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Managing
Another Boost for the Boss --- Compensation Rises Again As CEOs Get Lavish Packages For Coming, Going or Staying

By Joann S. Lublin
1306 words
12 December 2005
(Copyright (c) 2005, Dow Jones & Company, Inc.)

NORTEL NETWORKS Corp. directors offered a hefty package valued at roughly $20.5 million to woo Mike Zafirovski as chief executive this fall. But just before they hired him, they learned Nortel might have to shell out more to free the former Motorola Inc. president from a noncompete agreement, according to people close to the situation.

The Nortel Networks board members didn't blink, quickly agreeing to settle a Motorola suit and reimburse Mr. Zafirovski for $11.5 million of severance that he must forfeit to Motorola. "Directors feel strongly that Mike Zafirovski is the right person to lead Nortel," says Patricia Vernon, a spokeswoman for the telecommunications-equipment maker.

Criticism of lavish executive pay -- from shareholders, regulators and elected officials -- is on the rise again. But so too are pay deals. These days, it seems, corporate leaders are getting paid unusual sums for coming, going or even staying put. In addition to the millions it offered Mr. Zafirovski, for example, Nortel is also paying his predecessor, William Owens, more than $5 million in severance.

"Salaries are frothy again. Retention packages are compelling. And buying newcomers out of noncompetes is de rigueur," says Hal Reiter, chairman and CEO of New York recruiters Herbert Mines Associates Inc.

Total compensation for CEOs at 1,522 big U.S. companies rose a median of 30% last year to $2.4 million, double the 15% increase for 2003, according to researchers The Corporate Library in Portland, Maine. The figure includes salary, bonus, restricted stock grants, gains from exercising options and payouts from long-term incentive plans.

Compensation keeps rising despite ongoing complaints that executives are paid too much. Securities and Exchange Commission Chairman Christopher Cox wants improved disclosure of pay deals in corporate proxy statements. Democrats in Congress are pushing a similar measure. At a packed Senate hearing on high gas prices last month, California Democrat Barbara Boxer displayed a chart comparing last year's multimillion-dollar bonuses for three oil-industry CEOs to the annual pay -- $10,712 -- a minimum-wage worker makes in the U.S.

Shareholders, too, are increasingly restless. Last week, a pension fund for the American Federation of State, County and Municipal Employees, the large public-employee union, said it has submitted shareholder resolutions for annual meetings at 26 companies next spring that call for nonbinding votes by shareholders on executive compensation. Institutional Shareholder Services, a proxy-advisory firm, recently decided to oppose the re-election of corporate directors who hand out what it considers excessive perks, unjustified bonuses and other types of "poor" compensation practices. Patrick McGurn, an ISS executive vice president, says more stockholders will combat "what they consider to be egregious pay practices -- whether the company's performance is good or not."

Executive recruiters and compensation consultants attribute the sweeter pay deals to increased turnover in CEO positions, heightened efforts to retain top talent and directors' desire to avoid messy exits. Peter Crist, head of the boutique search firm Crist Associates in Hinsdale, Ill., says that employers are making counteroffers to retain key executives in 75% of his searches, about triple what it was two years ago.

The mere prospect of a counteroffer can help executives land a bigger package. Last year, Danaher Corp., a Washington, D.C., conglomerate, gave John Stroup, a group executive, extra stock options and restricted shares to keep him from jumping ship. Directors at Belden CDT Inc. knew that history when they offered Mr. Stroup their CEO post in September.

To loosen Danaher's grip on Mr. Stroup, Belden, a St. Louis maker of electronic cables, agreed to pay him a $600,000 salary, a 2005 bonus of at least $280,000, 451,580 stock options and restricted-stock units initially worth about $3 million. Belden also promised the 39-year-old Mr. Stroup annual equity grants worth at least $2.5 million for the next three years -- no matter how well he perforMs. The three-year guarantee "is really out of the ordinary," says Robert Fields, an executive-pay attorney in New York.

Glenn Kalnasy, chairman of Belden's compensation committee, says directors wanted to partly make up for the stock options and restricted shares that Mr. Stroup left behind at Danaher. "He will more than justify the package that we granted him," Mr. Kalnasy says.

One chief executive candidate recently swung a deal to start getting compensated before she started work. Financially ailing Whitehall Jewellers Inc. this summer paid industry veteran Beryl Raff $980,000 for "transition compensation," while she was still on the payroll of J.C. Penney Co. The money was intended partly to cover compensation Ms. Raff would forgo at Penney, according to her Aug. 10 employment contract.

But Ms. Raff, 54, resigned a week before her planned Sept. 15 debut at Whitehall. She sent Whitehall an after-tax reimbursement check for $593,865. Ms. Raff "doesn't wish to discuss the reasons why she didn't take the job," says her attorney, Jim Watson. John Desjardins, Whitehall's finance chief, says the transition payments were "a negotiated point" designed to cover "costs she experienced" in changing employers.

Keen to keep Ms. Raff, Penney promoted her to executive vice president, gave her fine-jewelry operation more resources and may enlarge her pay package early next year, according to Chief Executive Myron Ullman III. Mr. Ullman says he was "thrilled" when Ms. Raff decided to stay.

Other executives collect millions on the way out, even when their employer owes them nothing. Joseph Galli Jr., 47, quit the helm of Newell Rubbermaid Inc. in mid-October after stumbling in his 4 1/2-year effort to turn around the Atlanta maker of household products.

Mr. Galli didn't have an employment contract, so he wasn't entitled to any severance for resigning. Yet Newell Rubbermaid later agreed to give him about $4.6 million in separation pay, continue vesting of his equity grants for several years, and give him as much as $100,000 in outplacement counseling -- plus his company car, cellphone and computer. In return, he agreed not to hire certain staffers or compete with the company for two years.

The arrangement is "very generous for someone who left under less-than-stellar circumstances," says Mr. Fields, the pay attorney. Through a spokesman, Mr. Galli says he was proud of the team he left behind and that "the company has made great strides over the last five years," referring further comment to the company. Nancy de Jonge Davis, a Newell Rubbermaid vice president, says, "I have never seen a CEO compensation package that wasn't criticized."

Perhaps the oddest type of management reward is a "signing bonus" for an incumbent. Boards believe "it's far less risky" and cheaper than finding someone new, observes Pearl Meyer, senior managing director of Steven Hall & Partners, New York pay consultants.

Last month, struggling broadcaster Paxson Communications Corp. offered President Dean Goodman a $1.5 million signing bonus, $277,000 raise from his 2004 salary of $523,000 and $800,000-a-year potential bonus -- without changing his title or duties. The 58-year-old Mr. Goodman also got 1.3 million restricted-stock units and 666,667 options.

His lucrative deal was part of a broader accord that Paxson struck with NBC Universal, a General Electric Co. unit with a 32% Paxson stake. NBC Universal installed a new CEO at Paxson, but "desperately" wanted Mr. Goodman to stay, says Larry Patrick, Paxson's chairman.

Also, Paxson knew that Mr. Goodman "had been approached by people who were willing to pay him about $1 million a year just in salary," Mr. Patrick says. So "Dean was able to negotiate a somewhat better deal."

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