2000 was not a good year for plastic foam manufacturer Foamex International Inc. Company sales were flat for the third straight year at about $1.2 billion, profit was down to $17 million, and shareholder return dropped 35 percent.
But Chairman Marshall Cogan saw his pay jump 12 percent, to $950,000.
Company officials did not respond to questions, but the company has what experts say is a textbook case of a bad executive compensation plan. The chairman of the firm's compensation committee - the group of board members that sets pay levels - is the head of the firm's Asian joint venture, draws a $10,000 a month consulting contract and gets other lucrative perks from the company.
Cogan's pay package drew complaints from one professional investor and shareholder, Leon Cooperman, who mounted a successful legal challenge that was settled last year when the company agreed to add two independent directors to its board.
"In my opinion, Marshall Cogan, the nonexecutive chairman of Foamex International Inc., is one of the most egregiously overcompensated corporate executives in America," said Cooperman, who is general partner of Watchung Road Associates in New York.
Foamex may not be typical, but it's easy to understand why shareholders would be angry, or at least skeptical, about outsized executive pay packages and pay systems that do not seem to have a downside for executives.
Looking at the big picture, it's clear that 2000 was not a good year for investors in publicly owned plastics processing companies. The Plastics News stock index - comprising the same public companies from which the newspaper draws its top-paid executives - was down 22 percent in 2000.
The average pay of the top 100 plastics processing executives fell also, by about 4 percent, to about $1.05 million. That's down from a little more than $1.09 million in 1999.
Some of that decline was because one of the top-paying firms in the plastics processing industry - Uniroyal Technology Corp. - sold enough of its plastics operations in late 1999 to drop from 2000's rankings. Looking at the same group of executives for both years, pay was flat.
"Compensation isn't going south, but it isn't going north real fast," said James Aslaksen, a managing director for executive recruiter Korn Ferry International and global leader of the company's chemicals, plastics and metals business.
The retention bonus
In 2000, some of the strong inflationary pressure that dot-coms put on executive pay abated as many of those firms ran into financial trouble, according to compensation experts.
The overall poor performance of many industry stocks, particularly in the last half of the year, worked to hold pay down. Many executives found their bonuses cut or eliminated in 2000.
At industrial thermoformer Alltrista Corp., Chairman Thomas Clark saw his bonus eliminated and his pay drop 53 percent, to $397,000, as the company's shareholder return fell 39 percent. The company's poor performance in 2000 also meant that Clark's future bonuses will be reduced by $58,000.
Poor performance by compounder PolyOne Corp. also meant no bonus for Chairman Thomas Waltermire. His total salary and cash bonus dropped 46 percent.
But Waltermire's overall compensation actually rose, to $1.3 million, on the strength of a bonus he got when Geon Co., where he had been chairman, merged with M.A. Hanna Co. last year.
PolyOne officials termed that $460,000 payment a "retention bonus" for not leaving because of the merger. It is common practice for executives to have "change in control" agreements that compensate them if the company changes ownership.
"Tom and some of the senior management are important to the viability of the company," said PolyOne spokesman Dennis Cocco. "Tom, because of his position and the extent of his change of control agreement, theoretically could have walked away with a lot of money and left the company without a CEO.
"What the board authorized - it's a retention bonus in case you don't exercise your change in control."
Two colleagues at PolyOne, Donald Knechtges and Garth Henry, did leave and each pocketed payments of at least $1.7 million. PolyOne is embroiled in a lawsuit with former Hanna President Phillip Ashkettle over his severance package.
Evaluating executive pay can be complicated.
At film manufacturer Gundle/ SLT Environmental Inc., President and CEO Samir Badawi's pay rose 17 percent, to $521,000. Yet the Houston-based landfill-lining maker's net profit dropped 26 percent, to $3.6 million, while sales rose 7 percent, to $191 million.
Shareholder return dropped 41 percent in 2000, but company officials said they increased market share. Company officials declined to talk in detail about the factors that went into setting pay, but the firm's most recent proxy filed with the Securities and Exchange Commission said that "the emphasis of the [compensation] committee in recent years has been on encouraging management to maintain GSE's profitability."
Are stock links fair?
