Executive CompensationExecutive Compensation

Amy SachsAmy SachsKellie MacMullanKellie MacMullan

Meagan MucciaroneMeagan MucciaronePaul HainesPaul Haines

Highest Paid CEO’sHighest Paid CEO’sYearYear CEO, CompanyCEO, Company CompensationCompensation

19901990 Steven Ross, Time Steven Ross, Time WarnerWarner

$75,000,000$75,000,000

19911991 Roberto Goizueta, Roberto Goizueta, Coca-ColaCoca-Cola

$61,000,000$61,000,000

19921992 Alan Greenberg, Bear Alan Greenberg, Bear StearnsStearns

$16,000,000$16,000,000

19931993 George Fisher, George Fisher, Eastman KodakEastman Kodak

$29,000,000$29,000,000

19941994 Lawrence Coss, Allied Lawrence Coss, Allied SignalSignal

$34,000,000$34,000,000

19951995 Lawrence Coss, Lawrence Coss, Green Tree FinancialGreen Tree Financial

$66,000,000$66,000,000

19961996 Michael Eisner, Walt Michael Eisner, Walt DisneyDisney

$194,000,000$194,000,000

19971997 Henry Silverman, Henry Silverman, CedantCedant

$194,000,000$194,000,000

19981998 Michael Dell, Dell Michael Dell, Dell CompterCompter

$94,000,000$94,000,000

19991999 Charles Wang, Charles Wang, Computer AssociatesComputer Associates

$507,000,000$507,000,000

20002000 Steven Jobs, Apple Steven Jobs, Apple ComputerComputer

$381,000,000$381,000,000

DefinitionDefinition

Governance mechanism that seeks Governance mechanism that seeks to align the interests of managers to align the interests of managers and owners through salaries, and owners through salaries, bonuses, and long term incentive bonuses, and long term incentive compensation, such as stock options.compensation, such as stock options.

Strategic Management: Competitiveness and Globalization

Executive CompensationExecutive Compensation

Looking at:Looking at: PayPay BonusesBonuses PerformancePerformance Company makeupCompany makeup Stage Stores: Company and CEOStage Stores: Company and CEO

Interview with CEOInterview with CEO

Jim Scarborough, President, CEO, and Jim Scarborough, President, CEO, and Chairman of the Board—Stage Chairman of the Board—Stage Stores, IncStores, Inc

Stage StoresStage Stores

Stage Stores, IncStage Stores, Inc– Retail IndustryRetail Industry– 3 Department Stores: Bealls, Palais 3 Department Stores: Bealls, Palais

Royal, StageRoyal, Stage– ““Think Big in Small Town America” Think Big in Small Town America” – Headquarters in Houston, TXHeadquarters in Houston, TX– 362 Stores, mainly South Central362 Stores, mainly South Central– Over $1 Billion/yearOver $1 Billion/year

Jim ScarboroughJim Scarborough

CEO, President and CEO, President and Chairmen of Stage Stores for Chairmen of Stage Stores for over 3 yearsover 3 years

53 years old53 years old

Previously CEO at:Previously CEO at:– BusyBody-Fitness BusyBody-Fitness

equipmentequipment– Seattle Lighting-Lighting Seattle Lighting-Lighting

Fixture Fixture

Executive Compensation Executive Compensation BasicsBasics

Executives-Who are they?Executives-Who are they?

Key Employees in companyKey Employees in company

CEO, CFO, COOCEO, CFO, COO President, VPs, DirectorsPresident, VPs, Directors

What is Executive What is Executive Compensation?Compensation?

Core Compensation= Base Pay & BonusCore Compensation= Base Pay & Bonus Less than $1,000,000 due to tax implicationsLess than $1,000,000 due to tax implications

Short term IncentivesShort term Incentives

Stock OptionsStock Options

Fringe CompensationFringe Compensation

Issues With Compensation Issues With Compensation PackagesPackages

If CEO holds over 1% of stock, hard If CEO holds over 1% of stock, hard to fireto fire

Bonuses often cause oversight of Bonuses often cause oversight of long term goals long term goals

Jim Scarborough’s Compensation Jim Scarborough’s Compensation PackagePackage

Pay, bonusesPay, bonuses Long-termLong-term

– Company matches, defers incomeCompany matches, defers income Stock optionsStock options Car AllowanceCar Allowance Extra DiscountExtra Discount Life InsuranceLife Insurance 100% paid medical plans100% paid medical plans

– No deductible or premiumNo deductible or premium

Who Sets Executive Comp?Who Sets Executive Comp?

Different for Each CompanyDifferent for Each Company Compensation Consultants Compensation Consultants Compensation CommitteesCompensation Committees Board of DirectorsBoard of Directors ShareholdersShareholders

Board of DirectorsBoard of Directors

Is it fair for Board of Directors to Is it fair for Board of Directors to determine salary?determine salary?

““Boards are often quite friendly with the Boards are often quite friendly with the CEOs and find it hard to impose large CEOs and find it hard to impose large decreases in compensation on their decreases in compensation on their friends”friends”

Boards should usually be made of Boards should usually be made of outsiders to avoid much conflictoutsiders to avoid much conflict

Executive Compensation and Shareholder Value

How Stage Does ItHow Stage Does It

Compensation Committee Compensation Committee – Info from Hay Associates & Hewitt Info from Hay Associates & Hewitt

AssociatesAssociates– Pay gradesPay grades

Philosophy: to pay at 75Philosophy: to pay at 75thth percentile percentile

Brought to Board for RatificationBrought to Board for Ratification

Let’s Look at Salaries…Let’s Look at Salaries…

Are CEOs paid based on performance?Are CEOs paid based on performance?

