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The Association of U S West Retirees
 

 

 

Reducing Rewards
Facing greater disclosure, boards are cutting back on CEO extras from chauffeur service to deferred compensation
By Joann S. Lublin
The Wall Street Journal
Monday, April 9, 2007

Golden goodies for America's highest bosses are starting to lose their luster.

A growing number of corporate boards no longer treat chief executives like monarchs -- largely because their royal rewards lack justification.  Boards are trimming or dropping everything from perquisites to severance pay, deferred compensation and supplemental pension plans.

The moves come amid toughened pay-disclosure rules and directors' increased risk of shareholder lawsuits and election challenges.  The Securities and Exchange Commission adopted sweeping regulations last year that widen what companies must reveal about executive compensation -- and for the first time require the full board to approve and be legally responsible for the proxy statement's report on pay practices.

"Some of the recent changes in CEOs' perks and overall compensation levels are clearly driven by the changed disclosure rules," says David Yoffie, a Harvard Business School professor on the board compensation committees at Intel Corp. and Charles Schwab Corp.

Such "pay practices are now being discussed by the entire board to an unprecedented degree," says Charles Elson, a HealthSouth Corp. and AutoZone Inc. director who runs the Weinberg Center for Corporate Governance at the University of Delaware business school.

Boards' hottest target?  Perquisites.  On top of their salaries, bonuses, stock options and restricted shares, most chiefs enjoy a stunning array of benefits.  These often include free financial planning, home-security systems and chauffeur-driven cars.  The perks frequently cost a company relatively little, but draw considerable criticism as symbols of irrational largess.

Fear Factor

Under the new disclosure rules, proxy statements must list executive perks valued at $10,000 or more apiece.  The old rules limited disclosure to perks valued above $50,000.  With their reputations on the line, directors fear being embarrassed by the enlarged list.

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FEWER GOODIES
 
A sample of companies that have recently cut or curbed the following perks for the top boss:

 Financial Counseling:  Fannie Mae, Lockheed Martin Corp., Exelon Corp.*, Sunoco Inc., Fortune Brands Inc.
 
  Club Membership Dues:  Fannie Mae, Toro Co., Exxon Mobil Corp., Lockheed Martin, Exelon, Fortune Brands, Florida Rock Industries Inc., Gannett Co.*, Sunoco
 
 Personal Use of Corporate Aircraft:  General Mills Inc., Wendy's International Inc.
 
  "Gross Up" Payments to Cover Executives' Tax Bite on Certain Benefits: E*Trade Financial Corp., Fannie Mae, AT&T Inc., Sunoco, Sara Lee Corp., First Horizon National Corp., Avaya Inc.
 
  Company Car:  Exelon*, Fortune Brands, Florida Rock Industries, Sunoco, Wendy's International
 
*Effective in 2008
Source: Regulatory filings or company announcements
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Twenty-eight businesses cut or curbed at least one CEO perquisite in 2006, concludes a proxy analysis of 350 major U.S. corporations by Mercer Human Resource Consulting for The Wall Street Journal.  Among them: personal use of corporate aircraft, club membership fees, and "gross up" payments to cover officers' tax bills for other compensation.  Washington Mutual Inc., one of the 28 companies, said CEO Kerry K. Killinger had just one perquisite last year -- personal usage of corporate aircraft -- and began reimbursing his employer for such use at the start of this year.

Some companies acknowledge the expanded proxy requirements played a role in their killing certain perks.  "We certainly had our eye on the new disclosure rules," says John Daniel, an executive vice president at First Horizon National Corp.  In December, the Memphis, Tenn., bank holding company stopped reimbursing executives for taxes paid on benefits such as a car allowance, disability-insurance premiums and personal use of corporate aircraft.

First Horizon's board pay panel primarily halted the reimbursements because they no longer were seen as good governance, according to Mr. Daniel.  When a business covers a senior official's taxes, "the perception is that the executive is getting something special," he says.

Dissident investors occasionally claim credit for pared perks.  Applebee's International Inc. is struggling with depressed earnings and a proxy fight by hedge-fund activist Richard Breeden.  His Greenwich, Conn., investment firm, Breeden Partners LP, holds about 5.4% of Applebee's shares.  In a January letter to the chairman of the Applebee's compensation committee, Mr. Breeden lambasted what he suggested were extensive flights on corporate planes by former Applebee's CEO Lloyd Hill.  The company's planes had flown 29 times since last April in and out of Galveston, Texas, where Mr. Hill "happens to own a beach house," the letter said.

Mr. Hill has remained board chairman since he left the corner office last September.  Laurie Ellison, an Applebee's spokeswoman, says she doesn't know how many of those 29 flights Mr. Hill was on.

Shareholder interests aren't served "by turning corporate aircraft into flying limousines for senior executives' personal vacations," the Breeden letter argued.  Mr. Breeden, a former SEC chairman, thinks his attack persuaded Applebee's directors to ban senior officers' personal use of the company's sole remaining plane, effective March 1.  (It recently sold its other plane.)  The rides will occur only "in the case of a medical emergency or other extreme hardships," the Overland Park, Kan., restaurant chain states in its latest proxy.  The board updated the policy to reflect "best business and governance standards," Ms. Ellison says.

