Who's the most overpaid CEO? The most underpaid?

Boston Business Journal - August 26, 2004

by Tom Witkowski

Boston Business JournalWe list the highest-paid CEOs and rank them according to how their company performed compared with their peers'

During the past three years, as Cognex Corp.'s annual revenue dropped 19 percent then climbed back to above its 2001 level, CEO Robert Shillman went home without a paycheck.

Shillman forfeited his salary for two of those years as Natick-based Cognex, which sells machine vision systems used in making semiconductors -- suffered through a chip industry slowdown, putting him among the five most underpaid CEOs in Massachusetts.

In a study of CEO compensation, the Boston Business Journal examined the 100 highest-paid CEOs in Massachusetts and ranked them according to the performance of their companies. The result appeared in our CEOs of Massachusetts supplement to the BBJ. It showed which CEOs were paid handsomely while running companies that did poorly last year -- landing those CEOs in the category of overpaid executives -- and also showed which CEOs were more modestly compensated while leading their firms to stellar heights, becoming the region's "underpaid" CEOs.

The criteria for the rankings compared each CEO's pay against that of the other top 100 paid CEOs. Then we ranked their companies' performances against each other. To determine whether a CEO was relatively overpaid, fairly paid or underpaid, we subtracted each CEO's pay rank from his or her company's combined performance rank to find a resulting pay/performance figure. See the chart below.

For example, Shillman's compensation put him among the top five underpaid chief executives in terms of pay vs. company performance: His company's performance was 30th out of 100 companies, but among the highest paid execs, Shillman was listed at 97 -- a differential of 67, a gap bested by only four other execs on our list.

The Cognex CEO's compensation last year totaled $574,295, most of it coming from exercised stock options. He also received a $21,450 bonus from the company. Shillman's most recent annual salary, $89,190 in 2001, is low compared to the six- and seven-figure standards set by his peers. His decision to go without that salary also sets him apart from his local corner-office colleagues.

Likewise, Candela Corp. CEO Gerard Puorro's compensation put him at the bottom of the list among the 100 highest-paid chief execs, yet his Wayland-based laser company's performance was near the top, ranked fourth in our performance index, which took into account revenue growth, return on equity and stock appreciation.

With comparatively low compensation in a year his company did so well, at $649,939, he was (relatively speaking) the most underpaid chief executive in Massachusetts. In 2002, Puorro recommended his salary be lowered as a cost-cutting measure. His salary was restored to its previous level last year as the company became profitable again. Exercising options

Exercised stock options were a portion of the compensation of many underpaid and overpaid CEOs in Massachusetts in 2003. Despite possible changes in corporate accounting that would mandate expensing stock options, executive pay experts said that those options remain part of companies' compensation plans for now. And in a year when the public markets were on the upswing, as in 2003, option grants from earlier years gave some CEOs the extra fuel to make it to the top of the pile of overpaid CEOs.

Vertex Pharmaceuticals Inc. CEO Joshua Boger went home with $2.1 million in total compensation, ranking him 34th on the list of top-paid CEOs. His Cambridge-based drug company, however, finished last as No. 100 in terms of performance. Boger realized $1.5 million from the sale of stock, on top of his $525,000 salary. But Boger also asked not to receive a bonus for the year, even though the compensation committee of his company's board of directors evaluated his performance as "excellent" for the year, according to the 2003 proxy statement.
"The committee and the full board of directors' subjective view of Dr. Boger has consistently been that he is an outstanding scientist who has demonstrated exceptional ability to guide the company and to manage well not only the company's scientific progress, but its strategic business efforts," the committee said in the filing with the U.S. Securities and Exchange Commission.

Arnold Zetcher, CEO of Hingham-based clothing retailer Talbots Inc., went home last year with $7.4 million in total compensation, $5.3 million of it from options exercised and $809,000 of it in bonus. When you consider the company's performance, that pay scale stamps Zetcher's ticket into the overpaid club.

When a significant portion of an executive's compensation comes from exercising options, the argument can be made that the return is partially compensation and partially a return on investment, said William Caporizzo, co-chair of the tax department with William Cutler Pickering Hale and Dorr LLP.

"The new accounting rules would argue that if we're going to expense options based on the value on the day it was granted, that's the compensation. Anything beyond that is more investment," Caporizzo said, referring to yet-to-be implemented rules.

Larry Liebenow, the chief executive of textile manufacturer Quaker Fabric Corp., has the distinction of being the most overpaid CEO in the state, according to our rankings, with the bulk of Liebenow's 2003 compensation coming from $2.2 million in exercised options.

Among the companies of the 100 top-paid chief executives, Fall River-based Quaker ranked No. 92 for its 2003 performance. Liebenow's pay, however, came in at No. 23 on the compensation list.

Boston-based State Street Corp.'s David Spina, with $7.1 million in compensation, was the No. 8 highest-paid CEO, and Boston-based Nstar's Thomas May, with $4 million, was the No. 14 highest-paid CEO. When the performance of State Street and Nstar is taken into consideration, both Spina and May were also overpaid: State Street's performance ranking was 67th out of the 100 and Nstar's ranking landed at No. 71, according to our research.

Despite the potential changes in how they account for options, companies are in a holding pattern and not making any sudden moves to eliminate stock options. Under today's accounting rules, options are not considered an expense, and thus, are a long-term incentive for an executive and still considered free for the company, experts said.

"Make the expensing happen and I think you'll end up with a more rational compensation environment that allows boards and executives to really evaluate the strategic usefulness of each instrument, without the problem that one of the instruments is free and all the others aren't," said Joseph Rich, Marlborough-based vice chairman of Pearl Meyer & Partners, which counsels boards of directors on compensation.

Change is coming, however. The current trend is toward offering executives a mix of stock options and restricted stock. An analysis of 2004 proxy statements by Pearl Meyer showed that executives last year took home 23 percent more in cash and restricted stock, although their total compensation fell.