High pay either way

Bay Area execs watch compensation climb … even as their companies perform poorly

Arthur M. Louis / SF Chronicle 10jun01

Last year was terrible for a lot of Bay Area companies, terrible for many stockholders, but good for executives.

While corporate earnings were tanking and stock prices were collapsing, the top executives at the Bay Area's largest companies enjoyed huge pay increases.

The 325 executives from 59 companies included in The Chronicle's 17th annual executive-compensation survey received an average of $13.3 million during fiscal 2000 in salaries, bonuses, long-term incentive awards and -- as the bulk of their pay -- new option grants.

That's a staggering 93 percent increase from the $6.9 million average compensation received by the executives in the previous year's survey. It compares with a 40 percent pay hike those executives got in fiscal 1999.

The Chronicle's survey is complicated by the fact that companies disclose their executive compensation on a fiscal-year basis -- and fiscal years differ from company to company. For most companies the year ends on Dec. 31; but for some, fiscal 2000 ended as long ago as the spring of last year.

As a result, there inevitably will be some distortions in the survey's comparisons. In the spring of 2000, the earnings pinch wasn't so pronounced, and stock prices, while below their peaks, hadn't yet succumbed to a wholesale massacre.

To some extent, last year's bear market hurt the executives as well as the rank-and-file shareholders.

Options that might have been worth X dollars at the time they were granted last year were generally worth considerably less than X at the bottom of the stock-market slide.

But many companies have routinely negated that misfortune by granting scads of new options at lower exercise prices. That, for example, is what San Jose networking giant Cisco Systems did a few weeks ago.

Compensation experts also point out that executives receive so many options these days that it takes only a minuscule gain in stock values over the life of the options -- typically 10 years -- to make the executives fabulously wealthy.

"Pay for performance" has long been the mantra among executives, corporate compensation committees and consultants. Implicit in pay for performance is the notion that executives are taking a risk -- that they will be punished if their companies perform poorly and rewarded if the companies do well.

It ain't necessarily so, experts say.

"The risk side has been taken out of the risk-reward equation," laments Carl Schmitt, vice president of WestWard Pay Strategies, a San Francisco consulting firm.

Schmitt says there are "a lot of instances where the performance required to take home a great deal of wealth is minimal. For even modest performance, the pay packages can end up being extraordinary."

At the heart of all this are ever-more-enormous option grants.

Options with a total value of $3.8 billion, as calculated by the companies, accounted for 87 percent of the pay received by the executives in this year's survey -- up from 81 percent in last year's survey. That is more than $11 million worth of options per executive.

(Even though options might not be exercised for many years, the Securities and Exchange Commission requires public companies to figure the present value of option grants and to display the data in their proxy statements. The figures in The Chronicle survey represent the most conservative company estimates, which assume future annual stock-price growth of only 5 percent.)

Marty Katz, an executive-compensation specialist with William Mercer in San Francisco, contends that an options bonanza during hard times actually makes sense.

"If earnings are down, but a company is still fundamentally sound, and you want to encourage executives to stay and turn the situation around, a good, healthy stock-option grant is a good way to do that," he says.

Veteran compensation expert Graef Crystal strongly disagrees.

"If you pay people in good times because of their high performance, and in bad times to retain them, then when is it you really give it to them in the neck?" he asks. "It's a shameless system."

The prime beneficiary of last year's corporate largesse was Steve Jobs, co- founder and chief executive of Apple Computer, based in Cupertino. He was inundated with 20 million options last fiscal year, with a total estimated value, at the time, of $548.3 million. Apple's fiscal year ended last September.

Crystal, who has been analyzing executive pay for several decades, calls that arrangement "the largest grant in the history of the world."

Jobs' deal makes a piker of the perennially hyper-compensated Thomas Siebel,

CEO of Siebel Systems, the San Mateo software company, who ranked second in the survey with $252.4 million in new option grants last year.

However, Apple points out that its stock has lost about half its value since Jobs got the options, so the theoretical value of the shares has diminished considerably.

During fiscal 1998 and 1999, Jobs modestly accepted a $1 salary and no other compensation while serving as acting CEO.

In fiscal 2000, when he became permanent CEO -- as permanent as such things can be -- the pay window opened wide. Apple explained that the company had done exceedingly well while Jobs was taking next to no pay, and that it was time to play catch-up.

