At first glance, Nolan D. Archibald might seem like a perfect example for critics of runaway executive pay.
The chief executive of Black & Decker Corp. pulled in a base salary of nearly $1.5 million and a bonus of $3 million last year while implementing the Towson tool maker's strategy of shifting manufacturing jobs overseas and buying up competitors. Throw in use of the corporate jet, stock grants and other long-term incentives, and his total compensation topped $15.6 million.
But in a year when Black & Decker's total return was 81 percent, Archibald's paycheck was 7.3 percent less than it was in 2003.
Among Maryland CEOs who were in their jobs both years, 42 percent received no increase in total compensation last year or a pay cut, a Sun analysis of 86 publicly traded companies shows. The study was based on data compiled by Aon Consulting.
The pay of those near the median rose in the low- to mid-single digits, which was modest given the double-digit percentage pay increases CEOs nationwide received, according to several national surveys.
Meanwhile, shareholders did pretty well. Maryland companies achieved an average collective stock gain of 18 percent last year, twice the gain in the Standard & Poor's 500 index.
Experts say the apparent tempering of executive pay reflects a national trend away from rewarding CEOs just for showing up. Staggered by pressure from powerful shareholder rights groups and the fallout from scandals at Enron, WorldCom and Tyco, company boards are newly motivated to strengthen the link between executive pay and shareholder rewards.
"Shareholders have become more interested and more active, and they've been helped by shareholder advisory groups that 20 years ago nobody heard of," said Peter Kennedy, a senior vice president for Aon and an executive compensation analyst.
That's not to say that Maryland directors have become stingy. At least a third of the CEOs in the analysis received pay raises of 43 percent or more, while the pay of average Americans climbed 3 percent to 4 percent.
Bonuses for the richest CEOs also got bigger on average, with 14 companies handing out $1 million or more and nine topping $2 million, the analysis found.
There are still examples of eyebrow-raising paydays, including the options valued at $35.7 million that Coventry Health Care gave incoming CEO Dale B. Wolf, making him Maryland's highest-paid chief executive.
Though his base salary was a relatively modest $525,000, Radio One Inc.'s Alfred C. Liggins III rocketed to No. 2 among Maryland's highest-paid: Options valued at $16.8 million, pushed his total compensation to $17.9 million for the year.
In a nod to shareholders, big stock awards and bonuses increasingly depend on CEOs' meeting specific profit goals or producing shareholder value, and there is evidence that boards are shifting away from stock options ahead of new accounting rules that will require them to be expensed against profits. Often taking the place of stock options are restricted shares that eventually vest and require the executive to meet certain goals.
"There's a lot of pressure on boards," said Steve Harris, a senior executive compensation consultant for Mercer Human Resource Consulting in Atlanta. "I have had several compensation committee chairmen come to my office and spend a whole day in training sessions to understand this stuff."
Big shareholders give the board at Black & Decker credit for tying executive pay to a range of financial measures, from earnings per share to cash flow, among others. The use of multiple benchmarks makes it harder for executives to manipulate earnings to fatten bonuses.
"You could theoretically hide bad numbers in any one of those [measures], but it's awfully hard for an executive to hide poor results in all of them," said Bob Goldsborough, a research analyst for Ariel Capital Management in Chicago, which is Black & Decker's third-largest shareholder with 3.8 million shares.
Shareholder advocacy groups acknowledge that progress has been made, but they aren't ready to declare victory. A review of Securities and Exchange Commission filings shows that many Maryland companies still make it hard to figure out how much their executives are getting in pension and other retirement benefits. In some cases, CEOs still receive lucrative exit packages, lavish perks and huge stock options, despite their waning popularity.
"I'm saying the glass is one-quarter full, rather than three-quarters empty," said Patrick McGurn, executive vice president for Institutional Shareholder Services, which advises shareholders.
"Seeing million-share option grants these days is not that unusual at all," he said. "A $1 increase in the share price and that's $1 million in the pocket of that individual."
He might as well be talking about Wolf, who took over at Coventry on Jan. 1. The Bethesda HMO operator's board congratulated its chief financial officer on his pending promotion to CEO last year by awarding him options to buy 1 million shares of common stock.
The options, which have an exercise price of $48.69, will vest over four years, providing a healthy incentive for the executive to stay on for the full term. The award pushed Wolf's total compensation - at least on paper - to $37.4 million.
However, Wolf's options won't be worth anything unless he delivers for shareholders. So far, shareholders have little reason to complain. In Wolf's first full quarter as CEO, Coventry reported a nearly 52 percent increase in net income, to $112.7 million, and closed its $1.8 billion purchase of First Health Group Corp. of Downers Grove, Ill. The company's shares were trading in the high 60s last week, down slightly from a 52-week high of $72.59.
Coventry was almost as generous to Wolf's predecessor, Allen F. Wise, whose parting gifts as chief executive included a $2.6 million bonus, continued use of the corporate jet and a $750,000-per-year base salary in his new role as non-executive chairman. The board deferred $600,000 of his bonus to an executive retention plan.
