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August 28, 2006 02:00 AM

Playing the wild card: paying execs in stock

Mike Verespej
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    Despite a 51 percent increase in total compensation over the past two years on the Plastics News executive pay list, the overall compensation trend among all executives in the plastics industry is a bit different.

    ``We see a market very comparable to what it was in 2000,'' said Dennis Gros, president of PlasticsJobs by Gros Executive Recruiters Inc. in Brentwood, Tenn.

    Executive compensation is based more on a firm's revenue and growth - which is why pay has leveled off at most plastics companies, Gros said.

    ``We are not seeing increasing salary packages or a rising demand in the need for talent,'' he said. ``The marketplace has not been a place where packages need to be greater than they were in 2000 in order for the chief executive officer or other top executives to take the job. Pricing pressures on manufacturing costs have held the lid on salaries and compensation within much of the industry.''

    That may be an accurate assessment for the mostly privately held companies that comprise the North American processing sector - nearly 18,245 U.S. and 2,000 Canadian companies, according to some estimates.

    But executives at publicly traded processors and compounders in PN's annual ranking continue to see big jumps in pay. Among our top 150 executives, for example, now 54 have a compensation package worth at least a million dollars, up from 30 two years ago.

    Average executive compensation on the Plastics News pay list was $1.11 million in 2005, excluding Canadian auto megasupplier Magna International Inc., which gives its executives sizable amounts of restricted stock and distributes up to 6 percent of its profit in bonuses to executives.

    Salary - characteristically the largest single component in compensation in PN's rankings - has shown a steady decline. Bonuses also represent a smaller percentage of the overall package.

    The rising factor in the compensation equation? Stocks. Together, the value of restricted stock granted to executives and of stock options exercised in 2005 totaled more than 30 percent.

    The jump in the average value of stock options exercised by executives ranked in 2005 was dramatic, as it nearly doubled from a year earlier. But backlash from backdated options is likely to drive those numbers down again.

    Likewise, the average value of restricted stocks was up in 2005, and, as an element of total compensation, that is likely to climb.

    The pay shifts at public plastics firms parallel overall trends in stock options, bonuses and other forms of long-term incentives, Gros said. ``If you are looking to generate a profit, you are more likely to pay a bonus. If you are looking to generate an equity value, you are more likely to lean toward stock and other incentives,'' he said.

    ``If there is a performance culture in place, companies will use lots of performance shares and stock options because those incentives drive performance,'' said Joe Mallin, managing director in the Atlanta office of executive consultants Pearl Meyers & Partners. ``If they are more focused on retention of executives, they will use restricted stock.''

    Whether total compensation for the 150 executives on the annual PN pay list will continue its climb is a question of debate.

    Gros expects only a 6 percent increase in pay levels by year-end 2007, but others aren't so sure.

    Jim Aslaksen, senior partner and global sector leader for the performance materials practice in the Chicago office of Korn/Ferry International of Los Angeles, does not see pay level drops in the near future. But he does see a decline in salaries and bonuses, at least short-term.

    ``We have gone through a strong economic period and it appears to be slowing down, if you listen to the Federal Reserve Board,'' he said. ``So as long as we stay at a relatively low rate of inflation, [base] salaries will be coming down.''

    Aslaksen, who recruits for the chemical, plastics and packaging industries, said energy costs could keep compensation in check. And bonuses could drop, in sharp contrast to the past few years, he said.

    One-third of plastics executives got bonuses of over $300,000 in 2005. Even so, he said, the shortage of top executives that is expected to materialize in the next few years could counter other pressures and trigger higher pay.

    According to Aslaksen, 50-55 percent of plastics executives will retire in the next five years, which could push pay levels up as companies compete in a tight market. If that happens, he expects much of it will depend on performance.

    A second reason compensation levels may rise: Boards, despite more scrutiny over new disclosure rules, will make sure their packages don't fall below market levels, said James Reda, managing partner of James F. Reda & Associates LLC in New York.

    ``Most companies are walking a tightrope when it comes to executive compensation,'' Reda said. ``If they are too [low], their executives are too prone to leave. But they also don't want to overpay.''

    Realistically, the mix will never be static.

    ``When performance is strong, companies and boards put more value in the bonus and in the incentive package,'' said Matt Turner, senior compensation consultant with Mercer Human Resource Consulting in Chicago. When weak, they put more into salary, he said.

    And, just as the stock market focuses too much on quarterly results and not enough on long-term strategies, some experts think short-term evaluation of performance is deceptive.

    ``In my view, you have to look at a minimum of a five-year performance to evaluate someone,'' said Ron Botanno, senior partner in the executive compensation practice in the Chicago office of Korn/Ferry. ``You have to look at how much wealth over five years did the executive accumulate and how much did performance improve.''

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