- The Washington Times - Monday, February 17, 2003

The new chief executive of Kmart will have to pay for the company jet when he uses it for personal trips. His base salary is lower than that of the company's former CEOs, and he received no signing bonus.
Kmart's board of directors, criticized for not doing enough to prevent the century-old retailer from going bankrupt, showed evident restraint last month in the terms offered to Julian C. Day, its third CEO in less than a year.
As troubled companies turn over CEOs, not every new one is getting hired on bargain terms, and some specialists question whether that is a smart approach. But the lavish treatment of top executives is being scrutinized and often reconsidered after last year's string of scandals and bankruptcies.
Mr. Day, who held senior positions at Sears, Roebuck & Co. and Safeway Inc. before joining Kmart, will earn an annual salary of $1 million. He is guaranteed another $1 million when Kmart emerges from bankruptcy.
In contrast, former CEO Charles Conaway whose management is now the subject of an internal inquiry received more than $20 million in loans, cash, shares and bonuses in his first year, and he negotiated the right to fly anywhere he wanted in the company jet.
James Adamson, who succeeded Mr. Conaway as CEO, was granted a $2.5 million signing bonus and will be paid $3.6 million after Kmart emerges from bankruptcy which the company hopes to do by April 30.
Now chairman, Mr. Adamson arrived with a reputation as a turnaround expert after helping revive Denny's and Burger King.
Mr. Conaway's package may not have been considered extravagant at the time, but many would find it outrageous in the current climate. At least five of last year's bankruptcies WorldCom, Conseco, Global Crossing, UAL and Adelphia rank among the 10 largest in U.S. history.
Not everyone agrees that cutting back on executive compensation is advisable when companies need a leader with skill, experience and credibility. A chief who can guide a company successfully through the bankruptcy jungle, experts say, is probably worth every cent he makes.
After WorldCom filed for Chapter 11 protection in July, passing energy giant Enron Corp. to become the largest bankruptcy in U.S. history, Michael Capellas was named chief executive officer.
The corporate board's initial compensation package for Mr. Capellas was criticized by court-appointed monitor and former Securities and Exchange Commission Chairman Richard Breeden, and a bankruptcy judge rejected it. Mr. Capellas' package was brought down 23 percent, to about $20 million over three years.
While it may take years to unravel the accounting scandals and strategic missteps that led to WorldCom's fall, Mr. Capellas who led Compaq Computer Corp. through a restructuring and purchase by Hewlett-Packard Co. has expressed hope it could emerge from bankruptcy in the spring.
"In a world where football players are making $15 million to $20 million, I'm not at all troubled that a guy like Capellas is making $20 million over three years to save one of the largest telecom companies in America," said Harlan Platt, a finance professor at Northeastern University's College of Business Administration.
"On the other hand, there are a lot of corporate executives who are making millions of dollars, and they don't deserve it."
A princely compensation package that doesn't seem to match performance could indicate a corporate board has fallen under the influence of the chief executive, Mr. Platt said.
Corporate governance specialists advocate the independence of boards, which are responsible for evaluating executive performance and allocating compensation. Recent legislation calls for them to be at least 50 percent independent meaning half the members should have no prior relationship with the chief executive or the company.
"CEO compensation is a strong signifier of the strength of the board," said Paul Hodgson, an executive compensation specialist at the Corporate Library. For a troubled company, he added, cutting the top officer's pay is one of the clearest ways to prove the business is serious about change. If there are increases, he said, they should be related to performance.
"Maybe a few of these executives have realized it's time to buckle under and take these more modest packages instead of the sort of $45 million 'golden hello' we've seen in the past," Mr. Hodgson said.
He was referring to Gary Wendt's $45 million bonus when he took the CEO job at Conseco in 2000, promising to help the insurance giant reduce its $8.2 billion debt.
Mr. Wendt, who earned a reputation as a savvy cost-cutter at GE Capital, managed to trim $2.7 billion before abandoning the effort in the face of a slowing economy and mounting bad mobile-home loans.
He stepped down and became chairman, and the company filed for Chapter 11 in December the third-largest U.S. bankruptcy in history. He was replaced by William Shea, whose salary has not been disclosed in bankruptcy court.
Companies often bring professional crisis managers in to help with a restructuring. WorldCom named two principals from turnaround firm AlixPartners to top management posts. AlixPartners also has members of its team in senior jobs at Kmart and Enron.
Ken Hiltz, a partner with the Southfield, Mich., firm, said putting new faces in management roles can be a key to changing a company's direction, especially in cases in which corporate integrity is questioned.
But like anything else, he added, good corporate management doesn't come cheap.
"You wouldn't want to find a bargain-basement CEO any more than you would want to find a bargain-basement heart surgeon if you were having heart failure," he said.

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