Top-Exec Pay Train Runs Full Steam Ahead

By Staff Report

Mar. 9, 2009

Amid the deepest economic collapse in generations, corporate America is coming up with a novel way to justify extravagant executive pay: Ignore the bad news.

Companies that sank into the red last year are looking past a host of business expenses, ranging from asset write-downs to higher-than-expected operating costs, to rationalize paying brass even more than they got in flush times. Others appear to be reducing pay but continue to bestow extraordinary perks, such as “golden coffins.”

Defiant shareholders admit that reining in the practices is a tough battle, even though the dire economy and lousy results would seem to make pay cuts a given.

“Executive pay is the ultimate shell game,” said Richard Ferlauto, a longtime critic of corporate compensation practices and director of pension investment policy at the American Federation of State, County and Municipal Employees. “Boards come up with all sorts of new ways to pay people whose performance shows they don’t deserve it.”

Just last week, New York Stock Exchange parent NYSE Euronext Inc. said chief executive Duncan Niederauer had been awarded total compensation of $7.1 million in 2008—his first full year in the job—including $4 million designated as a “performance bonus.”
Niederauer’s pay was nearly $2 million more than predecessor John Thain got in 2006, his last full year at NYSE. The exchange’s performance in 2008 was dismal by almost any traditional measure. It posted a $738 million net loss, and the stock price fell 68 percent. (Rival Nasdaq dropped 50 percent.)

The loss was driven by a $1.6 billion asset write-down related to the 2007 acquisition of Paris-based Euronext. NYSE concluded that European operations will generate less cash than expected because of bleak markets and regulators’ opening trading to more competition, a much-anticipated development that hurt its market share and led to lower transaction fees.

In defending Niederauer’s pay, NYSE argues that the company fared better in 2008 than its financial results and stock price suggest. A spokesman pointed out that revenue rose 4 percent, while fixed operating expenses declined. “Pro forma” earnings rose 9 percent when the merger-related charges and other items are excluded, the spokesman said. “The board deemed that, overall, we met targets as a company,” he said.

Indeed, NYSE directors had tried to show Niederauer more largesse. They had established a $5 million “target bonus” for him but ultimately awarded less because management cut the companywide bonus pool by 20 percent. In a regulatory filing, the board said, “We believe individual performance would have supported higher award levels.”

Munificent as NYSE was, Loews Corp. went the extra mile when it came to CEO James Tisch.

Loews, whose holdings include hotels, insurers and oil exploration outfits, lost $182 million from continuing operations last year, and its stock price sank 44 percent. Yet the board paid Tisch $7 million—8 percent more than in 2007, when Loews generated $1.6 billion of net income from continuing operations.

Grading pay on a curve
The company covered Tisch’s raise partly by excluding $2 billion worth of setbacks that it said “would not be appropriate” to consider when setting pay.

The bad news includes a higher-than-budgeted $204 million of catastrophe losses in its insurance division, nearly five times as much as in 2007, mainly due to hurricanes Gustave and Ike. Companies often exclude noncore items when determining compensation, but Loews acknowledged in its annual report that catastrophe losses are an “inevitable” part of its insurance business.

Loews directors also decided it wasn’t fitting to consider the insurance division’s $750 million of realized investment losses. Additionally, they dismissed more than $750 million of write-downs in the oil exploration unit, which stemmed partly from revaluing reserves to account for lower commodity prices.

“What does ‘pay for performance’ mean if you ignore performance?” Ferlauto said.

Loews declined to comment.

Some CEOs are willing to accept less compensation. Stephen Schwarzman of the Blackstone Group cut his pay 99 percent last year, to $350,000, after the firm swung to a $1.2 billion net loss connected to heavy write-downs. Numbing the pain was the $180 million Schwarzman pocketed in 2007, when he took his leveraged-buyout firm public.

But even companies that have better aligned their pay policies with the times still seem to have a tin ear when it comes to what critics call over-the-top perks.

For example, the total pay of Verizon Communications Inc. CEO Ivan Seidenberg fell 30 percent last year, to $18.6 million. But some shareholders are peeved that his heirs stand to collect up to $35 million payable upon Seidenberg’s death—an unusual benefit known as a “golden coffin.”

Arguing that shareholders shouldn’t be saddled with a payment for which no service can be rendered, the Philadelphia city employees’ pension fund and another public pension fund have filed a shareholder resolution for Verizon investors to vote on the perk.

Verizon insists that golden coffins are necessary to retain key employees.

But the pension funds wryly retort that “in our opinion, death defeats this argument.”

Check stubs
Duncan Niederauer, $7.1 million
NYSE chief collects a performance bonus after posting a $738 million net loss.

James Tisch, $7 million
Loews CEO gets 8 percent hike from board that ignored $2 billion worth of bad news.

Ivan Seidenberg, $18.6 million
Verizon head keeps controversial $35 million “golden coffin.”

Filed by Aaron Elstein of Crain’s New York Business, a sister publication of Workforce Management. To comment, e-mail

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