Of course, many companies and executives argue that comparing stock price to pay is not fair. Stock price can go down, but a company still can be solid and growing. An executive still can make good decisions in a down market, and sometimes the large pay packages of executives reflect stock gains, which accrue over many years but only get recorded in one year.
Some also argue that senior executives need to be rewarded because their performance, more so than other employees, most directly impacts their company's performance. U.S. companies tend to pay the most around the globe, and the American economy has been the strongest.
James Swartwout, chairman, chief executive officer and chief financial officer of extruder and injection molder Summa Industries, said share price is not a factor in executive compensation at his firm. Instead, the company looks at things such as financial performance and how sales and profit matched the operating plan.
Summa recently announced it was considering selling the firm because officials think its stock is undervalued.
The acquisition-minded company grew from $106 million in sales in 1999 to $123 million last year, profit rose from $6.5 million to $7.3 million, and earnings per share grew, he said. But its one-year return to shareholders was down 16 percent in the firm's fiscal year and down 28 percent in calendar-year 2000. Swartwout's pay rose 16 percent, to $438,000.
Swartwout said that since executives have significant holdings of company stock, they do notice when stock prices drop. Swartwout had exercisable options worth $707,000 at the end of 2000, and owns 4.1 percent of the company, according to Summa's SEC filings. He did not exercise any of his stock options last year.
Pressure to re-price?
Sometimes falling stock prices prompt companies to adjust the price of stock options granted to executives in previous years, a practice known as re-pricing.
2000 saw no large-scale option re-pricing in plastics, but it did push Chicago-based Home Products International Inc. to do something similar.
HPI's stock price fell so low that the company canceled 830,000 stock options for Chairman and CEO James Tennant, and replaced them with a grant of 373,333 company shares valued at $594,000.
HPI's one-year return dropped 83 percent - the single worst performance of any company on the PN ranking - with the stock price closing out 2000 at $1.75.
The company's stock suffered for several reasons, according to Chief Financial Officer James Winslow.
First, the company could not pass along resin price hikes to customers such as Kmart Corp. and Target Corp. Also, new competitors entered the market and the company reduced its margins to maintain market share. Finally, going into 2000 speculators had pushed up HPI's stock price because the company was looking for a buyer. When it announced it was no longer for sale, the price dropped, according to Winslow.
Winslow declined to talk about why the company canceled the stock options, but he said they were $5-$10 underwater. The company also canceled 115,000 shares for Winslow and gave him a stock grant.
Some companies are taking another look at restricted stock grants, instead of options, because grants can be motivational in a down market, said B. Kenneth West, senior consultant for corporate governance for pension fund TIAA-CREF in New York.
But another executive pay observer, Nell Minow, editor of the Corporate Library.com, an executive compensation consulting service, said replacing options with grants is the "board's way of telling you they don't think the stock is going to go up."
Winslow said the executives must remain with the company until October 2003 to collect any of that money.
"Obviously it is in our best interest to do everything possible to increase shareholder value to get the price up," Winslow said.
However, actions like that sometimes are a bitter pill for shareholders because they have seen the value of their investment plummet and they have to eat those losses. For example, $100 invested in Home Products in 1995 was worth just $31 at the end of 2000.
Korn/Ferry's Aslaksen expects pressure for re-pricings to grow in 2001. Still, he thinks most companies will resist the pressure. "I think most compensation committees will hold the line and not do re-pricing," he said.
Falling stock prices did hurt pay. Among the top 100, the average executive made $201,000 from exercising stock options in 2000, compared with $278,000 in 1999, and cash bonuses dropped a little bit last year also, to about $270,000.
"It's probably a reflection of earnings being down," said Nick Fountas, managing director of JLI-Boston, who specializes in plastics industry executive recruiting.
On the other hand, the top officials basically made up for that in other ways.
Average salaries went up about 7.3 percent for the executives in 2000, to $351,000, and on average, the top 100 saw more pay in the form of restricted stock grants and more pay in the catchall category of "other cash compensation."
That could reflect a switch to cash and stock grant compensation that carries less risk than options, or it could be a statistical blip because a handful of executives got unusually large restricted stock and "other cash" awards in 2000.
Tumbling Internet stocks late last year and in 2001 put a lot less pressure on companies to boost executive pay, recruiters said.
