CEOs Likely to Find ’95 Was as Good to Them as It Was to Stocks

Here’s a piece of old news: 1995 was a terrific year for stocks. Standard & Poor’s 500 index, for example, rose a stunning 33.3%.

Now here’s a piece of news to come: Because 1995 was such a terrific year for stocks, company after company will shortly be reporting to their shareholders that their CEOs and other senior executives made a pile in 1995--either in actual gains from exercising stock options or in the buildup of paper profits on previously granted stock options.

I just looked at the chief executives of nearly 600 companies, including more than 30 in Southern California. All had held their positions for at least a three-year period--1992 through 1994.

Even though it will be a couple of months before the bulk of these companies will tell their shareholders about executive pay developments during 1995, it is still possible to make some educated guesses as to how various local chief executives fared.

To illustrate, let’s look at the biggest winner in Southern California (and the second-biggest winner nationwide): Walt Disney Co.’s Michael D. Eisner.

At the end of 1994, Eisner was holding a total of 8 million previously granted option shares. As of Dec. 31, 1994, those option shares contained a paper profit of $230 million.

That means if Eisner had been permitted to exercise all of his previously granted option shares, and if he had chosen to do so at the end of 1994, he would have reaped a pretax gain of $230 million.

Most people see a potential profit of that proportion as staggering. But in fairness to Eisner, it represented the fruits of years of work, not merely work performed in 1994.

In 1995, Disney’s stock rose from $46 a share to $58.88--a gain of 28%.

Let’s assume that in 1995 Eisner did not exercise any of those 8 million option shares he was holding at the end of 1994. If that assumption was correct, then in 1995, he would have reaped an additional paper profit of $12.88 a share on each of his option shares.

As a result, his reservoir of paper profit would have increased by an additional $103 million, thereby leaving him with a year-end balance of $333 million. Not bad for a year’s work, wouldn’t you say?

(That doesn’t include Eisner’s $750,000 base salary in 1995 and his $14-million bonus.)

Adding together Eisner’s past gains from exercising stock options and the $333 million produces a total potential profit for his 11 years on the job of more than $500 million in stock options.

Is Eisner worth this much? Is anyone worth this much?

Well, despite the wealth he has accumulated, you aren’t likely to find any of his shareholders picking up the paving stones and hurling them through the windows of Disney’s Burbank headquarters.

During the period between Oct. 1, 1984, when Eisner became Disney’s chief executive, and Dec. 31, 1995, a $100 investment in Disney stock would, with any reinvested dividends, have compounded to $1,728, a performance that ranked Disney ahead of all but 4% of the companies in the S&P; 500 index.

In contrast, an investor who bought the entire S&P; 500 index would have seen his investment increase from $100 to $532.

Many of the chief executives in my study undoubtedly earned additional large sums from new option grants made during 1995. And though the exact size of those new grants isn’t yet known, I did make a rough estimate of what they will get. Here’s how I did it:

I began by extrapolating the trend in past option grants from 1992 to 1994. Then, I calculated how the size of those grants had been growing, and I assumed that trend continued in 1995. I then calculated the additional CEO stock-option profit in 1995 by comparing the market price of the company’s stock at the end of the year to its average price during the year.

Applying that methodology to all the executives in my study, including the ones in Southern California, I found that the average executive started 1995 with $4.4 million of paper profit and then built up his or her paper-profit account by an additional $5 million.

The figures for the Southern California executives are more impressive yet. This group of chief executives started 1995 with an even larger reservoir of paper profit--$10.2 million versus $4.4 million for all chief executives in the study. Then they went on to pile up more profit than chief executives elsewhere in the country--$8.6 million per head.

And once again, folks, that’s before base salary and any performance bonuses. And, in short, that is why the CEOs of America are doing so well these days and most of the rest of us are not.

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Weighing Their Options

Here’s an estimate of the potential income that the chief executives of more than 30 Southern California companies earned or lost on their stock options in 1995, according to a recent study by executive compensation expert Graef Crystal:

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Amount Company CEO (millions) Walt Disney Michael Eisner $103.0 Amgen Gordon M. Binder 63.9 Mattel John W. Amerman 23.9 Northrop Grumman Kent Kresa 12.9 Avery Dennison Charles D. Miller 11.9 Diagnostic Products Sigi Ziering 11.6 Dole Food David H. Murdock 8.0 Great Western Financial James F. Montgomery 6.2 Benton Oil & Gas A.E. Benton 6.0 FileNet Theodore J. Smith 5.5 Coast Savings Financial Ray Martin 5.0 Fidelity National Financial William P. Foley II 4.8 Teledyne William P. Rutledge 3.6 Beckman Instruments Louis T. Rosso 2.6 Pacific Enterprises Willis B. Wood Jr. 2.4 Occidental Petroleum Ray R. Irani 1.8 Allergan William C. Shepherd 1.7 Varco International George I. Boyadjieff 1.6 Pacific Scientific Edgar S. Brower 1.3 Wynn’s International James Carroll 1.3 Southern California Edison John E. Bryson 0.8 CalMat A. Frederick Gerstell 0.4 Bell Industries Theodore E. Williams 0 Hilton Hotels Barron Hilton 0 Hollywood Park R.D. Hubbard 0 Standard Pacific Arthur E. Svendsen 0 BW/IP Peter C. Valli 0 Insurance Auto Auctions Bradley S. Scott 0 Syncor International Gene R. McGrevin -0.2 IHOP Richard K. Herzer -0.2 Superior Industries International Louis L. Borick -0.2 Merisel Michael D. Pickett -2.1

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