CEOs Getting Handed a Bigger Slice of the Pie

In Hollywood, you know you’ve made it when you can command a piece of the box office.

In corporate America, executive pay is rising so fast that many can now look at their pay through a similar lens: as a percentage of their company’s profit.

The $5.5 million that former Gateway Inc. Chief Executive Wayne R. Inouye made last year amounted to 89.4% of the company’s annual earnings. At Broadcom Corp. in Irvine, CEO Scott A. McGregor was rewarded with a pay package that equaled 15.7% of the company’s 2005 profit.

The salary, bonus and stock given last year to chief executives at California’s 100 largest publicly traded companies averaged 6.6% of their companies’ annual earnings, according to The Times’ annual executive compensation survey.

In terms of pay, the list was topped by Occidental Petroleum Corp. Chief Executive Ray Irani, who earned $71.6 million in direct compensation in 2005 as Oxy’s sales and profit soared amid rising energy prices.

But as a percentage of profit, the winner was W. Donald Bell of Bell Microsystems Inc. of San Jose, whose $1.2 million translated to 248.5% of the company’s profit. That percentage was skewed by the fact that the company made just $481,000 as the result of restructuring charges, said Jim Illson, Bell’s chief financial officer.

In all, 21 of California’s chief executives can boast that they earned 5% or more of what their company made, according to survey data compiled for The Times by Salary.com. For seven CEOs, a meaningful percentage could not be calculated because their companies lost money.

Underlying the profit percentages is a continued escalation in executive pay.

The CEOs earned a combined $1.32 billion in 2005, up 20% from 2004. Nineteen executives earned $20 million or more, up from 12 in the previous year.

Broadcom’s McGregor was No. 3 on the list at $64.7 million, primarily because of stock options he was granted that Salary.com values at $57 million. The company disagrees with that valuation of the options but defends the compensation package overall.

“When Scott came on board as Broadcom’s new CEO in January 2005, the company made a long-term investment by granting him an industry-competitive number of options and restricted stock units,” company spokesman Bill Blanning said. “We believe that his compensation package is fair, and that the company and shareholders are benefiting substantially from the investment in his leadership.”

Broadcom earned $412 million in 2005, up 88% from the previous year. But Rob Daines, a Stanford University business professor, contends that no matter how good a job McGregor does, it defies logic to give him an amount equal to 15.7% of profit. “If he’s doing 15% of the work, I guess a lot of the other people could just pack up and go home,” Daines said.

KB Home Chief Executive Bruce Karatz has a profit clause written into his contract. According to the Westwood company’s proxy statement, he’s entitled to between 1% and 2% of the company’s earnings before it pays taxes or incentives to its top executives. The company doesn’t disclose what this base figure is, but Karatz was paid $46 million in 2005, or 5.5% of KB Home’s net income.

California executives aren’t the only ones causing corporate bottom lines to sag, of course. A recent study concluded that executive compensation equals a greater percentage of corporate profit nationwide.

The study, by Harvard Law School economics and finance professor Lucian Bebchuk, examined pay for the top five executives combined at 1,500 publicly traded companies. It found that pay for the top tier rose from 5% of profit in 1993 to 10% in 2003.

“It has definitely taken a toll on corporate value and profit,” Bebchuk said. “These executives took $350 billion over a 10-year period. That’s an economically meaningful amount of money.”

Why are CEOs paid so much? According to the companies, the high pay is needed to attract and retain the kind of leaders who can generate strong profit.

“It’s pay for performance,” said Larry Meriage, spokesman for Westwood-based Occidental. “If you look at our peer group, you can see that Occidental has dramatically outperformed its peers, individually and collectively.”

Oxy’s Irani earned five times as much last year as David J. O’Reilly, who heads the much larger Chevron Corp. But Oxy earns $19.45 on each barrel of oil it produces, while Chevron earns just $13.35 a barrel, Meriage said. (Chevron, which also produces natural gas and chemicals, says it doesn’t disclose earnings per barrel of oil.)

“Everybody in the industry has benefited from higher oil prices, but when you look at performance on a per-barrel basis, Oxy has clearly outperformed,” Meriage said.

Irani’s top-ranking $71.6 million pay package consists of $4.9 million in salary and bonus, $10.6 million in long-term incentive payouts, $30.9 million in grants of stock, $2.6 million in miscellaneous compensation and options valued at $22.6 million.

Stock options are rights to buy shares at a fixed price. The Times’ survey does not count options granted in previous years that were cashed out. Instead, it assigns a value to options granted in the most recent fiscal year using the Black-Scholes pricing formula, which is widely used by compensation experts.

Valuing options is far from an exact science. Depending on how the stock performs, the options could be worth more or less than their estimated value.

Gateway’s Inouye, for example, was ranked as California’s second-highest paid chief executive in last year’s survey as the result of an option grant valued at $39.9 million. But those options expired and were rendered worthless this year, when Inouye resigned, company spokesman David Hallisey said.

The current Times survey ranks Inouye No. 61, with a compensation deal that works out to 89% of Irvine-based Gateway’s profit. That pay-to-profit ratio, Hallisey said, is misleading because some of the compensation paid in 2005 was related to the company’s 2004 acquisition of eMachines.

In McGregor’s case, Broadcom contends that a more accurate value of his options would be $21.4 million rather than the $57 million estimated by Salary.com. Although the options have a 10-year life, the company figures McGregor will exercise them sooner, and thus they will not be worth as much.

Broadcom shares would need to appreciate at an average of about 6.5% a year for the next 10 years for McGregor’s shares to be worth $57 million.

That may appear optimistic, but an index of big company stocks has earned average annual returns of 10.4% since 1925, according to Ibbotson Associates, a Chicago-based market research firm. Over the past 12 months, Broadcom’s stock has risen 42%, closing Friday at $34.56.

Options have proved to be very valuable for Yahoo Inc.’s Terry Semel, who was No. 2 on this year’s list with a compensation package valued at $66.9 million. That figure does not include $173.6 million that Semel earned on options granted in previous years, because they were rewards from past years’ work.

Semel was No. 1 in last year’s survey with $145 million. Yahoo earned $1.9 billion in 2005, up from $840 million the previous year. Its shares rose 4% in 2005, but so far this year are down 15.7%, to $33.02 on Friday.

For most executives on the list, the bulk of their pay is garnered from salary, bonus and grants of stock and options. But proxy statements include a category called “other” that can be a gold mine as well.

R. Chad Dreier, CEO of Calabasas home builder Ryland Group, earned $9.5 million in “other” compensation on top of his $1 million salary, $16.5 million bonus and $7.3 million in stock grants.

Ryland earned $447 million in 2005, up 39.5% from the previous year.

What was included in the “other” compensation to Dreier? According to the company’s regulatory filings, it includes about $700,000 for his retirement plan and about $2.1 million in insurance premiums.

About $139,258 covers his personal use of the company’s private plane and reimbursements for “personal health and fitness” programs.

But the biggest single component -- $5.5 million -- is for taxes, or rather, to make sure that Dreier doesn’t have to pay them on benefits that the company provides him.

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Profit taking

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