- The Washington Times - Wednesday, April 19, 2006

More companies are listening to investors’ criticism that they overpay chief executives, but that doesn’t mean businesses have fixed the problem.

CEO pay continued to climb in 2005, although not nearly as rapidly as in recent years, surveys show. The median pay to CEOs rose 11.3 percent, according to a survey of more than 550 companies by the Corporate Library, a governance firm.

For CEOs at the largest companies, however, pay rose 3.7 percent to a median of $5.2 million.

But the size of the typical CEO’s raise varied greatly by which companies were counted, and overall figures obscure wide variations in pay. A closer look at individual companies show that more than one in four granted their CEOs raises of at least 25 percent, according to a survey of nearly 200 large firms by compensation analyst Equilar Inc.

The newest raises for top executives mean the pay of the average CEO at a Standard & Poor’s 500 firm is now 430 times that of the average U.S. worker — more than 10 times what it was in 1980, according to the AFL-CIO.

Once again, the largest payouts went to CEOs cashing in huge numbers of stock options.

Tops on that list was Richard D. Fairbank, the chairman and chief executive of Capital One Financial Corp., the McLean credit card issuer. Mr. Fairbank, who earned no salary or bonus, was paid almost entirely in a grant of new options this year, valued at slightly more than $18 million. That paled, however, in comparison with the $249.3 million he earned last year by exercising previously issued options.

The list of those who profited most handsomely from cashing in options also included Bruce Karatz, the CEO of builder KB Home, who got $118.4 million.

In many cases, such gains went to executives who have held on to options for years, waiting for their stock prices to rebound. In the past few years, many companies have cut back on the number of options they issue, moving to restricted stock and long-term incentive payouts.

The days of huge options payouts are hardly over. More than 80 percent of large companies still include options in CEO compensation. But gauging the suitability of CEO pay packages increasingly requires investors and directors to focus on the size of future grants, rather than leftovers from the past, compensation specialists say.

Even as more companies embrace changes designed to link CEO pay to executives’ proven ability to deliver results over time, serious disconnects remain, analysts say.

“I think some of the companies are trying to improve the situation,” said Paul Hodgson, a compensation specialist for the Corporate Library. “To be honest, if I can figure it out, I don’t see why people who are leading some of the largest companies in the country shouldn’t be able to figure it out as well.”

The slow pace of change means some companies continue to pay CEOs far out of proportion to the results they deliver to shareholders, specialists say.

For example, AT&T; Inc. — until recently known as SBC Communications Inc. — paid CEO Edward E. Whitacre $17.1 million last year, a 15 percent increase. That raise brought his total pay in the past five years to more than $85 million, although shareholder return — the potential gain to investors who own the company’s stock — was down 40 percent in that period, according to analysis by Mr. Hodgson’s firm.

Directors at software maker Ariba Inc. paid CEO Robert M. Calderoni $10.4 million in 2005 — a large part of that in restricted stock — a 75 percent increase over the previous year. The raise came despite return to shareholders falling 39 percent last year.

according to Rockville proxy advisory firm Institutional Shareholder Services Inc.

Major companies that awarded their CEOs pay raises of 25 percent to 50 percent averaged total shareholder return of 7.4 percent, according to Equilar. Companies that gave their top executives raises of more than 50 percent averaged shareholder return of 11.1 percent, according to the analysis of the pay packages at 197 large companies.

Increasingly, however, such disconnects are the anomaly, compensation specialists say.

Most companies have moved past the era of awarding huge raises to their top executives even as profits and stock price dropped, said Patrick McGurn, executive vice president of Institutional Shareholder Services. But companies are still in the infancy of efforts to reform pay, and have yet to assure that CEO paychecks directly — and not just directionally — reflect how they perform compared with the top executives at rival companies, he said.

“Boards, frankly, are just getting up to speed in many instances on what they’ve done in the past and are really just starting to exhibit some control over the pay practices,” Mr. McGurn said. “It’s going to be a gradual process.”

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