CEO Pay Slows, But Still Grows - Vested Interests - Brief Article

Chief Executive, The, Dec, 2001 by Michael A. Verespej

THE ECONOMIC DOWNTURN has cast a pall over CEO compensation, but that doesn't mean that CEO pay cuts or rollbacks are in the offing.

"There's a recognition that this is not the time to go to the well quite as deeply," says Dave Hofrichter, head of the compensation consulting practice at Unifi Network, a subsidiary of PricewaterhouseCoopers. "And some CEOs may even ask their boards to hold their salary at the same level for next year. But it's more likely that instead of a 10 percent increase [in CEO compensation packages] in 2002, the increase will be more in the 3 to 4 percent range."

What's more, the isolated CEO pay cuts in the airline industry -- Mesa Air Group Chairman and CEO Jonathan Ornstein took a 50 percent pay cut to $100,000 six days after the September 11 terrorist attacks--appear to be just that.

To be sure, depressed stock market prices will reduce the bonuses CEOs collect this year--and maybe the next. But stock incentives--which typically account for 60 to 70 percent of a CEO's pay--aren't going away.

"I doubt that CEOs would be willing to give up on stock, especially now when they could get a lot of underwater options," says Steven E. Hall, managing director of Pearl Meyers & Partners. He notes, however, that there could be a shift toward restricted stock grants or deferred options.

Hofrichter agrees. "There won't be a return to cash. Boards will still give CEOs stock options because in times like these keeping an emphasis on performance is the motivation you need," he says. But, he adds, boards will increasingly ask, "Are we getting the performance we're paying for?"

In that vein, Hofrichter expects CEO stock options to be linked to "more specific performance measures such as reducing costs, bringing on new products, or completing an acquisition. "Boards will tie CEO compensation to the strategic plan as opposed to just tying CEO compensation to stock price and shareholder return," he says.