Golden Featherbedders

There's Something comforting about my line of work: I am in no danger of running out of it. Every time I painstakingly wind my way through a new case of executive greed, a dump truck shows up and buries me in 50 more cubic yards of the stuff.

Like lust, greed is an ancient and powerful motivation. Unlike lust, however, it shows no signs of diminishing with age. Indeed, there is some persuasive evidence to suggest that greed picks up where lust leaves off.

Each of the eight case histories that follow involves the chief executive officer of a major company who, in one fashion or another, has slopped at the trough of greed. Although the majority of Americans have for the past several years experienced a searing recession, one class of Americans rides through the tough times on shock absorbers that Detroit can only dream of.

Steven Ross and Nicholas Nicholas

Time Warner

Want a great recipe for combining two previously independent companies? Start by trying to avoid any hurt feelings. Can't decide whom to make the CEO of the new company? Appoint two persons to share the job. Can't face up to paying each new co-CEO half the pay of the average CEO? Pay each more than twice the pay of the average chief executive. Can't decide whom to have on your new board of directors? Then, with a few exceptions, invite everyone from both former boards to join. Can't face up to paying the new board members half the pay they used to receive so as to keep the board bill from going through the roof? Then nearly double the pay of each of the almost-twice-as-many board members.

You think I'm making this up? It's precisely what happened when Time Inc., the Manhattan-based publisher of magazines, acquired Warner Communications, the quintessential American entertainment company. The two new co-CEOs were Steven Ross, the founder of Warner Communications, and Nicholas Nicholas, the former president of Time Inc.

History records that duumvirates are inherently unstable, and Time Warner has proved history correct. Although both Ross and Nicholas signed virtually unheard-of 15-year employment contracts, the company's board requested Nicholas' resignation not three years later.

But don't book Carnegie Hall for a benefit concert for Nicholas, who has brought new meaning to the word fired. The board gave him a check for $15.8 million to bail itself out from some of those juicy commitments it made to him three years earlier. At the same time, it reemployed him, so to speak, at a salary of $250,000 for the next seven years. During the first two years of that period, he only has to sit in his company-provided office, dictate letters to his company-provided secretary and watch his company-provided pension benefits soar. He also gets to keep millions of shares of Time Warner he was previously granted in stock options. The last such option gave him the right, but not the obligation, to buy 1.2 million shares over at least ten years at a fixed price of $19.92 per share. At the time of his resignation, the options represented a paper profit of $8.5 million. If the company's stock price were to appreciate at the rate of ten percent per year for the next eight years, Nicholas' paper profit would swell to about $45 million. And that's just one of his many stock-option and free-stock grants.

Nicholas' erstwhile sidekick, Steven Ross, hasn't done too bad, either. Time Warner reported a loss last year, but Ross nonetheless earned $8.1 million in compensation. Moreover, he stands to make a fortune on an even larger stock-option grant—one for 7.2 million shares. If Time Warner's stock appreciates ten percent per year during the nine and a half years remaining in the option, he will cart away about $220 million. (Ross, however, has to pay $150 per share to exercise each of his stock options. At a recent price of about $28 per share, his options currently are worthless.)

So what has happened to Time Warner's stock price now that the board has air-dropped huge amounts of cash all over the upper echelons of the company? It fell from a high of $45.69 shortly after the Time and Warner combination was announced to the afore-mentioned $28 a share. Had a shareholder sold at $45.69 and reinvested the proceeds in a stock that performed as well as the market average, the investment would be worth close to $70 per share.

Roberto Goizueta

Coca-Cola

Things go better with Coke—like 2 million shares of free stock. That's what a grateful board of directors awarded Atlanta-based Coke's chief executive, Roberto Goizueta, for his performance during 1991. At the time, the shares had a value of about $59 million. However, lest Goizueta consider that compensation to be insufficient, the board also gave him $4.1 million in cash.

Goizueta cannot sell his shares until his retirement in 1996, but there's practically no way he can forfeit them unless he quits the company. In the meantime, he need do nothing more than fill out deposit slips on annual dividends currently worth $1.1 million.

If Coke's stock appreciates, Goizueta stands to make even more money. And appreciate it has. At a recent price of $44 per share, Goizueta's free-share grant is now worth $88 million. Even if the stock takes a dive, he will walk away an exceedingly rich man. He paid nothing for his shares—so if they decline in value to $15 per share, he will still earn $30 million. And don't forget those dividends.

