High pay linked to performance- but not always HOW SWEET IT IS


Maryland chief executives who produced big payoffs for their companies reaped the largest rewards last year.

Four of the 10 highest-paid officers had successfully guided their companies through major restructurings or made solid gains in a turnaround. And four others helped their firms to record profits.

Nineteen CEOs in the state earned more than $1 million in total compensation, and 11 made $2 million or more during their latest fiscal year, a review of 95 public companies in Maryland shows.

The information was compiled from company documents filed with the Securities and Exchange Commission. Total compensation includes base salary, bonus, restricted stock grants, gains from exercising stock options and other benefits -- such as insurance, pensions and company cars.

The highest-paid chief executive officer was Stephen F. Bollenbach of Bethesda hotel real estate firm Host Marriott Corp., who earned $7.5 million. Mr. Bollenbach hatched the successful plan to split the Marriott hotel empire into two companies, which helped propel the combined value of the stock.

Norman P. Blake Jr., the turnaround artist who led Baltimore insurer USF&G; Corp. back to strong profit growth, followed with $4.5 million.

Skyrocketing profits also helped George T. Jochum of Rockville-based managed care provider Mid Atlantic Medical Services Inc. earn $3.7 million. Others whose companies achieved record profits included A. B. Krongard of Baltimore brokerage Alex. Brown Inc., $3.4 million; Robert N. Elkins of Owings Mills medical services company Integrated Health Services Inc., $3.2 million; and Raymond A. Mason of Baltimore brokerage Legg Mason Inc., $2.1 million.

Pay for these chief executive officers reflects a national trend that began a decade ago amid growing shareholder criticism that executives too often received huge pay packages, voted on by rubber-stamp boards, even when the company's performance and the payoff to shareholders was poor, according to executive compensation experts.

Linking pay with performance "makes sense," said Donald C. Hambrick, a professor of management at Columbia Business School in New York. "These are situations where often a single executive can make a great amount of difference. But he only gets the big payoff if the whole thing works."

But critics say compensation for top executives has increased far faster than inflation and pay in the rest of the work force. They maintain performance-related payments are awarded on top of large salaries rather than as substitutes for them, so the payments have little value in pushing CEOs to get results.

Graef Crystal, a professor at the University of California at Berkeley and the editor of executive pay newsletter The Crystal Report, said executive compensation is rarely proportionate with the contributions CEOs make. When the company is doing poorly, pay increases only slow down a little, but when they do well the CEOs grab all they can, he said.

"You could call it, 'Loot while the board is happy,' " Mr. Crystal said. "Pay for performance in America is a joke."

Still, performance was essential for several of Maryland's top money-earners, who faced one of the toughest assignments in business: radically altering the way a company operates.

Michael A. Conte, director of the regional economic studies program at the University of Baltimore, said that these CEOs are part of a generation of CEOs that is willing to try much more radical strategies in search of performance.

"In much [of Maryland], the old guard has turned over. The old boys that had very fat arrangements that were secure are gone, and the new regime has a great deal more [performance-related] pay. That's reflective of a national phenomena as well," Mr. Conte said.

"Nationally, the top companies are the fast-moving ones where pay for managers and even nonmanagers is no longer regarded as something to enable you to live as it is something to motivate you to perform well."

Mastermind of plan

Mr. Bollenbach, for instance, masterminded the plan that last October split the Marriott hotel empire into two companies: Host Marriott Corp., the hotel real estate company, which carries a majority of the original firm's debt, and Marriott International Corp., which handles hotel management and institutional food service only.

In the process Mr. Bollenbach helped Marriott's stock price move from around $17 a share in the fall of 1992, before the split was announced, to a combined value of about $37 a share.

Mr. Bollenbach's base salary was relatively modest by CEO standards -- $473,000. The majority of his income came from a restricted stock grant worth $6.6 million. Restricted stock are shares given to an executive, typically free of charge, but with the provision that he must stay with the company several years and possibly meet performance goals years before selling it for a gain.

Mr. Crystal gave credit to Mr. Bollenbach for increasing the value of Marriott's stock. But he added: In 1989, the company's stock was trading in the low 30s and then fell, so the surge in value since splitting the company means that many shareholders only got their money back.

"Typically when a company [like Marriott] turns around, the CEO gets untold riches, even though the shareholders who have held the stock for years are wondering what all the cheering is about," he said.

USF&G; finally broke into the black, earning $165 million last year, after a wrenching restructuring that began at the end of 1990 and included cutting employment by 6,000 -- 48 percent of the work force -- and refocusing the company's business.

Strong leadership needed

Last year's results brought in $3.3 million extra for Mr. Blake on top of his base salary of $1 million.

Some complain about bonuses when a turnaround has come at the expense of other people's jobs. But experts in management say that such companies -- particularly those on the edge of bankruptcy -- need strong leadership and must be willing to pay whatever it takes.

"I truly think the alternative to what has been called 'the blood bath' was that USF&G; would have folded. That would have been a dire consequence for Baltimore," said Mr. Conte.

"High-level managerial talent is extremely scarce. You have to ask the question whether the shareholders and [the remaining] employees are better off as a result of having Norman Blake at the helm."

Timothy F. Finley found himself in a similar position, when Hampstead-based clothing retailer Jos. A. Bank Clothiers Inc. turned to him in 1990 to save the firm.

Jos. A. Bank had been hobbled by high debt from a leveraged buyout, poor management and lower sales.

Mr. Finley convinced bondholders to swap debt for a share of the company's stock, closed weak stores and tightly focused the remaining ones on selling well-made men's suits at reasonable prices. Two hundred employees lost their jobs.

But the company's sales have increased and it is planning to double the number of stores with cash raised from a stock offering in May. The turnaround earned Mr. Finley $2.7 million -- all but $800,000 from restricted stock.

And Norman R. Augustine led a repositioning of Bethesda defense contractor Martin Marietta Corp., which earned him $3.6 million last year.

Faced with deep federal cuts in defense spending, Mr. Augustine negotiated a string of acquisitions. Martin's revenues increased by 58 percent and profits 30 percent (not counting accounting changes). Mr. Augustine's compensation included $830,000 in salary, an $800,000 bonus, restricted stock worth almost $1.2 million and $800,000 from exercising stock options.

More performance-based pay is the result of the controversy that has surrounded the executive pay issue in the past few years. Margaret M. Blair, an economist with The Brookings Institution in Washington, said a study of the 250 largest public companies in the United States shows that CEO compensation between 1983 and 1992 had a net increase of 68 percent above the rate of inflation while wages of the average worker rose only 2.8 percent above inflation.

Such growth in compensation has led to increased pressure for companies to pay through long-term incentives. Incentive payments like restricted stock and exercising stock options make up more than two-thirds of total compensation in 1992, up from one-third in 1982, according to the study.

But the stock fell

But that does not always mean increased results for shareholders. For example, Robert S. Bowen of Lanham software firm COMNET Co. received a $400,000 bonus last year on top of his $273,000 base salary, even though the company's stock TC dropped about 40 percent. (COMNET's profits did increase, however.)

Similarly, Kevin J. Burns of the Rockville software and networking company Intersolv Inc. received a $52,000 bonus, while his firm's stock fell 54 percent.

"Even if the stock drop was beyond his control, why should there be a bonus when the shareholders aren't getting a bonus?" Mr. Conte asked.

But Ira Kay, a consultant with the executive compensation consulting division of The Wyatt Co. in New York, said these companies are not typical and in most other small-size companies, performance-related pay is more and more the rule.

"Despite the exceptions, that should be a good sign for stockholders," he said.

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