By MICHAEL A. HILTZIK
TIMES STAFF WRITER
As a leading manufacturer in the unglamorous chemical business, Monsanto Co. would never fit anyone's model of the corporate bomb thrower. But when the St. Louis based company this year unveiled its pay program for top executives, the business world gasped.
It wasn't that Chief Executive Robert B. Shapiro - whose salary and cash bonus totaled nearly $2 million in 1995 - stands to make millions more from stock options if the company does well.
What got everyone's attention is that if Monsanto turns in a sub-par performance over the next five years, Shapiro and 29 other top executives may end up owing the company money.
"This is really changing the dynamics by which business is being run," said Teri McCaslin, Monsanto's corporate vice president for human resources and an architect of the plan, which requires top executives to take out a company loan to buy Monsanto stock. If the stock does not significantly outperform most industrial companies in the next five years, they risk having to pay back the loan out of their own pockets.
Monsanto's plan represents one of the first signs that corporate boards are beginning to consider ways to rein in what has been explosive - and in some cases embarrassing - growth in top executive salaries.
But while the program has earned widespread praise in some quarters, there are few signs that it will be widely copied soon. Although top US executives are the best paid in the world, initiatives like Monsanto's that are designed to add a measure of risk to their lush rewards are Still shunned by nearly all of corporate America.
In fact, the pay of top US corporate managers continues to grow so fast that it has become an economic and political cause celebre. That's in part a side effect of the bull market, which has given the stock options in executive pay packages an extra jolt. It's also an unintended consequence of the movement in the 1980s to link executive pay more closely to corporate performance.
To many observers, it is only right that that top executives of major U.S. companies should lead the world in pay. America's companies are among the most competitive, its stock market the most buoyant.
Moreover, with boards of directors more willing than before to fire under-performing managers, "the risk of the CEO job has increased substantially," said Richard J. Semler, director of the executive pay and performance practice at the Princeton consulting firm of Sibson & Associates.
But critics argue that recent enjoyed by the brass often have more to do with such factors `as the burgeoning value of their stock options - a reflection of overall bull - market euphoria more than individual accomplishment.
Others point to the clubby atmosphere within corporate boards compensation committees, which est pay for top management. These are generally made up of directors who come from outside the comany but who are almost always current or former top corporate executives themselves.
That the spotlight is now on executive compensation is understandable. One reason is that this is presidential election year, when perennial concerns about the fairness of the American economic system get a boost from the rhetorical windstorms of partisan politics
However, this year's executive raises come during a period of brutal downsizing - with some of he biggest raises going to the chief executive officers with the sharpest hatchets.
Compounding the turmoil is a stagnation in the American workers hourly pay, which rose an average of 1% last year while chief executive officers at major corporations got raises that averaged 20% - to an average new compenation total of about $4.5 million. The growth rate at the top handily outstripped not only inflation, but the growth of corporate profits themselves.
Last year's figures continue a long-term trend. According to the AFL- CIO, the average CEO makes 187 times the wage of the average factory worker, up from a spread of 41 to 1 in 1960.
Jackpot compensation awards are coming just as the earnings potential and job security of the average working person seem weaker than at any time in the past 40 years," said Margaret M. Blair, a corporate affairs expert at the Brookings Institution.
The result is that the executive pay issue is a lightning rod for public discontent with many features of the economy and an all - purpose argument for initiatives aimed at sharing the wealth.
Just last week White House Chief of Staff Leon E. Panetta deflected GOP grumbling about proposals to hike the minimum wage by noting "When CEOs in this country . . . had their salaries double, I didn't hear a lot of complaints. We're now talking bout a lousy 90 cents' increase on the minimum wage."
Others argue that the widening gap between CEO pay and that of the rank and file threatens to undermine worker productivity gains that have contributed to the competitive success of American corporations in the last decade. The notion that there's a shared goal to improve quality depends in part on the workers' perception that there's a shared fate as well," said David Levine, a professor at the Haas School of Business at UC Berkeley. "Rewarding the manager for shrinking a company gets in the way of this shared commitment."
Others argue that the unrestrained surge in executive pay has made a mockery of any representations that compensation is linked to executive performance.
Consider AT&T Chairman and Chief Executive Robert E. Allen, whose overall compensation in 1995 rose 139% to $16 million. That came in a year in which Allen ordered layoffs of as many as 40,000 AT&T employees at least partially to help the company recover from failed strategies for which he was responsible.