Are CEOs paid based on industry?Are CEOs paid based on industry?

Are CEOs paid based on company size?Are CEOs paid based on company size?

Comparing Industry SalariesComparing Industry Salaries

Retail IndustryRetail Industry GAPGAP NORDSTROMNORDSTROM STAGE STORESSTAGE STORES

Financial Service IndustryFinancial Service Industry MERRILL LYNCHMERRILL LYNCH JP MORGAN CHASEJP MORGAN CHASE JANUS MUTUAL FUNDSJANUS MUTUAL FUNDS

Paul S. PresslerPresident and CEO of the Company

2002 $535,045 $885,000 $1,420,045

Gary MutoPresident, Gap U.S. Division

2002 $770,620 $1,045,385 $1,816,005

Jenny J. MingPresident, Old Navy Division

2002 $952,109 $1,291,077 $2,243,186

Kenneth S. PilotPresident, Gap International Division

2001 $648,670 $0 $648,670

GAP INCTWO FOLSOM STREETSAN FRANCISCO, CA(415) 952-4400Executive Comp Summary

John J. WhitacreFormer Chairman of the Board and CEO

2000 $433,333 $0 $433,333

Robert J. MiddlemasEVP

1999 $255,000 $194,116 $449,116

Blake W. NordstromPresident

2001 $580,000 $0 $580,000

NORDSTROM INC1617 SIXTH AVENUESUITE 500SEATTLE, WA(206) 628-2111Executive Comp Summary

Vivian BakerEVP, General Merchandise Manager

2001 $314,615 $704,000 $1,018,615

Michael E. McCreeryEVP and CFO

2001 $338,558 $770,000 $1,108,558

Ron LucasEVP of Human Resources

2001 $266,154 $605,000 $871,154

James ScarboroughChairman, CEO and President

2001 $720,192 $1,875,000 $2,595,192

STAGE STORES INC10201 MAIN ST5847 SAN FELIPE ST STE 2600HOUSTON, TX(713) 667-5601Executive Comp Summary

E. Stanley O'NealCEO

2002 $500,000 $7,150,000 $7,650,000

John L. SteffensVice Chairman

1999 $400,000 $5,765,000 $6,165,000

David H. KomanskyChairman of the Board

2002 $700,000 $7,000,000 $7,700,000

MERRILL LYNCH & CO INC4 WORLD FINANCIAL CTRNEW YORK, NY(212) 449-1000Executive Comp Summary

Douglas A. WarnerChairman of the Board

2000 $700,000 $13,700,000 $14,400,000

William B. HarrisonChairman and CEO

2001 $1,000,000 $10,000,000 $11,000,000

J P MORGAN CHASE & CO270 PARK AVE39TH FLNEW YORK, NY(212) 270-6000Executive Comp Summary

Landon H. RowlandChairman of the Board, President and CEO

2002 $825,000 $0 $825,000

Thomas H. BaileyChairman, President and CEO of JCC

2002 $486,779 $0 $486,779

JANUS CAPITAL GROUP INC100 FILLMORE STREETDENVER, CO(303) 333-3863Executive Comp Summary

As You Can See…As You Can See…

Within each industry:Within each industry:

Size of company does not reflect Size of company does not reflect salaries of CEOssalaries of CEOs

Difference between industries:Difference between industries:

Industries reflect a large pay Industries reflect a large pay difference to CEOs difference to CEOs

What Do You Think:What Do You Think:

Should company size or Should company size or industry type determine industry type determine

pay?pay?

Does Salary=High Does Salary=High Performance?Performance?

CompanyCompany Change in Change in Stock PriceStock Price

Salary Salary ChangesChanges

JP MorganJP Morgan -$10/Share-$10/Share $10 million bonus $10 million bonus for mergerfor mergerNo performance No performance bonusbonus

GapGap No ChangeNo Change $.5 Million raise in $.5 Million raise in bonusbonus

Merrill LynchMerrill Lynch -$5/Share-$5/Share Bonus up from $1 Bonus up from $1 million to $7 Millionmillion to $7 MillionCut 28.9% jobsCut 28.9% jobs

CEO CompensationCEO Compensation

Citigroup Share price down 25%, Citigroup Share price down 25%, Stock bonus went from 17 million to Stock bonus went from 17 million to 17.9 million17.9 million

Bear Stearns profits rose, pay Bear Stearns profits rose, pay doubled to $19.6 milliondoubled to $19.6 million

E*Trade Group resigned after taking E*Trade Group resigned after taking $80 million pay package$80 million pay package

After pressure from investors Delta After pressure from investors Delta CEO gave up $9.1 in bonusesCEO gave up $9.1 in bonuses

ReasoningReasoning

Board of Directors feel exec’s Board of Directors feel exec’s deserve high salarydeserve high salary Doing good job in hard timesDoing good job in hard times Doing more work to manage in a bad Doing more work to manage in a bad

economyeconomy

How Should Executives Be How Should Executives Be Paid?Paid?

Strictly performance based?Strictly performance based?

Because of responsibility ok to Because of responsibility ok to pay even when not performing pay even when not performing well?well?

What do you think?

ConclusionConclusion

Executive Compensation is differentExecutive Compensation is different

Much more than just salaryMuch more than just salary

Always a debatable topicAlways a debatable topic

Ever-growing issue with the current Ever-growing issue with the current economyeconomy

Questions?Questions?