1997 was a very good year for plastics executives' paychecks.
The average pay of the 100 highest-paid industry executives hit almost $1.5 million in 1997, a 74 percent increase over the previous year and up from about $520,000 when Plastics News began its ranking in 1993.
Thirty-five executives each made more than $1 million last year, compared with 22 in the 1996 listing of compensation of leaders of publicly traded plastics companies in the United States and Canada.
The reason for the growth: stock payouts. Executives seemed to be cashing in options and stock grants handed out during the past several years of the bull market.
That tendency mirrored national trends, with total compensation of chief executive officers last year rising 35 percent in a Business Week survey and 29 percent in a Wall Street Journal analysis.
The huge wealth being created at the tops of companies stokes the debate: Are the CEOs collecting rewards earned for years of growing their companies, creating jobs and generating returns for investors?
Or are they, as some institutional investors argue, enjoying the fruits of a bull market and a broken executive pay system?
``What's really been our concern is, this so-called pay for performance is really pay for not-so-good performance,'' said Ken West, senior consultant for corporate governance with TIAA-CREF in New York, the country's largest pension fund. ``A lot of these options were granted years ago, when nobody visualized the market going up so much.''
For plastics, the stellar pay was led by Ivex Packaging Corp., which had four of the six highest-paid executives. Its executives were cashing in equity they had in then-closely held Ivex when the Lincolnshire, Ill., company went public in 1997.
President and CEO George Bayly earned $14.6 million, with $12.8 million coming from a one-time windfall from the company's initial public offering, which brought the company $117.3 million in 1997. Equity that Bayly had in Ivex's parent under a 1993 option plan was converted to common stock.
``It's the result of five or six years of performance,'' said Rick Cote, Ivex treasurer. ``He didn't get a payout of this in '93, '94 and '95.''
That IPO also brought Chief Financial Officer Frank Tannura $5.2 million, Vice Presidents Eugene Whitacre and Thomas Ellsworth about $3.6 million each and general counsel G. Douglas Patterson $1.7 million.
The gain for the executives, however, did not come cheaply for Ivex. The company took a $53.3 million charge against earnings last year related to the IPO, enough to give the $538 million company a $36.2 million loss in 1997, according to documents filed with the Securities and Exchange Commission.
Some $33.8 million of that charge went to convert employee options into common stock and $19.5 million to cover the cost of loans from the company to the executives to pay their taxes on the stock gains.
But the key question in evaluating pay: Did the rewards sufficiently motivate executives to boost earnings?
Acquisition-minded Ivex has been growing. Between 1994 and 1997, its sales went from $391 million to $538 million, and its profit before interest, taxes and other adjustments rose from $53.6 million to $86.8 million.
In those four years, however, the company posted only one year of net profit, $8.7 million in 1996, while posting losses totaling $69 million.
Cote said Ivex's growth in profit before adjustments is the more-important measure of financial health. Before the IPO, the firm was more concerned with paying down debt and making acquisitions than showing a net profit.
Executive compensation analysts say it's not how much money the executive suite gets, but rather whether those officers are making the company and its shareholders money.
Rhoda Edelman, managing director at New York executive compensation specialists Pearl Meyers and Partners, said an analysis her firm did of compensation at 100 large companies that filed early reports with the SEC found that total executive pay was up 25 percent in 1997, fueled by stock options.
But total shareholder return rose 35 percent in that year, outpacing the increase in executive pay, she said.
And compensation specialists point out that stock pay does carry risk. Those gains could diminish or disappear if the market or a company's stock goes sour.
The Plastics News stock index closed out 1997 about 13 percent higher than 1996, significantly below the 74 percent increase in the average compensation given to the top 100 highest-paid executives.
That contrasts with 1996, when plastics stocks rose 24 percent and the total pay of the 100 top-earning industry executives rose just 13 percent, mainly because executives were holding on to their stocks.
The growth of stock compensation has institutional investors concerned.
``The use of stock incentives has really gotten out of control in our view, both in terms of the amount of incentives and how they are administered,'' said a spokesman for the State of Wisconsin Investment Board in Madison, a $65 billion pension fund for government employees. ``People get rewards for not only mediocre performance but poor performance.''