The company declined to comment on either executive. But in its proxy statement filed with the SEC, Coventry's board noted that Wise increased earnings per share by 1,517 percent in the eight years he served as chief executive, a result owed largely to rapid growth through acquisitions. Its shares gained 23.5 percent last year, while the S&P's index of 11 managed-care insurers gained 50.5 percent.
"Relative to other highly compensated individuals, such as star athletes, movie stars and so on, CEO compensation doesn't look out of whack," said Stephen Bainbridge, professor of corporate and securities law at the University of California, Los Angeles. "The number of people capable of running a company as complicated as, say, [General Electric] is probably not that much different from the number of people who can run an NBA fast break."
Wall St. v. Main St.
But the average person can't comprehend the stratospheric pay of many CEOs and will never get comfortable with it, said Mike Kesner, an executive compensation expert with Deloitte Consulting in Chicago. Exorbitant pay has become a flashpoint issue in corporate America during the past decade - a great divide between Wall Street and Main Street.
"I think pay levels have gotten to a point that is probably too high," Kesner said. "But it's hard to point to a figure that is the cutoff."
Columbia-based chemical maker W.R. Grace & Co. put the figure at $5.1 million for chief executive Paul J. Norris, who in 2001 steered the company into bankruptcy in the face of thousands of asbestos injury claims.
The company reported a loss of $402.3 million in 2004, mostly because of charges related to asbestos litigation liabilities. It estimates that there are 130,000 personal injury suits filed by people claiming to suffer from exposure to asbestos products, which the company sold before 1973.
Norris, who announced his retirement in November after a six-year run, pocketed $1 million in salary and a bonus of $2.5 million, making for a total pay raise of 52 percent over 2003. In retirement, he'll be paid $475,000 for consulting services, and, if he decides to move out of state, the company expects to reimburse him $440,000 for relocation to his new retirement residence.
The company defends Norris' salary, saying his pay incentives were approved by the bankruptcy court. The company exceeded its targets for operating earnings by 200 percent, said Greg Euston, a spokesman for the company. Look past the asbestos charges and Grace reported pretax income from its core operations of $179.3 million, an increase of 21 percent from the previous year.
The stock, which fell below $2 after the company filed for bankruptcy, gained 430 percent during the year as investors began to see improved sales and progress in the reorganization plan. But its Dec. 31 close of $13.61 was well below the more than $20 per share that the company fetched in 1999 before its legal problems began to heat up.
"As an operating company, they're doing very well," Euston said. "They're making the right moves."
Measuring pay for performance is further complicated with respect to Maryland's growing biotechnology industry.
Such companies often pay hefty salaries to attract CEOs, despite expectations that the companies may post skimpy profits, if any, while they endure the potentially decade-long process of getting new drugs or therapies on the market.
David M. Mott, chief executive of MedImmune Inc., was Maryland's fourth-highest-paid executive despite the company's loss of $3.8 million last year. The CEO of the Gaithersburg-based maker of FluMist nasal spray received $15 million in total compensation for the year.
That was a decline of 18.8 percent, but his package included a 67 percent increase in his yearly bonus, to $1 million, and a 30.2 percent increase in total cash compensation, to about $1.9 million from about $1.5 million in the previous year.
MedImmune spokeswoman Jamie Lacey noted that the company's sales of $1.1 billion for the year were a record for the company, which was formed in 1988.
Mott was also credited with helping to move several of the company's new drugs through the regulatory process and meeting benchmarks tied to research and other long-term goals.
"The bonus piece is a subjective valuation of the contribution of each executive officer toward the achievement of the company's business goals of that year," Lacey said.
Getting boards to take some of the subjectivity out of the awarding of bonuses is part of the challenge, shareholder advocates say. They argue that compensation committees should seek advice on pay from a source outside the company who can set strict benchmarks for the executives to meet.
Independence is key, they say, because boards often have too cozy a relationship with CEOs, who are frequently board chairmen.
"The groups that are concerned about compensation aren't coming from an anti-pay perspective," said Ted White, deputy director of the Council of Institutional Investors, which represents large pension funds. "The thing that concerns people is the pay-for-failure issue. It's that they tend to get paid almost no matter what."
Executive-compensation experts agree no one formula fits all. Even investor watchdog groups can't always agree on how best to tie pay to performance. But pay critics and compensation consultants acknowledge that boards are working harder to solve the problem.
"The U.S. executive pay model ... has definitely created a lot of rich executives, but it has also created a lot of rich shareholders and comfortable pensioners," said Ira Kay, who runs the executive-pay practice for Watson Wyatt Worldwide.
"There is a moral and greed issue here, but the fundamental question is does the model work, and I think you'd be hard-pressed to come up with an alternative," Kay said.Copyright © 2015, The Baltimore Sun