A handful of chiefs are encouraging the perks retreat, undoubtedly "because they're worried about internal optics as lavish benefits can demoralize a work force," says G. Steven Harris, a Mercer senior executive-compensation consultant.  Sunoco Inc.'s John G. Drosdick asked the Philadelphia refiner and gasoline retailer to cease tax gross-ups for his personal use of corporate aircraft, the current proxy says.  He also abandoned his company-provided car, financial counseling and country-club dues.  In addition, he decided to pay Sunoco upfront for the full annual cost of his company parking space and home-security monitoring system.

Mr. Drosdick can well afford the extra tab.  Perks accounted for $77,855 of his total 2006 compensation, which Sunoco valued at about $23 million.  "The proxy statement speaks for itself," says spokesman Jerry Davis.

'Good Year'

Similarly, Exelon Corp.'s plan to drop most executive perquisites next January was strongly supported by Chief Executive John W. Rowe, says Gary Snodgrass, chief human-resources officer for the Chicago electric utility.  And Mr. Rowe rejected the $50,000 he is entitled to under the company's plan to give officials one-time transition payments to cover their canceled company cars, financial planning and club memberships, because "he felt it was unnecessary," Mr. Snodgrass says.  "John had a pretty good year last year." Mr. Rowe's 2006 compensation totaled $16.4 million, a regulatory filing reported.

Not all CEOs simply lose out when they lose perks. Norman H. Wesley, the longtime chief of Fortune Brands Inc., received $87,826 in perks last year -- a small piece of his $10.8 million total compensation.  The Deerfield, Ill., consumer-products giant abolished some of those perks -- his allowance for a car, financial planning and country-club membership -- last month.  In return, the company bumped up his salary $14,000, to $1.25 million.  The idea was to simplify compensation "and keep everyone whole in the process," says company spokesman Clarkson Hine.

Perquisite reductions "get rid of this nickel-and-dime stuff," says Charles Haggerty, a retired leader of Western Digital Corp., who's mulling similar moves at four other companies where he chairs the pay panel.  But "in the grander scheme of things," he adds, "perks aren't a big item."

Harder to Let Go

The more-valuable goodies -- such as severance pay, deferred compensation and supplemental pensions -- are disappearing more slowly, even though the new proxy rules highlight their stupendous size.  Jerry A. Grundhofer, chairman of U.S. Bancorp and CEO until his December retirement, amassed $111.4 million in deferred compensation and pension benefits, for instance.  Teri Charest, a U.S. Bancorp spokeswoman, says Mr. Grundhofer can now collect his years of accumulated benefits, but she declines to say whether he does.

Among these big-ticket items, huge severance deals have come under the sharpest attacks.  At least a dozen big businesses recently shrank or ended senior officers' promised severance.  Abbott Laboratories CEO Miles D. White and two top lieutenants terminated agreements that would have rewarded them handsomely after a takeover of the Abbott Park, Ill., drug and medical-device maker.  More than $25 million of Mr. White's stock options and restricted shares would have vested if Abbott had changed hands last Dec. 31, the latest proxy reports.  He would have been eligible for three years' salary and bonus, too.  Mr. White believes a change-in-control accord isn't necessary, says company spokeswoman Melissa D. Brotz.

Sumner Redstone, executive chairman of Viacom Inc. and CBS Corp. in New York, is among the few business titans to relinquish deferred compensation.  He and fellow directors revised his pay packages so they're more closely tied to shareholder returns, according to both companies.

Mr. Redstone previously collected $1.3 million a year in deferred compensation from Viacom and CBS -- plus two salaries.  He changed his mind partly because Philippe Dauman spurned deferred compensation when he took the helm of Viacom last September, Viacom spokesman Carl Folta says.

Mr. Redstone, the media conglomerate's chief before it split early last year, also swapped his $9.4 million of deferred compensation for Viacom options and lowered his $1.75 million salary to $1 million at both companies.  CBS recently agreed to settle a shareholder suit filed against Viacom before the split that alleged directors breached their fiduciary duty by approving nearly $160 million in compensation for Mr. Redstone and two other executives after a year in which Viacom's share price fell nearly 20%.

Still Not Happy

Several other employers are curtailing their chief's potential payout from a supplemental executive retirement pension, or SERP.  Such pensions can be very expensive because they usually reflect compensation earned during the last years of an individual's career.

Wendy's International Inc. will roughly halve its annual SERP contributions for officers this year following a review launched by CEO Kerrii Anderson while she was finance chief, recalls Jeffrey M. Cava, an executive vice president at the Dublin, Ohio, fast-food chain.  "Times had changed," he says.

Such steps, however, fail to mollify disgruntled investors.  They say too many chief executives still reap sizable compensation despite poor performance.  They vow to step up their activism by seeking lifetime limits on equity grants, eradication of employment contracts -- and board seats.

Businesses with the worst investor returns typically "have not made any attempt to link performance and compensation and are substantially overgenerous," says Mr. Breeden, the Applebee's dissident.  He finds board members only "get religion about executive pay when somebody runs against them."

Write to Joann S. Lublin at joann.lublin@wsj.com

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