A Board's Eye View On Executive Pay

  How card-industry executives made out financially in 2004 depends on whom you ask. Overall salaries and bonuses certainly were up at most companies, but bonuses plus salaries actually declined as a percentage of total compensation from the previous year. As a result, other compensation components, particularly options exercised, are bringing home the bacon.
  The median total compensation among the card-industry executives examined by Cards&Payments was $1.78 million, up about 77% from $1.01 million in 2003. The median salary was $410,770, up 11.3% from $369,000 in 2003. The median bonus for card-industry executives was $514,180, a whopping 87.9% increase from $273,619 in 2003.
  Richard Fairbank, Capital One Financial Corp. chairman, president and CEO, topped the overall 2004 compensation list. He received $56.7 million, up considerably from $67,544 in 2003 and way ahead of the next top-four highest paid executives.
  Jeffrey Jordan, president of eBay Inc.'s Pay Pal, received $23.8 million, nearly double the $12 million he earned in 2003. Kenneth Chenault, chairman and CEO of American Express Co., came in third at $19.8 million, up some 61% from $12.3 million in 2003.
  How executives are paid is changing in all industries, says Shekhar Purohit, a senior consultant with Chicago-based The Delves Group. Executive pay levels have been rebounding in the last 12 to 18 months, he says, but the look and feel of the pay packages are different than they used to be two or three years ago.
  Public companies are more judicious about how they pay executives, partly because of pressure from the U.S. Securities and Exchange Commission to provide clearer, more detailed disclosure of their compensation packages. The SEC's directive was clarified in October when Alan Beller, director of the agency's Division of Corporate Finance, gave a speech to a conference of executive-compensation professionals.
  "He gave the speech to send a message, 'This is what we expect you to do going forward,'" says Mike Melbinger, head of executive compensation at Winston & Strawn in Chicago. "That's when things changed 180 degrees."
  It is easier to pressure boards to pay executives judiciously when everyone knows who is getting paid what, how and why. Peruse MBNA's latest proxy statement and one can learn not only what the company's top executives earned last year and what they are set to earn when they retire, but also which of their relatives work for the firm and how much they make.
  Such detail is helping to dampen the excesses in perquisites and hidden retirement and tax benefits that companies such as MBNA made infamous in the past. It also has brought overall compensation down for what Melbinger calls "pure play" card companies that deal only in payment cards while other forces have nudged up pay for executives in the credit and debit card divisions of investment banking companies.
  "You have the MBNAs and Cap Ones, who are public and have people scrutinizing their compensation information, which is causing them to come a little bit toward the middle, while you also have the large financial-service providers who are now starting to pay their credit card division heads a little more," Melbinger says.
  That does not mean that card executives cannot be compensated well. Melbinger says he counsels boards to pay their executives competitively but disclose every dollar.
  Which brings us back to the bonus. The average bonus was up 87.9% from 2003. AmEx's Chenault saw his bonus jump 71.4% last year, to $6 million from $3.5 million in 2003. James Cracchiolo, AmEx's group president of global financial services, saw his bonus jump 202%, to $3.1 million last year from $1 million in 2003.
  Bonuses are tied more to company performance than they were in the past. That seems fair enough, but when a company has a couple of years of double-digit growth, a subsequent normal year can seem like a tepid performance. And that puts card executives paid according to the numbers in a jam, says Susan Allard, president of Allard Associates Inc., a San Francisco-based executive search firm.
  "It's getting harder and harder for a great big company with a lot of market share to meet these growth targets," she says. "One guy said, 'Gee, if I'm going to meet these growth numbers, I need to acquire a whole country.'"
  Many boards are tying bonuses to other measures, such as an increased focus on employee retention and internal management development, according to Daina Di Veto, managing director of Card Resource Group, a Lynden, Ontario executive search firm.
  Stock options are not as valued as they once were, even at companies that showed gains. The volatility of the past few years has made executives unsure they will be with a company long enough to collect any benefit, says Kathryn Trott, president of Woodlands, Calif.-based e-Trott Inc. They fear their firm could be merged, acquired or slow to perform, or their position could be downsized, consolidated or transferred overseas.
  Options have regained a little of their luster, and they tell a better story now than they did three or four years ago, according to Di Veto, who also believes card executives prefer more tangible bonuses.
  It was a good year to get an executive position in some sectors of the card industry, despite consolidation, according to analysts. Firms that had been holding back on necessary hires reached a point of no return and are finally adding workers in all areas, Di Veto says.
  "We have seen a resurgence of senior marketing positions," Di Veto says. "Until this year, marketing had been particularly flat for the previous three years."
  And there is opportunity to work with consumers who were a bit too susceptible to marketing campaigns of the past. Collections, for example, is an area of job growth, both with issuers and third-party agencies, as is risk management because of expansion into the acquiring and payment sectors, Trott says.
  More executives who already have jobs are staying put, according to Trott and Di Veto. "There continues to be a reluctance to change companies, as managers and executives seem to prefer the devil they know to the devil they don't, unless there is an overwhelming reason to make the move," Di Veto says.
  Trott says executives are only looking to change jobs if they feel their company is unstable or vulnerable to acquisition, or they are soon to be out of work.
  Those executives who have been ousted by disruptions such as mergers do not necessarily want to work for similar big companies, Allard says. Many are being drawn to new opportunities in smaller companies set to benefit from the growth of emerging payments.
  Other executives are doing what many employees affected by downsizing do, which is to start their own businesses, Allard says.
  Card executives generally care more about having a life outside of work than they once did, Trott says. "A good job that allows you to have a quality of life with your friends and family is more important than a great position with a high risk of family dislocation, separation or slightly higher compensation at a riskier company," she says.
  Indeed, more executives are entering jobs wanting guarantees that their quality of life will be maintained in retirement. "We are fielding more questions now, and earlier in the process, about pension plans and 401K contributions," Di Veto says, attributing the trend to the aging workforce. "People are closer to retirement and don't want to move to a job where their future pension income isn't going to grow."
  With the SEC and shareholders expecting better disclosure of severance and retirement benefits along with everything else, executives should not expect the gonzo retirement packages that some executives enjoyed in the past.
  The SEC is paying close attention to proper disclosure of the supplemental executive retirement plans, or SERPs, that many executives receive. SERPs usually offer better benefits than do the general pension plans most employees receive. Fair enough, say Melbinger and Purohit, but SERPs often have left boards with surprises from hidden benefits such as one-time awards of restricted stock treated as annual pay that unnaturally inflated the pension.
  "These are legacy plans that are going away," Purohit says. "The reason they're going away is that compensation committees are doing a better job."
  Bottom line, executives increasingly are being paid what they are worth. And boards are watching the financial impact of every incentive plan and executive-pay program in the company.
  EXECUTIVE COMPENSATION TRENDS
   2004 2003 Change
  Median Total Comp. $1,784,485 $1,005,062 77.50%
  Median Salary 410,770 369,000 11.30
  Median Bonus 514,180 273,619 87.90
  Median Salary & Bonus
   As % of Total Pay 51.80% 63.90%
  Source: Standard & Poor's.
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