It's gospel in American business to tie executive compensation to company performance. But what about those executives who continue to reap handsome rewards while their companies sputter?
Consider Dennis Caulfield, who stepped down as chairman of BPI Packaging Technologies Inc. in early July.
The company had lost more than $29 million since 1995 in the very competitive commodity bag-making business, defaulted on all its capital and operating leases in 1997 and saw its sales plummet from $30.8 million to $13.9 million.
Meanwhile, Caulfield saw his pay rise from $355,472 in 1995 to $422,220 in 1997 because he cashed in unused vacation.
The chairman took out a $61,657 loan from the company in 1997, according to Securities and Exchange Commission documents, and convinced the North Dighton, Mass., packaging company to lower interest payments on previous loans to him that had totaled $586,000 since 1990. That lower interest rate will save him $107,000, but Caulfield had not paid any of the 1997 loan back as of Aug. 14, the company's lawyer said.
And he continued to get a monthly car payment of $980 and more than $2,000 in other monthly perks such as insurance. His severance package, spelled out in SEC documents, amounts to two years' pay — $640,000.
Caulfield is a dramatic example of an executive who continued to collect a sizable check while his company struggled, part of what critics say is an executive-pay system that too often does not contain any real risk for the chief executive officer.
Executive-pay critics say abuses are more likely when boards are not independent enough from companies. In Caulfield's case, the three-person board at the time he renegotiated his loan consisted of himself, the company president and the only remaining director from outside the company.
And the company also engaged in another no-no cited by big investors critical of CEO pay packages: It repriced stock options in April 1997, lowering what Caulfield had to pay for 265,230 shares from $4 to $2.50. Company officials declined to comment on the repricing or on Caulfield's loan restructuring.
``In general, when you see a stock repricing go down, you are generally seeing executives taking care of themselves,'' said James Aslaksen, an executive recruiter for plastics and chemical companies and senior partner in New York-based LAI Ward Howell.
There are times when repricings are good, such as when they are used to retain key people or help turn around a company, said Rhoda Edelman, managing director of New York executive compensation specialists Pearl Meyers and Partners.
But pension funds and other institutional investors are becoming leery of repricing, and some, like the State of Wisconsin Investment Board in Madison, are pushing companies to agree not to reprice stocks unless shareholders approve.
Another big complaint of corporate governance experts is that boards are not independent enough and are too deferential to the company management. Sometimes shareholders are not aware of ties between directors and executives that could taint what should be an arm's-length relationship, according to an April report from the AFL-CIO's Executive Paywatch program in Washington.
SEC regulations do not require companies to report the financial relationships with nonprofit organizations to which a director has ties, and Internal Revenue Service rules consider a director independent even if the person has financial or professional relationships with management, the report said.
``We still have a way to go in ensuring independence of the boards, the people with oversight,'' said Carol Bowie, research director with Executive Compensation Advisory Services, a Springfield, Va., compensation firm.
One company that has seen critics leave its board as the company's sales and stock prices have suffered is Utah Medical Products Inc. in Midvale, Utah. But determining how the exodus has affected performance is tricky.
The plastics processor saw Chairman Perry Lane resign in March, and its sales in 1997 dropped 37 percent to $24.2 million when it lost a key contract with Baxter Healthcare Corp. Lane argued in a letter filed with the SEC that mismanagement by Kevin Cornwell, who had been CEO since 1992, was to blame.
After Lane and another director who was critical of management left, Lane's letter said, Utah Medical replaced them with the company's chief administrative officer, Paul Richins, and Barbara Payne, who Lane's letter described as ``a good personal friend'' of Cornwell.
Cornwell nominated Payne for an earlier board opening when Lane was chairman, but she was rejected because of concerns about her qualifications, the letter said.
The company's board has ``lost balance'' with the changes and has ``less outside influence than in the past,''said Roger Chase, an Indianapolis investment adviser who owns stock in Utah Medical. Chase is also the uncle of a former UM board member, David Chase.
Utah Medical officials did not return calls seeking comment.
Lane's letter said the company's value tumbled from $141 million in 1993 to $55 million in 1998. The troubles pushed shareholder return down 65 percent, placing the company among the worst performers on this year's ranking by Plastics News, which tracks publicly held companies in North America that derive at least half their sales from plastics operations.
Company products developed between 1993 and 1997 generated only 0.5 percent of sales. Employees representing 90 percent of the work force met with Lane to voice concerns about Cornwell's management, the letter said.
But company officials said the loss of the Baxter contract and cheaper catheters that violate UM's patent were to blame for declining sales, and they said the rest of the board met with the employees and determined their complaints to be ``unsupported.''
In spite of all those troubles, the company still made a profit of $4.3 million on 1997 sales of $24.2 million, and is showing signs of turning around. Its past two quarters saw growth in sales and profit and it has made several acquisitions lately.
Chase said Cornwell deserves credit for staying the course and making difficult decisions to rebuild the company.
As for Cornwell's pay, the loss in sales meant his bonus was cut from $125,280 in 1996 to $75,000 in 1997. But the board's compensation committee wrote that Cornwell still merited some bonus because he provided ``the determination and patience to stay with UM's niche-oriented, value-added market strategy ... [that] made possible UM's continuing profitability on a smaller sales volume.''
The board also boosted Cornwell's base salary in 1998, from $185,000 to $195,000, and granted him 85,000 stock options this year, up from 65,000 last year.
Sometimes the tenure of executives is marked by problems beyond their control, such as with Fred Wenninger and computer keyboard molder Key Tronics Corp. of Spokane, Wash. That can make evaluating compensation more difficult.
When Wenninger stepped down as CEO in mid-1997, the firm had suffered for several years.
Its sales fell from $207.5 million in 1995 to $184.9 million in 1997, and its profit plunged from $4.4 million to $300,000 in that period. It was one of the worst-performing stocks in Plastics News' ranking of plastics industry executives, giving shareholders a return of nearly minus 47.8 percent between 1995 and 1997.
The company said in financial documents that it was buffeted by cheaper competitors in Asia and constant cost-cutting in the keyboards market. It had to transfer manufacturing from Ireland to Mexico, and posted a loss of $1.8 million in 1996 to pay for that restructuring.
``Basically their problems weren't because of [Wenninger],'' said Les Childress, owner of Childress Investment Research in Bainbridge Island, Wash. ``Their markets began to soften up before he ever got there.''
Wenninger, who became CEO in 1995, collected a salary of $243,462 in 1996, along with a guaranteed bonus of $150,000. In 1997, the year he left, his annual salary was $294,000, and he got a $300,000 severance package and 20,000 shares of Key Tronic stock when he departed, SEC documents show.
Wenninger's replacement, Jack Oehlke, was promoted from chief operating officer, and given a raise from $179,808 to $230,000.
Ronald Klawiter, Key Tronic's executive vice president of administration, said Wenninger negotiated a guaranteed bonus, an arrangement Klawiter said is common. But he said the stock options awarded to Wenninger were not worth much because the option price is well above the market value.