(Aug. 30, 2004) — Pay is down, scrutiny is up and some executives are out.
That's the short version of our Executive Pay Special Report this year. Average pay is down for the 100 best-paid executives, from $1 million in 2002 to about $890,000 last year, when you factor out the chart-topping pay of Magna International Inc. There's more scrutiny, and chiefs at some of the worst-performing companies got pushed aside.
At a basic level, you might conclude that pay-for-performance works, or at least it is working better than it has. There weren't the prominent sort of examples we've seen in past years — the type where companies get into trouble and then give executives lucrative paydays.
In fact, some of those at the center of previous storms have moved on: Foamex International Inc.'s Chairman Marshall Cogan left the company earlier this year, and Royal Group Technologies Ltd. Chief Executive Officer Vic De Zen moved into a nonexecutive chairman's job, out of day-to-day management.
For the first time, Plastics News tried to take a more analytical look at pay for performance. We compared three years' worth of pay against three years' worth of shareholder return for 34 industry CEOs who held the top job at their companies for 2001, 2002 and 2003.
The results were intriguing.
One of the better performers, Winpak Ltd., doesn't give out stock, and has a pretty stingy compensation system. It also had strong shareholder return.
Other companies that were not good investments, like Foamex and Royal, had executive pay systems that were basically broken. Both seem to be making changes, particularly Royal.
Anecdotally, that might suggest that having a good executive pay system — things like an independent board and sharply defined performance metrics for executives — is important for long-term corporate growth.
It's hard to disagree with that, but it's worth remembering that some companies defy simple yardsticks. Automotive systems maker Magna International Inc., for one, has been both a good performer for shareholders and a target of criticism for its executive pay packages. Institutional investors have knocked it for being too generous, and for not having an independent board.
The company, though, more than doubled shareholders' money from 2000-2003.
It has an unusual pay system: Executives get base salaries of about $100,000 a year, miniscule for the size of the firm. But they typically get various performance-based bonuses that often top $10 million a year.
The National Association of Corporate Directors, a trade association for board members, came out with a study on executive compensation worth taking a look at. It urged companies to put in place a principle of “fairness” — of not having large, unexplained gaps between pay for CEOs and others.
It also said that a company's compensation committee should have the ability to hire and fire its own consultants, a key recommendation. According to NACD, too many comp committees rely on pay consultants the company provides, rather than seeking independent advice that might challenge existing practices.
NACD members are not a wild-eyed bunch. But the group recognizes the need for more scrutiny and transparency in compensation to combat what it terms the “deepening public distrust of CEO pay packages and the boards who oversee them.”