Apple's business did indeed do well in fiscal 2000. Both its revenues and earnings rose by about 30 percent.

However, its business fizzled in the first half of the 2001 fiscal year. Its year-over-year revenues were down more than 40 percent through March, and it went from a tidy profit to a substantial loss.

In addition to the half-billion in options, the board of directors gave Jobs a Gulfstream V jet airplane as a "bonus." The ultimate in corporate luxury jets, the Gulfstream V was valued at $90 million.

As a result, Jobs led all the executives in the survey in non-option compensation as well as option grants.

No one can accuse the board of paying Jobs too much salary, however. Once again, he modestly accepted $1.

Jobs was arguably not the most overpaid chief executive in this year's survey.

The Chronicle compares CEO pay to company sales and company market capitalization (see charts). By both those measures, the most overpaid CEO last year was David Peterschmidt of Inktomi, the Foster City producer of Internet software.

Peterschmidt's $88.8 million pay package -- the bulk of it consisting of $88.1 million in new options -- was equivalent to nearly 40 percent of his company's fiscal 2000 revenues and nearly 10 percent of its recent market value.

Inktomi officials were not available for comment.

Compensation buffs always keep a close watch on Millard Drexler, president and chief executive of Gap, the San Francisco clothing retailer, who is consistently among the very highest-paid executives in the Bay Area.

He also has been among the most successful businessmen, having pushed Gap to new highs in sales, earnings and stock price year after year.

Because Gap fared uncharacteristically poorly last year -- both its earnings and stock price were down more than 20 percent -- one might reasonably suppose that Drexler's pay would have suffered.

It did and it didn't.

Drexler's non-option compensation was cut to $5.7 million from $7.9 million the year before, reflecting a $2.4 million reduction in his bonus, caused by Gap's declining earnings.

But Drexler was awarded $33.6 million in option grants last year, compared with just $2.5 million worth the previous year.

So, overall, Drexler made out much better in 2000 than he did in 1999. His total compensation nearly quadrupled to $39.3 million, ranking him 14th among the 325 executives in this year's survey.

According to Gap's proxy statement, the purpose of the big options grant was to "reward exceptional performance."

Gap spokeswoman Kelly Leonard elaborated on this, noting that Drexler's grant was "intended to reward him for exceptional performance in 1999."

She declined to comment on how many options, if any, he has received or is likely to receive this year in recognition of his less-than-exceptional performance in 2000.

Hewlett-Packard's CEO, Carly Fiorina, went Drexler one better. In a much- publicized gesture, she voluntarily gave back $625,000 of the $1,766,250 bonus she was guaranteed last year under the terms of her contract -- in effect an apology for HP's weak profit performance in the second half of the fiscal year.

However, Fiorina did accept new option grants last year on 1.28 million shares. They had an estimated value of $28.7 million at the time they were granted.

Of the 325 Bay Area executives in The Chronicle's annual survey, six received at least $100 million in total compensation for fiscal 2000.

Steve Jobs

Apple CEO

Compensation: $638 million

Apple stock: Down 18.7 percent (1)

Thomas M. Siebel

Siebel Systems chairman and CEO

Compensation: $255 million

Siebel stock: Up 61 percent (2)

Gary Bloom (x)

Oracle executive vice president

Compensation: $179 million

Oracle stock: Up 479.4 percent (3)

Larry Ellison

Oracle chairman and CEO

Compensation: $173 million

Oracle stock: Up 479.4 percent (3)

John Chambers

Cisco Systems president and CEO

Compensation: $122 million

Cisco stock: Up 110.7 percent (4)

Jozef Straus

JDS Uniphase co-chairman and CEO

Compensation: $108 million

JDS Uniphase stock: Up 477.7 percent (5)

(x) Bloom left Oracle on Dec. 15, 2000, to become president and CEO of Veritas Software.

1. During Apple's fiscal year from September 1999-September 2000.

2. During Siebel's fiscal year from December 1999-December 2000.

3. During Oracle's fiscal year from May 1999-May 2000.

4. During Cisco's fiscal year from July 1999-July 2000.

5. During JDS Uniphase's fiscal year from June 1999-June 2000.

Source: Chronicle research