Goizueta didn't make a killing just in 1991. He has been richly rewarded for years. A check of some of the various incentive grants (those offering payouts based on Coca-Cola's stock price) given to Goizueta between 1984 and 1991 shows that his various plans have generated $425 million in compensation. Add perhaps $30 million of salary and bonuses, and his pay works out to better than $55 million per year.

Goizueta has, however, been a spectacular performer. During his 11 years at the helm, he has delivered total annual returns (counting stock appreciation and dividends) of 31 percent, a performance that ranks him in the top seven percent of CEOs at major companies. Still, other CEOs perform as well as or better and earn only a tenth as much.

If Goizueta never receives another stock grant (and don't bet he won't), and if his company's stock price were to rise at ten percent per year until he retires in 1996, his stock incentives would be worth $610 million. Alternatively, if the stock continued to grow at the 25.3 percent per year rate it has achieved under his leadership, his stock grants will be worth a cool $1 billion. Even if the stock price drops by half, Goizueta will still make about $200 million.

Ray Irani

Occidental Petroleum

I can see the scene now: In late 1990 Armand Hammer, the longtime chief executive of Los Angeles-based Occidental Petroleum and one of the greediest bosses of yesteryear, contemplates from his deathbed the golden coffin his heirs would soon receive—a continuation of his multimillion-dollar per year pay package until 1998. His corporate heir, Ray Irani, who has toiled faithfully in Hammer's shadow, bends over to kiss the old man. The virus is transmitted and he becomes greed-positive.

Irani has grabbed it all. His salary, counting a guaranteed free-share award, will be $5 million per year, thereby destroying any pretense that his pay is predicated on his company's performance. And should he die while still employed, his wife stands to receive a consolation payment of about $34 million in addition to an annual pension of $1.2 million per year. (Should Irani live to retirement, he will receive an annual pension of $2.5 million.) On top of that, his grateful company will pay his California state income taxes for him.

Occidental's long-suffering shareholders can only wish they could purchase a piece of Irani's growing compensation package. Since he took over, the stock has gone nowhere.

William Anders

General Dynamics

Formerly an Air Force major general, moon astronaut and ambassador to Norway, this longtime public servant has discovered the corporate sandbox.

When he took over General Dynamics in 1991, the Falls Church, Virginia-based aerospace firm's stock had sagged in the course of the previous year and a half from $60 per share to $25. But Anders made some major changes. From what I can see, he met each morning with his personnel chief to plan layoffs and other ways to reduce the company's payroll. And then he met each afternoon with the same personnel chief to design compensation plans that would allow him to make up for all those low-paying years in the government.

In one year Anders did some great things for his shareholders, but he didn't neglect himself, either. The firm's stock price more than doubled—from $25.25 per share to $53.75—a level of performance exceeded by only two percent of major companies. (It recently traded around $80.) The cash and deferred payments Anders received (and the increase in the value of his various stock plans) generated about $14 million in potential compensation in 1991, making him an island of prosperity in a sea of employee despair.

One innovative plan inaugurated in the Anders era awarded him an extra $3 million in recognition of his role in getting the stock price to $49 per share. Fortunately for him, he is not required to return money if stock prices sag back to $25.25. Instead, he is being paid an interest rate of about 13 percent to leave his money on deposit with the company. It sure beats buying CDs.

Anders has also proved able as a pioneer compensation planner. He has designed a pay package for himself that offers the incentives associated with an entrepreneur and the downside risk associated with a civil servant. He must be the envy of all those he left behind in the Defense Department.

Leon Hirsch

United States Surgical

His performance is to die for. He has been CEO of Norwalk, Connecticut–based United States Surgical since he founded the company 28 years ago. During the past 20 years, he has delivered an astounding compound annual return of 29.1 percent. That may not sound like much, but if you had invested $1000 with him 20 years ago, you'd (continued on page 170)Featherbedders(continued from page 158) be sitting on $165,000 today.

