When performance falters, so does the boss's pay

2012-05-06T00:05:00Z 2012-09-07T08:48:52Z When performance falters, so does the boss's payBY DAVID NICKLAUS • dnicklaus@post-dispatch.com > 314-340-8213 stltoday.com

Critics of executive pay say corporate America has established a system that's like a one-way escalator: It only goes up.

That wasn't the case in St. Louis last year, though. Among 27 large St. Louis companies that had the same chief executive throughout 2010 and 2011, median CEO pay fell by 5 percent. Nearly two-thirds of the CEOs earned less last year, even though a majority of the companies reported higher profits.

The numbers appear to reflect an increased emphasis on pay for performance. One-fourth of St. Louis CEOs went without a bonus last year, usually because the company missed its profit target. A handful of bosses, including Joseph Burgess at Aegion and Maxine Clark at Build-A-Bear Workshop, forfeited some stock when earnings fell short.

Even Express Scripts, St. Louis' largest and in some ways most successful company, didn't hand out bonuses last year. Its profits rose, but not as much as the company had hoped. CEO George Paz saw his total pay fall 17 percent to $8.5 million.

“There has been a very strong realization recently that if performance is down, pay had better be down as well,” says compensation consultant Steven Hall, managing director of Steven Hall & Partners in New York. “In the past you could rationalize that management is doing a good job, so let's reward them anyway. You see less of that today.”

To be sure, executive pay remains in the stratosphere. The five highest-paid CEOs in St. Louis took home more than $10 million apiece: $20.5 million for Michael Lovett of Charter Communications, $12.8 million for David Farr of Emerson, $11.6 million for Hugh Grant of Monsanto, $10.5 million for Michael Neidorff of Centene and $10.2 million for Gregory Boyce of Peabody Energy.

(Lovett's tally comes with an asterisk: $16 million of his pay was in the form of stock options, and he gave up most of those when he left Charter last month. He will, however, collect $4.6 million in severance.)

Of nine St. Louis companies that had lower profits, or lost money, in 2011, only Ameren and Stifel Financial paid their CEOs more money. Ameren, in making its bonus calculations for CEO Thomas Voss, chose to exclude several non-recurring items that depressed last year's earnings. Stifel did hand Ron Kruszewski a sharply reduced bonus, but his pay tally was swelled by a one-time stock grant of $3 million.

Because of the complexities of pay packages, it's hard to make black-and-white judgments about whether pay is truly in line with performance. Each company uses its own definition of performance and most companies have plans that measure progress over several years, not just the last 12 months.

Those long-term compensation plans have seen some of the biggest changes in recent years, says Eric Marquardt, a Clayton-based partner in consulting firm Pay Governance.

Traditionally, companies used restricted stock and stock options as long-term rewards. The restricted stock was derided as “pay for pulse” -- it was handed out regardless of performance. And options have their own flaws: Some critics think they encourage too much risk-taking.

So, Marquardt said, companies have begun including performance targets for some restricted stock. If the target isn't hit, the stock goes away. Last year, that cost Aegion's Joseph Burgess $525,000 and Build-A-Bear's Maxine Clark $340,507.

“Pay programs are getting much more scrutiny than they have in the past,” Marquardt said. “Where there have been negative trends in performance, pay seems to have responded.”

The scrutiny of pay has come partly from shareholders, who since last year have been able to cast an up-or-down advisory vote on the way a company pays its executives. It also has come from politicians and the media.

And, while boards have addressed many of shareholders' concerns, they haven't been able to assuage some critics, such as members of the Occupy Wall Street movement, who say CEO pay has simply gotten out of hand.

A study by the Economic Policy Institute, a left-leaning think tank, says big-company CEOs make 231 times as much as the average worker. The institute says CEO pay has risen 725 percent since 1978, while workers' pay has gone up just 5.7 percent.

The critics are correct about some of the up-escalator aspects of CEO pay. Most boards measure their executives' pay scale against a group of similar companies, and then set a goal of paying, say, at the median level of that group.

This poses a couple of problems. First, it's possible to game the system by choosing only high-paying companies for your peer group. Second, if everyone keeps getting raises to bring them up to the median, the median will keep rising.

Stuart Greenbaum, an emeritus professor at Washington University's Olin School of Business, says corporate America has seen a “sea change in governance” over the past couple of decades, with clubby boards giving way to a much more professional environment.

Today's board members, he says, are serious about wanting to keep pay in line with performance, but they're also worried about losing good executives. That's why no one company can successfully challenge the upward-ratcheting peer-group system.

Greenbaum, who has served on a couple of corporate boards, says he's sympathetic to the Occupy critique of pay. “There is a change taking place in the compensation area, but it's a very slow change,” he said. “We haven't completely cracked the nut of excessive pay for CEOs.”

Read more from David Nicklaus, who is the business columnist for the Post-Dispatch. On Twitter, follow him @dnickbiz and the Business section @postdispatchbiz.

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