Option Wealth

Article excerpt

Executive compensation continued to climb in 1998, with the United States leaping ahead and Britain following modestly behind.

Like the US stock market, US chief financial officers had a bullish year in 1998. According to Standard & Poor's Compustat data prepared for Global Finance, average total remuneration for the top 100 companies surveyed soared 61.26% from 1997 to 1998. Based on 80 companies (an average excluding those companies that don't have a total of two years of data or whose value of realized options for the executive isn't reported for the prior year), average total remuneration increased a whopping 56.92% from 1997 to 1998.

What's fueling the skyrocketing compensation in the United States? It's simple: options exercised. In many cases, base salary plus bonus increased slightly year to year. But exercising options catapulted many CFO's to the top of the rankings.

Consider this: Based on the top 100 companies, average total cash (salary plus bonus) was $1.110 million in 1998 compared with $1.024 million in 1997. Total compensation, comprising cash plus restricted stock and long-term incentive payouts, averaged $1.895 million in 1998, compared with the previous year's figure of $1.551 million. Total remuneration, which includes cash plus compensation plus options exercised, was $4.790 million for American CFOs in 1998. In 1997 the total remuneration average was a mere $2.970 million. That's the power of exercising options.

But is including options exercised a fair way to look at executive compensation? The answer is mixed. On one hand, exercising options can be considered one of the perks of the job. An executive is granted options as a long-term incentive for excellent performance at a company. When an executive is able to cash in those options, he or she is seeing the actual monetary reward. Often the options-exercised figure is staggering. This camp argues that it is fair to include options exercised in the total picture since the options are a form of income for the executive.

That's not the only view, however. Some executive compensation analysts do not favor including options exercised as part of the overall remuneration picture, feeling that it skews the numbers. Furthermore, the choice of exercising options"is always a personal decision," observes Rhoda Edelman of Pearl Meyer, a New York compensation consulting firm. Commenting on the Global Finance rankings, Edelman points out that for John L. Cecil of Lehman Brothers Holdings and Robert G. Scott of Morgan Stanley Dean Witter salary and bonus went down but options exercised went up. Therefore, instead of compensation for those two executives declining, it actually rose because of options exercised.

In Cecil's case salary and bonus was $2.750 million in 1998 versus $3.750 million in 1997. But total remuneration jumped 231% from 1997 to 1998 because he exercised $16.3 million worth of options in 1998. In 1997 Cecil didn't exercise any options, and his total remuneration amounted to just $6.965 million.

For Scott, salary and bonus fell to $4.025 million in 1998, from 1997's level of $5.257 million. Like Cecil, Scott didn't exercise any options in 1997; his total remuneration for the year was $6.811 million. But in 1998 he exercised $5.786 million in options, which gave him a substantial boost over the prior year.

Rather than looking at options exercised, Pearl Meyer's Edelman believes it's more relevant to look at restricted stock grants. Edelman points out that on the US CFO rankings, total compensation for Mark H. Swartz of Tyco International and for James H. Hance Jr of Bank of America rose sharply in 1998, indicating that the CFOs were receiving a big reward in restricted stock. Total compensation in 1998 was $ 11.879 million for Swartz and $13.087 for Hance, compared with the 1997 figures of $3.581 million and $3.050 million, respectively.

Focusing on restricted stock grants is also a favored measurement of Robert Freedman, a principal at Towers Perrin and head of the firm's global compensation group in NewYork. …