(Corporations publish each year's executive raises in disclosure statements generally issued the following spring; 1995's raises are being disclosed now.)
Many other CEOs held on to fat packages without having materially improved their companies' fortunes. Time Warner CEO Gerald Levin, for example, made $5 million despite leading his company to only three profitable quarters in the last three years.
A Time Warner spokesman said Levin's "achievements and accomplishments" justifying his pay were fully set forth in the company's annual proxy statement, in which executive compensation is disclosed.
That statement gives Levin credit for, among other things,' selling assets to reduce debt, restructuring Time Warner's cable marketing strategy and "playing, an effective role with governments, and their agencies" aimed at gaining more advantageous regulation of telecommunications. The spokesman also noted that Levin has not received a raise in base salary or bonus in three years.
Even CEOs of high-flying companies have faced charges they are grossly overpaid. The best paid American chief executive of 1995, Lawrence Coss of St. Paul-based Green Tree Financial Corp., has increased the company's market value a hundredfold in the last five years. But his salary and bonus of $65.6 million last year was the equivalent of nearly 26% of the company's 1995 profit.
"Mr. Coss' compensation is extraordinary because his results are extraordinary," said John Dolphin, Green Tree's vice president for investor and public relations.
He noted that Coss' bonus formula for 1995, which was based on a percentage of the company's pretax earnings, was devised in 1985 when the future of the manufactured-housing and home-improvement finance company was cloudy. (A new formula going into effect next year would cut Goss' bonus pay by as much as 90%. given 1995's results.) In any event, Green Tree last year paid nearly $11 million in stock options and cash bonuses to 118 executives and 2,500 employees. "I will acknowledge the disparity," Dolphin said, "but everyone has benefited from the success of the company."
Ironically, much of the huge gains pocketed by top managers in recent years have come as a result of a trend rooted in the corporate raids of a decade ago.
At the time, boards of directors realized that complacent managements had allowed corporate performance to slip and stock prices to drift below the breakup values of their companies -thus giving hostile raiders the chance to buy laggard companies on the cheap.
The boards reasoned that linking executive pay more closely to corporate performance would better focus managements' minds. And what better measurement of performance than stock prices?
Thus options, which gain value as the underlying stock price advances, began to account for an ever larger portion of executive compensation.
But two new trends once again strain the link between pay and performance. One is the "megagrant" of options.
Since 1990, according to surveys of 40 leading corporations by Frederic W. Cook & Co., a Chicago - based executive compensation consulting firm, option grants to top brass have increased in value by 15% a year. In the same period their cash portion has risen by 6% tog% annually.
(For instance, AT&T Chairman Allen's cash compensation actually was cut in 1995 by 15%; but an enormous option grant of 858,000 shares—up from 72,854 the previous year—more than made up the difference. )
"Options have always been a significant part of executives' pay, but it's only in the last five or six years that the grant is not $500,000 but millions," said Corey Rosen, director of the San Francisco based National Center for Emplee Ownership, which promotes employee stock plans.
The other trend is the record setting bull market, which began after the October 1987 crash and has persisted almost unbroken. Conforming to the Wall Street adage that "a rising tide lifts all boats," the surge has allowed even managers of poorly performing companies to pocket generous option gains.
"I said said [years ago], like Joan of Arc with righteousness shining from my eyes, 'Link pay to performance,'" recalled Neil Minow, a principal at the investment management firm of Lens Inc. "I never figured they'd be able to link so much pay to such mediocre performance."
Boards may be so generous with options in part because corporate accounting rules make them seem like play money. Cash salaries and bonuses have to be recorded as corporate expenses and charged against profits; options do not.
In fact, a 1992 proposal by the authoritative Financial Accounting Standards Board to treat them as a real expense on corporate books provoked such a heated response from the business community that FASB quickly backed down.
"That was the last chance to rein in options," said compensation expert Graef S. Crystal. "Now there's no discipline. If there was a charge to earnings from option grants these boards would know they were playing with live ammunition."
Therefore, an option grant with no apparent impact on a corporation's bottom line and scant relationship to its performance can be worth millions to an executive. To see how that works, consider a chief executive awarded 200,000 options exercisable at $100 per share within 10 years - by no means an unusual package.