Like Roberto Goizueta, Hirsch raises the issue of how much is enough. In one year, he has received options on 2.75 million shares of stock. Leaving aside the $21 million he already reaped by exercising some shares in 1991, these grants contain a further $25 million of paper profit. If his company's stock price increases at ten percent per year until his options expire in 2001, his profit will grow to $271 million. If he is lucky enough to duplicate his company's 28.3 percent per year stock-price growth rate of the past 20 years, his profit will balloon to $1.9 billion. And all this stems from just one year's worth of stock-option grants.

Stock-option shares provide a better link between pay and performance than the free-share grants made by a company such as Coca-Cola. There's no payout if the stock price sinks below the price the executive must pay to exercise the option. Still, if you look again at the 2.75-miIlion-share grant and if you assume that U.S. Surgical's stock price increases at only seven percent per year during the ten-year life of the option—about what an investor can receive from investing in Treasury bonds—Hirsch will earn $164 million from that single grant.

Hirsch is a stupendous performer, but $1.9 billion seems to be an awfully big reward for continuing to bat the ball out of the park. At the same time, if he grounds out, the $164 million he stands to earn is about $164 million too much. And don't forget that he will probably receive further large option grants before he packs it in.

Hirsch's wife also works at U.S. Surgical. In 1991, when Hirsch was exercising some of his stock options for a profit of $21 million, his wife was exercising some of her stock options for a profit of $23 million. Her recent grants are running at roughly one third the size of her husband's, so the stock's continued great performance ought to add another $600 million to the Hirsch family coffers.

W.J.Sanders 111

Advanced Micro Devices

Earlier, I made this statement about stock options: "There's no payout if the stock price sinks below the price the executive must pay to exercise the option." Well, I was kidding, and the proof of that can be seen at Advanced Micro Devices, a large Silicon Valley computer-chip manufacturer.

Suppose an executive receives an option on 100,000 shares at $50 per share. And suppose that, instead of rising, his company's stock falls to $30 per share. The option is worthless, right? Wrong, on two counts. First, the option may not expire for, say, nine years, and during that time, the stock can rebound to more than $50 per share. Second, the company can invite the executive to turn in his old option and receive a new one carrying a purchase price of $30 per share. If the stock makes it back to $50 per share, the executive can receive a $2 million reward. This sort of transaction, which can occur any number of times, is called an option swap.

Option swaps show that the game of executive compensation is played differently from, say, the Olympic Games. If you are participating in the high jump, and if the bar is set at six feet, you either clear the bar or you head for the showers. But at the executive compensation Olympics, if you crash into the bar at six feet, the indulgent officials (the board of directors) lower the bar to five feet and invite you to try again. If you fail a second time, the bar is lowered to four feet. And so on until, in the case of the most inept performer, a trench is dug and the bar is buried. The executive compensation Olympics isn't much fun for the spectators, but the participants just love it, and they can hardly wait to start a new game.

Advanced Micro Devices is headed by its flamboyant founder, W. J. 'Jerry" Sanders III. His record for long-term total shareholder return has been about average for companies of similar size. But his company's stock has fallen from a high of $41.13 per share in 1984 to a low of $3.63 in October 1990. The company's board responded to this assault on its executive's wealth by engaging in three different option swaps—one in 1988 and two in 1990. Although the directors didn't manage to swap at the $3.63 market bottom, they did manage to swap a lot of shares at $4.25 per share. All in all, Sanders swapped 2.16 million shares. Then, in January and February 1992, he exercised options on 863,000 of those swapped shares—the ones carrying the purchase price of $4.25 per share. The share price at the date of exercise was around $20, and the shares were sold the same days he bought them. (The $20 price on the dates Sanders exercised his options was right near the top. The stock peaked at $21.50 per share in February and was recently selling around $12.) Sanders walked away with a profit of $14 million. Not bad for recovering less than half the stock price Advanced Micro lost. And don't forget that he exercised only 863,000 of those swapped option shares. He has 1.3 million shares left, which, in total, can be supposed to contain many millions of further compensation.

In explaining Advanced Micro's seeming proclivity to swap options at the drop of a hat, a company spokesperson told a CNN reporter that the decline in its stock price was caused by the dumping of computer chips by the Japanese. In other words, the stock price sag was not the fault of Sanders or any of his executives; it was the fault of others—and foreigners, to boot. Perhaps that is truly so, but perhaps the subsequent stock-price rise also wasn't Sanders' responsibility. John Kennedy was fond of quoting a proverb: "Victory has a hundred fathers and defeat is an orphan."

