June 1, 2008
Tennessee's CEOs pull in hefty salaries
By GETAHN WARD
For 2007, a year in which the typical Tennessee worker saw a modest 3.4 percent increase in
base salaries, the chief executives of 50 of the largest Tennessee-based publicly traded companies on average saw double-digit gains in their overall compensation packages.
On average, total compensation of the state's top business executives were valued at $3.3 million, up 12.8 percent for the 39 executives for whom year-over-year comparisons are available.
The analysis of corporate proxy filings by Redwood Shores, Calif.-based executive compensation research firm Equilar Inc., meanwhile, showed that those gains came in a fiscal year during which shareholders of the 50 companies saw an overall 7.3 percent decline in stock returns, including dividends. The companies, however, saw revenues increase 6.3 percent on average to $2.7 million, though earnings per share fell 9 percent.
The gap between executive pay and stock performance comes as shareholder activists seek more of a say in how much the big boss is paid. A regulatory change three
years ago that required companies to record the value of stock options as an expense on their income statements also has led to more focus on linking long-term compensation more closely to performance measures.
"The scrutiny has increased tenfold," said T.K. Kerstetter, CEO of Board Member Inc., the Brentwood-based publisher of Corporate Board Member magazine. Those factors have "really brought compensation to be much more transparent than it ever has been."
Kerstetter said comparing the performance of companies against industry peers is a better way to measure whether chief executives are worth their pay increases than looking at changes in a company's stock price.
"There are some CEOs whose stocks have dropped, whose earnings are lower, but who still deserve to be rewarded because they may have done their best management job yet in managing a company in a down cycle and in saving shareholders hundreds of millions of dollars
compared to other companies in their same industry," Kerstetter said. "There are also companies where CEOs have gotten increased compensation where it clearly wasn't warranted."
James Burton, dean of the College of Business at Middle Tennessee State University and a director of Charlotte, N.C.-based Piedmont Natural Gas, said that management teams sometimes pursue actions that are in a company's best long-term interest but that in the short term could negatively affect both their earnings and performance.
Two-thirds get C's, D's
An analysis by San Francisco-based proxy advisory firm Glass, Lewis & Co., using 36 measurement points and including comparisons of executive compensation to peers, gave pay-for-performance grades of C's and D's to two-thirds of 40 of the Tennessee public companies.
Memphis-based pulp maker Buckeye Technologies and National Health Investors, the Murfreesboro-based real
estate investment trust, had A's. CBRL Group, the Lebanon-based restaurant operator, Franklin-based hospital operator Community Health Systems, and drugmaker King Pharmaceuticals of Bristol, Tenn., meanwhile, were all given F's.
Glass, Lewis declined to disclose details about its proprietary research methodology, but each company CEO is compared against sector peers, as well as companies with similar-sized revenues.
Overall, the $17 million total compensation to Fred Smith, CEO of Memphis-based delivery giant FedEx, was the biggest pay package for fiscal 2007. Michael A. Woodhouse of CBRL, who got $12.1 million in total compensation, and Wayne T. Smith of Community Health, who got $11.9 million, were the two Middle Tennessee executives who made the top five statewide.
Wayne Smith's 63 percent increase in total compensation from 2006 came in a year in which investors in Community Health saw a mere 1 percent return. But 2007 also was a
year in which Smith engineered a buyout of Plano, Texas-based Triad Hospitals to double Community's size and largely more than double revenues for its recent first quarter.
Workers earn fraction
Still, most executive pay packages are worth far more than the average $35,375 salary of workers statewide, according to the state's Department of Labor and Workforce Development.
For the 50 CEOs on the list, the median total compensation was valued at $1.56 million, up 4.3 percent for companies that have past data available.
Comparative data isn't available on some companies because their different fiscal years meant they didn't have to comply in fiscal 2006 with new rules providing more details on pay.
In some cases, the amount of total compensation shown in a company's proxy might not be what the CEO actually took home. For instance, Brentwood-based LifePoint Hospitals CEO William F.
Carpenter III's 2007 package rose 41 percent to $3.5 million in a year in which the company saw a 12 percent decline in shareholders' return.
But 18 percent of that compensation package was related to stock options forfeited because certain criteria under LifePoint's pay-for-performance plan weren't met. A 31 percent rise in Carpenter's salary reflects a smaller base in 2006 before his promotion to CEO and 44 percent of his total package for 2007 involved restricted stock that would vest at the end of 2009 if the company hits certain performance targets, officials said.
Similarly, FedEx spokesman Ryan Furby said of the $17 million Smith received in total compensation in fiscal 2007, only about a third of it, or $6.2 million, came in the form of direct payment of salary and incentive compensation.
Among trends in compensation of CEOs of Tennessee's public companies, average bonuses of the
39 executives whose compensation could be compared year over year fell 18.5 percent to $549,785. Alexander Cwirko-Godycki, research manager at Equilar, wasn't surprised because bonuses are often tied directly to short-term performance, which was affected by the stock market's decline during the second half of last year.
CEOs might not see any big change in longer-term stock-based compensation in a downturn because that compensation may be tied to three- to five-year goals, which means performance would have to keep falling to create an effect, he added.
"It goes to the fact that you have a lot of different pieces in place that explains why overall pay might be going up, while performance isn't so great," Cwirko-Godycki said.
Efforts by shareholder advocates to gain a greater say on executive pay include plans by John Chevedden, a Redondo Beach, Calif., retiree, to introduce a proposal at this year's FedEx annual meeting that would put
pay packages of executives up to a shareholder vote.
"High executive pay $17 million for Fred Smith that's what the concern is," Chevedden said, referring to the total compensation package of FedEx's CEO last year.
Nationwide, shareholders have passed only a few of such "say on pay" proposals, an outcome that experts said reflects a thinking that executive pay is more of an issue for boards than individual investors. "Shareholders elect directors who are suppose to act in the best interest of the company and shareholders," said Gary Brown, a securities attorney with law firm Baker, Donelson, Bearman, Caldwell & Berkowitz in Nashville.
"If you're going to micromanage everything that directors do, why have directors?"