A rise in the stock to $150 over that time would represent an annual return to shareholders of a measly 4%. But it would be worth $10 million to the executive.
"In these cases the guy gets rich if he can just walk and chew gum at the same time," said Blair of the Brookings Institution.
She also argues that tying executives' pay too closely to the stock price may lead them to strategies that benefit shareholders at the expense of the company's other stakeholders including employees, suppliers and communities where factories are located.
"Options are incentives to take excessive risks that you hope will produce short-term gains," she said.
That these actions may include cutting the work force in the interest of trimming costs has not been lost on employees. "We're not opposed to high compensation for hard work," said AFL-CIO President John Sweeney. "We're opposed to a system that rewards these individuals who cut the jobs of American workers."
Increasingly, not only workers but shareholders are souring on option giveaways to executives.
One reason is that their own ownership gets watered down by the millions of shares issued to the brass; at Time Warner, according to sources within the company, options to top management account for as much as 20% of the company's 390 million shares. (The figure includes options held by the estate of the company's late chairman and CEO, Steven Ross. )
Moreover, firm evidence is lacking that options necessarily turn mediocre managers into better ones.
"I don't think these options really change their behavior," said Crystal, who has charted corporate performance against executive pay since 1988. "We'd like to believe it but the evidence doesn't show it."
That may be because most options carry no downside. If the stock price goes up, the executive profits; if it goes down, he or she loses nothing. ( Some Silicon Valley companies, including Apple and Advanced Micro Devices, have even lowered the hurdles After their stocks suffered sharp selloffs, their boards revised executive options to kick in at a lower price. )
In recent years some companies have tried balancing reward with more risk. About 30% of major U.S. corporations have imposed stock ownership guidelines for top executives to ensure they experience the ups and downs of real stock ownership, according to a survey by Sibson & Associates.
Others design options so they only kick in if the underlying share price outperforms the market.
"The key problem with stock options is that they reward off the first dollar of share price improvement," said Gary Hourihan, president of Los Angeles-based Strategic Compensation Associates and one of the designers of the Monsanto plan. "A lot of mediocre stocks have gone up because they rode the boat higher, so there ought to be some minimum level of expected stock appreciation before the executives can cash in."
But such "premium" and "performance" options are still quite rare. Of 250 top companies surveyed last year by Frederick W. Cook & Co., only 15% tied their executives' ability to cash in their options to any significant performance or price hurdle.
Even among those that do, few companies have developed as demanding a pay plan as Monsanto's. There, new CEO Shapiro told compensation consultants to "come up with something provocative that would get people's attention internally," in Hourihan's words.
"Bob is a very performance oriented CEO," he added, "and not someone who tolerates mediocrity."
The plan, which affects top managers ranging from Shapiro to the heads of several subsidiaries, has two components.
The first is a grant of options whose strike prices - that is, the prices at which they could be exercised - were set aggressively high, at $150, $175, $220 and $225 share. If the stock does not reach those hurdles within a fixed period that group of options is canceled.
(Monsanto, which was selling for $116 when the plan was implemented, hit $158 in March, triggering the first slice of options. The stock closed Thursday at $148.50.)
The second component requires most executives to make substential purchases of Monsanto Stock on the open market, financed by an interest-bearing loan from the company backed by the executive's personal assets.
If shareholder return over the next five years ranks in the top 25% of companies that make up the Standard & Poor's industrial index Monsanto will forgive the loan. If it ranks among the bottom 50%, the executives will have to pay almost all of it back. And since in that case the stock value may also have plummeted, they will likely be using their own money. Shapiro's personal exposure is more than $6 million.
Within the company, Monsanto officials say, executive are "excited, but they know performance is everything," McCaslin said.
To ease the potent/al pain, the company's option grants to executives are as much as 13% higher than they would have been if they were only "plain vanilla" options. The company also is extending 200 ordinary stock options to virtually all of its 27,000 employees, up from 1,100 last year.
Monsanto spokesmen say the plan was designed to discourage managers from seeking short-term gains—as through cost cuts, asset sales or layoffs.
"Cost-cutting by itself would never get us over these [price] hurdles," argued McCaslin. "Managers will have to figure out howl to position the company for growth, because we're working against time."
Times Staff Writer Martha Groves contributed to this story.