Chief executives of companies that had the largest layoffs and most
underfunded pensions and that moved operations offshore to avoid U.S.
taxes were rewarded with the biggest pay hikes in 2002, on average, a
new report has found.
The study, released Monday by United for a Fair Economy in Boston and
the Institute for Policy Studies in Washington, used methodology that
some companies criticized as misleading. Still, the report may add to
the furor over executive pay.
Carol Bowie, director of governance research at the Investor
Responsibility Research Center in Washington, said the study
"demonstrates the flaws in how some incentive pay plans are
Many plans "are fairly short-term in nature and all of these things —
layoffs, underfunded pensions and going offshore to avoid taxes — can
pump up short-term results," Bowie said.
While the median CEO pay increase was 6% in 2002, median pay rocketed
44% for chiefs of the 50 companies that announced the biggest layoffs
in 2001, according to the study.
At the 30 companies with the greatest shortfall in their employees'
pension funds in 2002, CEOs that year made 59% more than the CEO median
reported in BusinessWeek's annual executive compensation report, the
Among the 24 companies with the most offshore subsidiaries in tax-haven
countries, CEOs earned 87% more than the median pay for the last three
years, the study concluded.
In the case of tax havens, CEO pay was measured over a longer time
frame because the decision to use tax havens is considered a long-term
move rather than a short-term step, said Chris Hartman, research
director for United for a Fair Economy.
The group, founded in 1994, says its mission is to "focus public
attention on economic inequality." The Institute for Policy Studies,
founded in 1963, calls itself "an independent center for progressive
research and education."
At the top of the study's list of companies that announced large
layoffs in 2001 was Palo Alto-based Hewlett-Packard Co.,
which set plans to shave nearly 26,000 jobs that year.
In 2002, HP's CEO, Carly Fiorina, saw her pay rise 231% from 2001, to
$4.1 million, the study said.
An HP spokeswoman "strongly disputed" the implied correlation, saying
that Fiorina's base pay has remained constant. All employees, including
the CEO, received a bonus in 2002 because the company met certain
performance goals, the spokeswoman added. Fiorina turned down a
merger-related bonus, she said.
Some experts noted that CEO pay would be expected to reflect the
leader's ability to make a company more efficient and boost shareholder
value, even if that required layoffs.
"The key question is did the executive get a bonus for doing layoffs,
or did he or she get a bonus for cutting costs and riding through the
tough times," said Matt Ward, president of Westward Pay Strategies in
San Francisco. "Obviously, it is uncomfortable for the executives on
this list, but to determine whether the link is a fair one, you'd have
to look at these companies on a case-by-case basis."
HP's stock price fell 15% in 2002 while the Standard & Poor's 500
index sank 23%.
The study also cited AOL Time Warner Inc.'s former
CEO, Gerald Levin, as the executive taking home the biggest 2002
percentage pay increase — a 1,612% hike — in the wake of 4,380 layoffs
An AOL Time Warner spokeswoman said the data were misleading. Levin's
cash compensation remained level in 2002, but he exercised stock
options worth more than $19 million, boosting his total pay to nearly
$21 million, the company said. Those stock options, which accounted for
the bulk of his pay, would have expired if not exercised in 2002.
According to the study, CEOs at 22 of the companies with big layoffs in
2001 saw their compensation drop in 2002. Those included the top
executives at Motorola Inc., Solectron
Corp. and Cisco Systems Inc.
The study looked at layoffs in absolute numbers, not as a percentage of
a company's total staff. That was likely to result in a big-company
bias, and big companies tend to pay their executives more than smaller
companies simply because of scale, pay experts said.
Similarly, the companies with the largest pension shortfalls, in total
dollar terms, also are some of the biggest U.S. companies, which would
be expected to pay their CEOs more than smaller companies that may have
larger pension shortfalls as a percentage of total liabilities.
United for a Fair Economy chose to use raw numbers rather than
percentages because the group also wanted to look at how the layoffs
and pension shortfalls affected the economy as a whole, said Scott
Klinger, co-director of the group's "responsible-wealth" project.
While a small firm's layoffs of 100 people may be huge as a percentage
of its workforce, the total of 465,000 individuals who were jettisoned
by the major companies in the study shows the effect of layoffs
nationwide, Klinger said.
Thirty firms with a collective pension deficit of $131 billion at
year-end in 2002 paid their chief executives a total of $352 million
that year, according to the study. The authors also pointed at a
growing trend of securing executive pension plans with special trusts,
even as pensions for rank-and-file workers were sinking.
"This study picked up on a number of important themes that are emerging
in the post-Enron environment," said Brandon Rees,
research analyst at the AFL-CIO's office of investment. "One of the
most important ones is that executives are sheltering their retirement
plans from the risks that everyone else is expected to shoulder."
The study's authors said the data argued for more action to rein in
executive compensation. The report listed a number of recommendations,
including formal corporate expensing of stock options, requiring "more
realistic" pension accounting and requiring shareholder approval of
large severance plans.
Many of those recommendations already are focal points of pension-fund
activists, accounting regulators and some members of Congress.
"This study is a useful guide for employees, investors and the general
public to understand what's wrong with executive compensation," Rees
said. "We believe excessive executive compensation is the primary
corporate governance abuse that needs to be addressed."