Paul Lego

Westinghouse

The Wall Street Journal headline blared: Westinghouse Cut Legos Pay by si.5 Million. Well, The Wall Street Journal had it wrong. The cash compensation of Pittsburgh-based Westinghouse chief Paul Lego did decline by $1.5 million, but he is apt to get far more than that back from two outsized stock-option grants.

When Lego took over the company in July 1990, Westinghouse's stock was trading at $36.75 per share, and he received a normal stock-option grant covering 124,000 shares at $36.53 per share. His first month on the job saw the stock peak at $39.38 and then head south because of rumors that the company was having problems at its credit subsidiary. Sure enough, write-offs totaling $2.6 billion followed over the next 15 months. Westinghouse stock went into a spiral from which it did not recover until December 1991, when the stock bottomed out at $13.75 per share.

But Westinghouse, unlike Advanced Micro Devices' dealings with Sanders,didn't swap Lego's earlier-granted options for new ones carrying lower (continued on page 226)Featherbedders(continued from page 170) purchase prices. No, in some ways, it did something even worse. It left all of the old options in place and then granted Lego two new options, each of monster dimensions.

After Westinghouse stock dropped to $28.56 per share during the first half of 1991, Lego was given an option on 350,000 shares. But the stock took no notice and kept falling. After October 1991, when Westinghouse announced the second of its huge write-offs, the stock fell to $16 per share. That became the purchase price for Lego's second stock option, again covering 350,000 shares.

Since that second grant, Westinghouse stock has hovered at $16 per share, orless than half of what it sold for when Lego took charge. If the stock recovers to $36.75 per share, Lego's two option grants will be worth $10.1 million. And he will have all his earlier option grants working for him as well.

Lego's case illustrates the money that can be made by chasing a stock price as it declines. With stock volatility being what it is, the chances are good that share prices will eventually recover some of their lost ground. When they do, pow!

J. Peter Grace

W. R. Grace

Peter Grace has been chief executive officer of his family-founded and Manhattan-headquartered industrial and natural-resource firm for 47 years. (Late last year he moved himself and the company to Boca Raton, Florida.) I don't have records on his performance during his entire tenure, but over the past two decades, his shareholder return record was bettered by 59 percent of major companies. Even during shorter periods of time, the performance of W. R. Grace has been substandard.

But Peter Grace's mediocre performance has not kept him from making a great deal of money. Last year he received cash compensation of $1.7 million. Yet the centerpiece of his banquet table was the estimated $5.2 million he made from exercising 446,668 previously granted stock-option shares. The $5.2 million in option profits triggered the need for him to pay about $2 million in federal, New York state and New York City income taxes. It's hard, however, to work up much pity for Grace, because his company paid the taxes for him. Unfortunately, the $2 million tax payment itself became taxable to Grace, so his company cut another check for him. That second check became taxable income, too . . . and so on and so on until his company ended up paying him an additional $3.3 million to extinguish his tax liability on the $5.2 million of option profits.

Perhaps Grace, far from being venal, is a selfless person. In pharmaceutical trials, an experimental group of people take the new drug, while the control group gets the sugar pills. Perhaps Grace is a one-man experiment to test the motivational value of eliminating the need for a person to pay income taxes. The rank-and-file workers of W. R. Grace are, of course, the control group. In the interests of science, they must pay their own taxes, at least until the effects on Grace can be assessed. But it may well take years before it can be determined that this new drug is suitable for all W. R. Grace employees.

And don't feel bad that Peter Grace had to dig into his cookie jar of stock options and burn 446,668 shares to garner his $5.2 million of option gains and $3.3 million of tax reimbursement payments. The company promptly issued him a new option on another 446,668 shares.

A few months back, I was a guest on Larry King's radio show. After listening to example after example of huge CEO pay, Larry expostulated: "Don't these people have any shame?" To paraphrase Leona Helmsley, only the little people have shame. And even if the CEOs profiled in this article do have a bit of shame, think of the resources they can draw on to pay their shrink bills.

"Executive compensation is different from the Olympics. If you fail, the officials invite you to try again."

"Perhaps Grace is an experiment to lest the motivational value of eliminating the need to pay taxes."