CEO pay: Grow profits, rewards will follow

PRINTING PAPER: Everett Pizzuti, retired CEO of Astro-Med Inc., said that he favored taking
PRINTING PAPER: Everett Pizzuti, retired CEO of Astro-Med Inc., said that he favored taking "modest CEO pays," believing that increasing the value of the company's stock was the best means to grow wealth. / PBN PHOTO/ MICHAEL SALERNO

Executive compensation is often a touchy subject.

Next year’s business strategy is an easier conversation to have compared with telling a CEO his or her compensation package is out of date and needs tweaking to better align with the firm’s financial performance.

But heightened public scrutiny, a more-stringent regulatory environment and increased shareholder involvement in the decision-making process, especially over the last decade, have increasingly forced publicly traded companies across the country to more closely tie executive pay to company performance.

Rhode Island has followed this trend, according to Anthony R. Wheeler, Spachman professor of human resource management at the University of Rhode Island.

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“Rhode Island publicly traded companies are very middle of the range,” Wheeler said. “They’re doing what a normal publicly traded company does in terms of not paying crazy amounts directly, but rather, CEOs are being incentivized based on performance goals.”

The strategy is called, “pay-for-performance.” Under this widely used compensation model, a typical CEO’s base salary, albeit several digits long, is just a slice of total compensation.

For instance, Woonsocket-based CVS Health Corp. CEO Larry J. Merlo heads the state’s largest publicly traded company and his 2014 base salary of $1.3 million was just 4.1 percent of his total compensation.

Tying a CEO’s financial livelihood to company stock options and incentive programs will – in theory – give them more reason to do better by the shareholders because it also represents a more lucrative opportunity personally.

The strategy sits well with many of Rhode Island’s public companies and CEOs.

“Executive pay should be based on the performance of the company and paid in stock … so the executive has a true ownership in the company,” said Joseph J. MarcAurele, chairman and CEO of Washington Trust Bancorp., parent of Westerly-based Washington Trust Co.

“Their performance and their ability to be paid [should be] based on a close alignment with what’s good for shareholders,” he added.

Regionally, CEOs – by and large – have done well for themselves and their companies over the last decade, despite having to deal with an economic crisis that turned on the stock market and hit Rhode Island harder than most.

Providence Business News examined the regulatory filings of 14 publicly traded companies in the Ocean State and Bristol County, Mass. Research shows average profit among those companies grew from $191.3 million to $493.1 million in the last decade, representing an average compounded annual growth rate of about 10 percent.

The average CEO compensation during the same period grew from $3.8 million to $6.4 million, representing an average compounded annual growth rate of about 5.4 percent.

CEOs regionally have done well in comparison with companies nationwide. The Economic Policy Institute, a left-leaning Washington, D.C., think tank, last year released a study examining CEO pay among the country’s largest 350 companies. Between 2000 and 2013, executive pay – on average – fell from $20.2 million to $15.2 million, representing an average compounded annual growth rate of negative 2 percent.

Between 1965 and 2013, however, CEO pay – on average – increased from $819,000 to $15.2 million, according to the study, which represents an average compounded annual growth rate of 6 percent. A typical worker’s compensation in the same period grew from $39,500 to $55,800 representing an average compounded annual growth rate of .45 percent.

Michael Dennis Graham, who has penned several books about executive compensation, said there’s often an “alarmist view” toward executive pay given the lofty figures, but in reality it’s a well-thought out and appropriate number that is tied to a number of different factors.

“I would argue that about 90 percent of the industry programs are doing what they are designed to accomplish,” Graham said. “Like any industry, there’s 10 percent of the industry that has a legitimate reason to be concerned.”

CEOs are often scrutinized for pulling in five, six or even seven-figure amounts, especially when compared with median wages in their respected industries, but as Graham and Wheeler both argue: there is rhyme and reason – when done correctly – to executive compensation.

