paid person in their organization, but some top executives now earn as much as 500 times more," said Gary Kaplan, president of Kaplan & Associates, a Pasadena-based executive search firm.
"This is an obscene amount of compensation," he said. "The key to thinking about this is, are these people creating value? If they create value and really make a significant contribution to the organization they lead, then it's challenging to debate it."
"We live in a superstar society today, with actors making $10 million per film and athletes signing huge contracts," Kaplan said. "The same mindset is found in the corporate world, that people do add value to the organizations they lead," he said.
"I'm not as troubled by the high compensation for a CEO if it's based on performance, if the metrics are in place so the CEO is evaluated objectively," Kaplan said.
"When an executive is forced out and takes hundreds of millions of dollars along as severance, that's often the responsibility of the board of directors," he said.
"But the option always exists to vote with your feet," he said.
At least one local CEO agrees.
"Everybody has a right not to buy shares," said Dominic Ng, president and CEO of East West Bank in Pasadena. "Anyone who feels \ is not doing what is right and is wasting expenses, all they need to do is move their cash to a more efficiently run company."
"There's no right or wrong way to gauge compensation," he said. "Board members sometimes compete for pride against other companies when setting pay."
"High performing CEOs don't necessarily get paid more," Ng said. "Sometimes an aggressive CEO will get more because he or she asked for more."
"Look where this person is taking the company when evaluating salary," Ng said. "Is the company's value increasing?"
East West Bank has 43 percent compounded annual earnings per share growth, according to Ng.
President Bush, in his speech on the state of the economy in January, talked about the Securities and Exchange Commission's new rules to ensure that executive compensation packages are transparent.
Government should not decide compensation for America's corporate executives, but the salaries and bonuses of CEOs should be based on their success at improving their companies and building value for their shareholders, according to Bush.
"A leader's pay and compensation should be in line with the organization," said Richard Lepsinger, president of OnPoint Consulting.
"Generally speaking, when an organization suffers, the CEO should share in that or at least demonstrate they're part of the organization, not above the organization," he said. "When an organization does well, it's great if everyone could realize the benefits."
Ng's value to East West goes without saying. In addition to 43 percent compounded annual earnings per share growth, the bank has posted 10 years of record earnings.
For fiscal 2006, Ng earned a salary of $740,000 as well as a cash bonus of $1.28 million, bringing his total compensation to $2.02 million. The value he realized by exercising stock options brought him another $14.7 million.
Michael W. Perry, chairman and CEO of IndyMac Bancorp Inc., the holding company for IndyMac Bank, earned a base salary of $1 million in 2006 and additionally received a cash bonus of $791,300.
Perry didn't exercise any stock options and there were no grants of stock.
Perry's compensation would also appear to be based largely on the value he has brought to the company.
For fiscal 2006, IndyMac generated $2.6 billion in revenue, up from $1.8 billion the previous year.
"A CEO should behave in a manner consistent with the values and priorities of the organization. Costco CEO Jim Sinegal runs a tight-margin operation and conducts himself that way, with a no-frills office and by spending time on the sales floor," Lepsinger said.
"A CEO must balance what appears to be mutually exclusive or competing demands - continuity and change, cost containment, growing the business and balancing the needs of stockholders, customers and employees," he said.
"Salary should be in line with comparable positions in similar organizations," said Larry Comp, principal at compensation practice Humanomics Inc. in Granada Hills.
Determining factors include the size and complexity of the organization and the type of industry.
"Another factor is location," Comp said. Attracting a CEO from the Midwest to San Francisco or Los Angeles might be difficult because of the higher cost of living.
"People take greater issue with bonuses and long-term elements," Comp said. The most prevalent way of structuring bonuses is using a percentage of the CEO's base salary. Long-term compensation, such as stock options or long-term cash plans, also draws a lot of attention.
"Long-term plans should also be established in line with comparable positions and organizations and tied to performance as much as possible," Comp said.
"If bonuses and long term plans are truly tied to performance, and a company has to lay off lots of people because the performance of a company was poor, I would question why an executive would be receiving extravagant bonuses or stock options," Comp said. "That's a real turnoff,"
Compensation packages are typically negotiated on the front end.
"I think that companies now should be more careful in developing those plans," Comp said. "They are attractive enough to bring a CEO into an organization. Typically, it takes a CEO a longer period of time to find a position than a lower-level person, but it should not be extravagant, it should be realistic."
"Companies are under increasing pressure to examine their compensation practices," Comp said.
"I think that the real goal is to tie CEO pay to true performance, which is typically a combination of company performance and individual performance," Comp said. "The problem you run into sometimes is a company could be performing very well, but its stock is not doing well or vice versa, and so a lot of organizations are trying to develop more innovative plans that better tie (compensation) to true performance."