"There is less unrealistic pressure on salaries because the dot-coms have gone away," Fountas said.
Executive pay probably will drop more in 2001 compared to 2000, because of falling bonuses and stock prices, Korn/Ferry's Aslaksen said.
Pay for performance
Some companies on the PN ranking did perform very well, and their executives were well-rewarded.
Pipe manufacturer Lamson & Sessions Co. saw its one-year return to shareholders rise 115 percent, as business conditions were very strong.
The salary and bonus of Chairman, President and Chief Executive Officer John Schulze rose 21 percent because of a much larger cash bonus. When you toss in a $687,000 gain on a stock sale, Schulze's total compensation topped $1.7 million.
The company's board based its bonuses on growth in EBITDA (earnings before interest, taxes, depreciation and amortization) - it set a target of $31 million, and the company made $45.7 million.
"We had a target that was pretty much blown away," said Charles Allen, senior vice president of human resources at the Beachwood, Ohio, company.
But Allen said the firm has not given bonuses in years when performance was poor, such as in 1997.
Another construction industry player, PW Eagle Inc., also saw its executive salaries jump as performance soared in 2000.
PW Eagle's one-year return to shareholders grew 85 percent, while Chief Executive Officer William Spell saw his salary and bonus rise 33 percent in 2000, putting his total pay at $599,000. Spell, who is the son of Chairman Harry Spell, guided the company from $60 million in sales in 1998 to $350 million in 2000, in a series of mergers, according to Robert Bauer, a company spokesman and investor relations consultant.
"Bill Spell has made some good moves for the company," said Bauer. "Any time you have management talent, you have to retain that talent."
Lately, however, PW has suffered from the economic downturn, announcing in July it was closing or idling two factories.
'Out of bounds'
It's clear that some plastics companies have executive pay systems that fall well short of the ideal. Consider Foamex again.
The Linwood, Pa., firm has been the target of several shareholder lawsuits, including the one by dissident investor Cooperman, which forced the company to add two independent directors to its board.
Cooperman believes the company's board is not independent enough from company Chairman Cogan.
"Therein lies the real scandal," Cooperman said. "Until corporate directors start getting called to account, their too-cozy relationships with the very management they're theoretically watchdogging will continue, to the almost inevitable detriment of the public stockholders whose interests they're supposed to be caretaking."
The chairman of the company's compensation committee has direct financial ties to the firm beyond his work on the board, a problem that critics say generally can make it difficult for directors to make tough decisions on pay.
Beyond his compensation for work as chairman of the board's compensation committee, John Tunney has a $10,000 a month consulting contract with Foamex. He heads and owns 5 percent of the company's Foamex Asia joint venture.
The company also pays $200,000 a year to rent an apartment for Tunney, a former U.S. senator from California. It is a relationship that strikes some executive compensation observers as suspect.
"That is just out of bounds," said West, the TIAA CREF corporate governance consultant. "You've got a guy setting pay for executive staff that are his colleagues, maybe his boss ... You want a compensation committee that is absolutely objective and hard-nosed."
The company has had a revolving door of executives below Cogan - two CEOs have resigned since March 1999. The last, John Johnson, was paid $669,000 last year and then resigned in January. He received a severance worth $1.3 million in cash and immediate vesting of many of his options, according to company SEC filings.
Johnson's contract guaranteed him a bonus of $250,000 in his first year on the job in 1999. The company cut that to $110,000 last year. His replacement, John Televantos, got a similar guaranteed bonus in his first year on the job, according to SEC filings.
Foamex also asked shareholders this year to approve a new cash bonus plan that gives a performance-based award of up to $3 million. Company officials did not respond to requests for comment.
Generally, though, there have not been a lot of obvious signs of shareholder concern with plastic industry pay packages.
Injection press maker Milacron Inc. did face an anti-executive compensation resolution at its annual meeting this year. The resolution, sponsored by a shareholder and former employee, received favorable votes from shareholders with 13.5 percent of its stock.
Still, to many watchdogs and observers of executive pay, the system is full of companies with boards that are not independent enough. Too often, the link between pay and performance is too weak, they argue.
"What we hope is that CEO pay rises and falls with shareholder value," said Minow of Corporate Library.com. "However, we seldom see that. What we more often see is that pay rises faster and falls more slowly."