“The first thing to consider is that executive compensation has three purposes: to attract, to [motivate] and to retain,” Wheeler said. “We, often times, outside of companies, look at executive compensation from a very personal standpoint, but companies have a different perspective – compensation is about the worth of a job.”

WHAT ARE THEY PAID?

Based on R.I. and Bristol County, Mass. companies’ 2014 federal filings with the Securities and Exchange Commission (ranked by total compensation):

1. Larry J. Merlo, president and chief executive of CVS Health Corp., received $32.3 million (Salary: $1.3 million; Bonus: NA; Stock awards: $6.7 million; Option awards: $4 million; Nonequity incentive plan compensation: $11.5 million; Change in pension value and nonqualified deferred compensation earnings: $8 million; Other compensation: $720,414).

2. Brian Goldner, president and CEO of Hasbro Inc., received $14.6 million (Salary: $1.3 million; Bonus: $0; Stock awards: $7.7 million; Option awards: $2.8 million; Nonequity incentive plan compensation: $2.3 million; Change in pension value and nonqualified deferred compensation earnings: $185,125; Other compensation: $297,938).

3. Scott C. Donnelly, chairman, president and CEO of Textron Inc., received $13.6 million (Salary: $1.08 million; Bonus: $0; Stock awards: $6.5 million; Option awards: $2.8 million; Nonequity incentive plan compensation: $1.7 million; Change in pension value and nonqualified deferred compensation earnings: $1.4 million; Other compensation: $75,370).

4. Bruce Van Saun, chairman and CEO of Citizens Financial Group Inc., received $10.5 million (Salary: $1.5 million; Bonus: $0; Stock awards: $4.9 million; Option awards: NA; Nonequity incentive plan compensation: $3.3 million; Change in pension value and nonqualified deferred compensation earnings: $0; Other compensation: $790,541).

5. Martha Sullivan, president and CEO of Sensata Technologies Holdings NV, received $5.2 million (Salary: $718,753; Bonus: NA; Stock awards: $1.1 million; Option awards: $2.3 million; Nonequity incentive plan compensation: $757,629; Change in pension value and nonqualified deferred compensation earnings: $228,609; Other compensation: $75,938).

6. Steven L. Spinner, president and CEO of United Natural Foods Inc., received $4.8 million (Salary: $872,300; Bonus: NA; Stock awards: $2.7 million; Option awards: $216,377; Nonequity incentive plan compensation: $964,682; Change in pension value and nonqualified deferred compensation earnings: $46,080; Other compensation: $80,080).

7. Michael J. Clarke, president and CEO of Nortek Inc., received $3.3 million (Salary: $958,673; Bonus: $116,228; Stock awards: $999,790; Option awards: $525,365; Nonequity incentive plan compensation: $623,811; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: $79,072).

8. Martin A. Kits van Heyningen, president, chairman and CEO of KVH Industries Inc., received $1.2 million (Salary: $453,202; Bonus: $1,000; Stock awards: $623,614; Option awards: NA; Nonequity incentive plan compensation: $91,733; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: $18,418).

9. Joseph J. MarcAurele, chairman and CEO of Washington Trust Co., received $1.1 million (Salary: $514,596; Bonus: NA; Stock awards: $208,653; Option awards: NA; Nonequity incentive plan compensation: $318,407; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: $93,005).

10. Jeffrey M. Thompson, president and chief executive of Towerstream Corp., received $694,069 (Salary: $373,277; Bonus: $240,800; Stock awards: N/A; Option awards: $79,992; Non-equity incentive plan compensation: $0; Change in pension value and non-qualified deferred compensation earnings: NA; Other compensation: NA).

11. Gregory A. Woods, president and CEO of Astro-Med Inc., received $666,056 (Salary: $287,796; Bonus: NA; Stock awards: NA; Option awards: $142,130; Nonequity incentive plan compensation: $182,120; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: $54,010).

12. Carol E. Bramson, chief executive of Summer Infant Inc., received $651,634 (Salary: $309,617; Bonus: $100,000; Stock awards: NA; Option awards: $240,000; Non-equity incentive plan compensation: NA; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: $2,019).

