Sunday, July 06, 2003
Copyright © Las Vegas Review-Journal

EXECUTIVE COMPENSATION: Worth their weight?

Many 2002 pay increases for Nevada corporate bosses linked to strong profit jumps

Click above for enlarged image. Illustration by Anton. Click above for enlarged image.

"Pay for performance" is the mantra companies trot out when they explain their corporate compensation plans.

Salaries and bonuses for chief executive officers, the top bosses who run day-to-day finance, marketing and operations, go up when the company grows bigger and more profitable, the argument goes.

While CEOs around the country are defending recent salary increases despite declining corporate earnings, Nevada's top bosses don't have to make such excuses.

Big salary increases in 2002 were based, in part, on healthy profits despite 2001 economic doldrums. Most of the biggest Nevada companies increased income last year, suggesting that 2003 will be a banner year at the CEO pay window.

Robust 2002 earnings by the state's biggest casino operators were matched by equally impressive salary and bonus increases, based, in most cases, on 2001 performance, Securities and Exchange Commission filings for Nevada's most prominent publicly traded companies show.

Eight of the companies are gaming companies, including seven casino operators and a slot maker. Two major utilities and Sierra Health Services are the others surveyed.

Million-dollar-plus salaries and bonuses aren't even the biggest part of total CEO compensation, A recent Wall Street Journal/Mercer Human Resource study found.

Long-term incentives such as stock options and retirement pay are the main vehicles for CEO compensation, the study released in April shows. About 68 percent of all CEO pay is long-term incentive pay; salaries and bonuses make up only a 32 percent share.

But that salary and bonus share jumped dramatically for a number of the state's leading executives, results that coincided with strong 2002 performances by most of the state's biggest companies.

The state's biggest gaming companies were able to report healthy earnings increases last year based on small revenue jumps because of comparisons to exceptionally poor 2001 earnings, which were dragged down by the recession and after effects of the Sept. 11, 2001, terrorist attacks.

Among the stellar performers:

• Reno-based International Game Technology reported a 51.8 percent income increase to $331.3 million as the company benefited from its market dominance and the industry's move toward coinless slots.

• Las Vegas-based Mandalay Resort Group reported a 118 percent increase in income to $115 million, a jump boosted by steady increases in nongaming revenue, particularly hotel room revenue at its flagship Mandalay Bay megaresort.

• Las Vegas-based MGM Mirage income was up 72 percent to $292 million.

• Las Vegas-based Sierra Health Services, a health maintenance organization, reported a better-than-tenfold increase in income, to $36.4 million from $3.5 million.

While making strong cases for 2003 salary increases, many of the state's top bosses did quite well in 2002, as IGT's Tom Baker collected $2.8 million, an 8 percent increase; Mandalay Resort's Mike Ensign received $2.8 million, a 65 percent boost; and MGM Mirage's Terry Lanni garnered $4.1 million, a 78 percent jump.

CEO pay is primarily based on two criteria: the size of the executive's company, measured by revenue; and the company's profitability, said executive compensation expert Mae Lon Ding, president of Anaheim Hills, Calif.-based Personnel Systems Associates.

Park Place boss Wally Barr, who succeeded Tom Gallagher at the helm of the industry's top revenue producer in November, collected $1.6 million, a 14 percent increase above his 2001 salary and bonus, when he served as Gallagher's operations man.

Park Place reported an $821 million loss last year because of new federal rules that forced the company to take a one-time charge, writing down the value of goodwill associated with major acquisitions.

Some corporations point to industry studies as the basis their boards used in setting the top executive's salary and compensation.

Sierra Pacific Resources, the parent company of Nevada Power Co., relies on a national consulting firm for guidance on its executive compensation and salaries, said Sonya Headen, a company spokeswoman.

"These salaries, we believe, are well within the electric utility industry standards," she said.

Roger Buehrer, a spokesman for Southwest Gas Corp., declined to elaborate on an annual meeting proxy statement that outlines the gas company's policy on CEO compensation.

The proxy states that the salary of Michael Maffie, chief executive officer, "is set relative to the midpoint level for salaries paid to chief executive officers of comparable companies, taking into consideration the length of service in his current position."

A Southwest Gas incentive plan rewards executives based on company profits, customer-to-employee ratios and customer service satisfaction.

Maffie last year received a 6 percent increase in his base salary and $311,190 in bonuses.

The salary of Dr. Anthony Marlon, chairman and chief executive officer of Sierra Health Services, didn't increase last year, said Peter O'Neill, a Sierra Health spokesman. The board instead decided to pay a bonus to Marlon based on the company's operating income and other financial performance indicators.

The company reached 180 percent of its operating income goal.

"The stock has appreciated significantly over the last several months, including in 2002," O'Neill said.

Competition for proven CEO talent is keen, a factor that drives companies' boards of directors to both overpay and write contracts that don't penalize poor performance, Ding said.

"Boards want a proven commodity, a proven winner," Ding said. "You need to be competitive, but you don't want to pay the best unless you're getting the best. Unfortunately, the best paid is rarely the best performer."

Many companies also make the mistake of giving CEO's contractually guaranteed payments if they're forced out of their jobs, she said.

"Directors need to ask how their formula-driven pay plans, their golden and platinum parachutes, will treat the CEO if the business goes downhill," Ding said. "In effect, they're telling the CEO that 'If you fail, we'll make you rich.' "

Critics of escalating CEO salaries believe Corporate America falsely claims that executive pay is linked to performance.

Compensation committees on boards of directors routinely justify double-digit salary and bonus increases despite poor performance, the critics argue.

Investor Warren Buffett, the nation's second-richest man, recently criticized escalating executive salaries and called for compensation committees to reduce executive pay as a way to win back investor confidence following recent corporate governance scandals.

Buffett puts his money where his mouth is; the Berkshire Hathaway boss collects a $100,000 annual salary.

Securities and Exchange Commission Chairman William Donaldson also called on corporate boards to rein in executive pay.

"(CEOs have) steadily increased in power and influence" during the past 10 years, Donaldson said in a recent Bloomberg report. "In some cases the CEO had become more of a monarch than a manager."

But much of the criticism doesn't stick to the casino industry, at least last year, experts said.

The Nevada CEO reporting the biggest salary and bonus combination last year was former Harrah's Entertainment CEO Phil Satre.

Satre, who resigned his executive position at the end of last year and remains chairman of the board, collected $5 million last year including almost $3.9 million in bonuses.

Harrah's reported $326 million in 2002 income, a 56 percent increase.

"It's tough to criticize CEO pay if the company's growing and making more money," Ding added.