But it's not always that simple, say executive-pay consultants. Companies are putting more pay in at-risk compensation, whether that is stocks or cash awards linked to performance goals.
Even the harshest critics of executive-pay methods, like the AFL-CIO's Executive Paywatch unit in Washington, say stock options are effective, if administered properly.
Plans in vogue include premium options, where the shares granted to the executive are priced above the market, and accelerated vesting, which shortens the time executives wait for stocks if the company meets some performance targets.
A look at package maker Bemis Co. Inc., which placed three executives in the top 15, illustrates some of the complexities of executive pay and some of the changes going on, particularly such newer-style option programs.
CEO John Roe saw his bonus drop dramatically from 1995—97, enough to push his overall cash compensation down 14 percent to $907,000. That's because Bemis instituted an executive compensation system in 1995 that more rigidly ties pay to performance.
The plan sets base salary at the midpoint for similar companies, and is setting increasingly difficult goals for performance-based cash bonuses, such as requiring 10 percent increases in earnings per share, up from 8 percent in 1996.
But Roe and several other high-ranking Bemis executives each collected between $440,000 and $3.5 million worth of stock, left over from what the company said was a ``not performance-based'' system in place in 1991.
And Roe pulled in another $2.8 million in stock in 1997, boosting his total pay to $7.3 million in 1997, a sevenfold jump from $1 million in 1996.
To some extent, Bemis' old plan did tie the amount of stock granted to how the company did, requiring the executive to wait a number of years before the stock is vested and can be sold. But the new program allows executives to shorten the vesting period, if the company meets performance targets.
``You have a much tighter tie to the rest of the shareholders,'' said Larry Kleiber, director of investor relations for Minneapolis-based Bemis.
For Bemis shareholders, there was a nice payoff: a return of 78 percent between 1995 and 1997, as the company saw its sales in
1997 rise 13 percent and its profit rise 6 percent, as it spent record amounts to upgrade its facilities.
GenCorp Inc. also saw return to shareholders rise dramatically—115 percent—between 1995 and 1997. Its net profit soared from $38 million to $137 million.
And the Fairlawn, Ohio, company was not shy about rewarding Chairman, CEO and President John Yasinsky, who pulled in $3.84 million in 1997, up from $1.5 million in 1996. More than $2 million of that came from stock.
The board's nonemployee members wrote in an SEC filing that they were ``extremely pleased'' with Yasinsky's efforts to improve profit margins and return on assets.
And stocks fueled the pay of Vic De Zen, chairman of Woodbridge, Ontario-based Royal Group Technologies Ltd.
De Zen took home $13.8 million in stock compensation, and saw his cash compensation climb 25 percent. That boosted his total 1997 pay to $15.9 million, topping the Plastics News ranking.
Royal saw its sales and earnings increase more than 25 percent in 1997, with sales topping $592 million, continuing trends evident since 1993.
De Zen, who is described in company documents as controlling Royal, received 21.8 percent of all options granted to employees in 1997. Royal also explicitly rejected guidelines from Toronto and Montreal stock exchanges on board independence from management, and said it does not need a nonmanagement chairman.
``I wouldn't say [executive pay] is out of whack with shareholder gains,'' said Carol Bowie, research director with Executive Compensation Advisory Services, a Springfield, Va., compensation firm. ``Stock options work: they are designed to improve stock prices.''
Workers may not be enjoying the same magnitude of gains, though.
National surveys say salaries for workers have risen about 4 percent, and several plastics companies contacted said they generally had increases in hourly wages of between 4-5 percent.
Employee pay increases generally measure wages, leaving out any stock awards or performance bonuses the employees might get. When you take away the stock bonuses and one-time payouts for plastics industry executives, increases for salary and cash bonuses more evenly tracked workers' pay: up 5.2 percent in 1997, to $575,690.
But the booming stock market is making a difference, compensation consultants say.
``If you take a look at the guy who is running an injection molding machine, his equity performance gain vs. the executive is not even in the same ballpark,'' said executive recruiter James Aslaksen, a senior partner in New York-based LAI Ward Howell. ``They are not seeing a great deal of wealth accumulation.''