- The Washington Times - Friday, April 15, 2005

NEW YORK — CEO pay is climbing again, rewarding top executives with the biggest gains many have seen since the stock market bubble.

The executives piloting U.S. companies pocketed substantially more in 2004 than in the previous two years. Those gains come even as more corporate boards — responding to sustained criticism about excessive pay — rethink the way they award compensation, trying to more closely tie CEO pay to performance.

Chief executives’ pay increased by an average of 12.6 percent last year, according to an analysis of nearly 180 corporate proxy statements by compensation consulting firm Pearl Meyer & Partners. That figure does not include the profits many CEOs reaped by exercising stock options.

The jump in pay takes the average CEO’s compensation to $9.97 million, resuming a long-running rise in pay after two years of little movement.

But that overall figure pales compared to the pay netted by individual CEOs. Directors at Merrill Lynch awarded chief E. Stanley O’Neal with $31.3 million worth of restricted stock. At Wells Fargo & Co., CEO Richard M. Kovacevich pocketed stock options valued by the company at $20.4 million, on top of a $7.5 million bonus.

The surge in what for many CEOs were already huge pay packages, contrasts sharply with an overall slowing in pay for rank-and-file workers. In the past year, the pay of the average U.S. worker rose by just 2.6 percent, an increase more than offset by inflation.

The increase in CEO pay is rekindling debate in corporate governance circles. The argument focuses not just on how much CEOs deserve, but also the extent to which boards of directors control compensation and whether they’re doing enough to make sure shareholders get their money’s worth.

Bigger pay packages this year are drawing fresh criticism from shareholder advocates and others. They are glad to see many companies moving away from the stock options that were a primary source of excessive pay in the late 1990s. But companies’ shift to giving executives restricted stock — shares that can be sold after a set amount of time has passed — has just replaced options with shares whose worth is largely guaranteed, critics say.

CEO pay packages soared in the late 1990s, as companies granted huge numbers of stock options whose value mounted with the run-up in the financial markets. And while many firms have edged away from options — which give executives the right to buy stock at a set price, then turn around sell if they choose — they are once again netting huge returns for some CEOs.

The leader of that pack is Yahoo Inc. CEO Terry Semel, who last year pocketed $230 million by exercising options. Mr. Semel — paid almost entirely in options — was awarded 7.2 million new options last year.

Companies soon will be required to count options as an expense. So a growing number of firms are rewarding CEOs with restricted stock. A much smaller number are partly paying CEOs with “performance shares” — restricted stock that vests only after an executive steers a firm to meet stated targets.

Directors at a relatively small group of companies have moved to not just restructure, but rein in CEO pay they judged to be out of control.

At MBNA Corp., the board pared CEO Bruce L. Hammonds’ direct pay by 34 percent, following a 24 percent reduction the previous year. The resulting changes still left Mr. Hammonds’ pay at $9.2 million, reflecting lower base pay, a smaller bonus, a smaller grant of restricted stock and no options.

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