Executive compensation packages are being tied to performance measures more than ever. But when the numbers are scrutinized, the companies with the highest pay packages for their executive teams still don't have the best performance.
And more often than not, the firms with the best performance have an executive team that ranks low on the compensation chart.
For example, Stephen Newlin, chairman, president and chief executive officer of PolyOne Corp., earned $6.47 million in 2006, even though the company's combined total shareholder return (TSR) during the past three years was 5.5 percent.
His pay last year was more than the amount of compensation paid during the last three years to the top five executives at PW Eagle Inc., which produced the second-highest three-year TSR return of any plastics company at 99.4 percent. PW Eagle was purchased earlier this year by J-M Manufacturing Co., which has renamed itself JM Eagle.
Likewise, the Magna International Inc. executive team produced only a 2 percent three-year TSR. Yet, Magna has the plastics industry's highest-paid executive - Manfred Gingl, at $9.4 million - as well as three others in the top 10 and executives in the 20th and 32nd slot
By contrast, with a compensation package of $291,470 - 146th on the Plastics News list - Venence Côté, president and CEO of ZCL Composites Inc., produced the highest three-year TSR, 122.7 percent.
The highest-paid executive team on the PN list that also ranked among the elite in TSR was that of flexible packaging film manufacturer AEP Industries Inc.
AEP had the fourth-highest three-year TSR, at 91.5 percent. Chairman, President and CEO J. Brendan Barba - with just under $3.6 million in total compensation - ranked ninth overall.
Barba would have ranked sixth, but for Magna, which gives its executives sizable amounts of restricted stock and distributes up to 6 percent of the company's profit in bonuses to executives.
What's more, Barba has led a restructuring and capacity expansion that has given the company a sharper focus on high-quality, high-volume film extrusion. He's increased sales 33 percent and turned combined losses of more than $69 million in 2004 and 2005 into a net profit of almost $63 million in 2006. He has boosted shareholder equity by more than $10 million since 2004, to nearly $57 million.
``Executive compensation is difficult to judge from a distance, unless you know what a company is doing and why, and what incentives have been put into place,'' said Bill Coleman, senior vice president of compensation at Waltham, Mass.-based Salary.com.
``You can't tell if a CEO is overpaid or underpaid'' just by looking at the numbers. What's more, ``you can't assess whether someone is paid accordingly'' without looking at the company's compensation strategy and whether share price, markets and profitability are going in the same direction as pay.
It's his view, though, that taking a longer-term look provides a better perspective.
``The best way to evaluate compensation is to do it over multiple years,'' Coleman said. ``If you do it over the shorter term, you are just looking at how well they manage quick wins. As a shareholder, do you want day trades or long-term value? You want the CEO to increase the value of the corporation over time - and that equation is going to be different for every company.''
Sometimes, when compensation numbers look incongruous, it relates to compensation agreements that can't be altered.
For example, Channell Commercial Corp. had a negative 10.7 percent three-year TSR and lost $13.8 million the past two years, after a $4.6 million profit in 2004. But President and CEO William Channell Jr. still earned $1.8 million in 2004, $1.6 million in 2005 and $810,356 in 2006 - to rank 23rd, 30th and then 70th in pay the last three years.
Part of that is a five-year contract he signed in December 2003 that does not allow his base salary to drop below $718,000. That contract also has a clause that gives him percentage increases, every six months, tied to the consumer price index for the Los Angeles area. In addition, he received a $1 million bonus in 2004, for achieving short-term performance goals; and in 2005, he exercised previously granted stock options tied to long-term incentives that were worth $800,000.
But if contracts and performance incentives do not produce return to shareholders, they should be changed, experts said.
``The question is always whether the goals are appropriate,'' said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and an advisory board member of the National Association of Corporate Directors. ``But the only way to evaluate that is the appreciation of the stock over the long term.
``Right now, it is a `heads I win, tails I win' proposition,'' Elson said. ``If you have a good year, you get paid, and, if you have a bad year, you get paid. But if you have a bad year, you should take less pay. If you are going to give someone a financial award for performance, you have to pay him - and not pay him - accordingly.''
That's why ZCL - which boosted shareholder equity from about $21 million to $32 million and almost doubled net income - and its CEO, Côté, get plaudits from investors. ZCL and similar examples make some analysts question the need for high-compensation packages at other companies.
``The average worker looks at what an executive makes and can't fathom anyone being paid that much or getting that much money for any job,'' said Andrew Goldstein, central division practice leader of executive compensation in the Chicago office of Washington-based Watson Wyatt Worldwide. ``It is becoming a question of how much does someone really need?''