13. William A. White, president and CEO of Coastway Bancorp Inc., received $502,688 (Salary: $306,000; Bonus: $61,200; Stock awards: NA; Option awards: NA; Nonequity incentive plan compensation: NA; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: $135,488).

14. Robert H. Eder, chairman of Capital Properties Inc., received $263,500 (Salary: $263,500; Bonus: NA; Stock awards: NA; Option awards: NA; Nonequity incentive plan compensation: NA; Change in pension value and nonqualified deferred compensation earnings: NA; Other compensation: NA). n

Hasbro — Say on Pay

Hasbro Inc., based in Pawtucket, has a vocal group of shareholders who have become so active in the company’s executive-compensation process that it has driven the board of directors to amend aspects of CEO Brian Goldner’s contract.

Following the 2008 economic crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. Within that act came an initiative nicknamed, “say-on-pay,” which gives shareholders annual nonbinding votes on executive-compensation packages.

The say-on-pay initiative has drawn sharp criticism from opponents who say government shouldn’t mandate company decision-making, but the new allowance has had little effect thus far.

An estimated 98 percent of companies nationwide pass say-on-pay votes every year, but in 2014 Hasbro joined the minority and failed to pass the vote. Despite the nonbinding nature of the vote, Hasbro made an unusual decision.

“After a disappointing vote on executive compensation in 2014, our board and CEO mutually agreed to take the extraordinary step of reopening and amending aspects of our CEO’s existing employment agreement to address the views we heard most often from our shareholders,” wrote Alfred J. Verrecchia, chairman of the board, in an open letter to the company’s shareholders.

Goldner, who will take over as board chairman when Verrecchia retires this month, saw his pay cut 46.7 percent to $14.6 million in fiscal 2014. Goldner and the company also agreed to add return on invested capital as a metric for granting share awards, trimmed a performance multiplier from a different set of share awards and added new vesting components to stock awards.

Anthony Wheeler, URI professor of human resource management, says CEO contracts come with a lot of pressure.

“You have to think of CEO contracts like head coach contracts in the [National Football League],” he said. “These aren’t open-ended, they are contracts that are renewed and there is bargaining and negotiating.”

The board of directors hopes the tweaked contract will satisfy some of the concerns raised by shareholders and will likely find out when it holds its annual shareholders meeting on May 21. n

Astro-Med Inc. — Spending Wisely

One of Rhode Island’s smallest publicly traded companies, West Warwick-based Astro-Med Inc. is a manufacturer of specialty high-tech printing systems, electronic medical equipment and test and measurement instruments.

The company recorded $4.7 million in profit and $61.9 million in total assets last fiscal year.

Astro-Med comes from humble beginnings. It was founded as Atlan-Tol by Albert W. Ondis in 1969. He held the position of CEO until he retired in 2011 and passed away soon after. Everett V. Pizzuti, who helped found the company with Ondis, took over as CEO and retired last year.

He now sits on the board of directors and says the company has been able to survive all these years by living within its means.

“Albert … was not greedy and he and I had modest CEO pays,” Pizzuti said. “Our job was to grow the company and the value of the stock and we both had a significant amount of stock, which was the way we created our wealth.”

The company has slowly been increasing profits since the financial crisis and Pizzuti said they spent a lot of time during the lowest parts of the Great Recession investing in research and development, which allowed them to hang onto employees.

Executive pay at the company, however, has grown quickly since Ondis’ retirement. In 2010, Ondis was paid $281,428 and the new CEO, Gregory A. Woods, pulled in $666,056 last fiscal year, according to regulatory filings.

Pizzuti, now a member of the company’s board, is in the unique position of having worked in every facet of the company. It is now his job to help determine effective compensation packages for the new CEO in order to guide the company toward continued success.

“Well, I would say the company is generally continuing with the drive and philosophy that Albert Ondis and I initially started,” Pizzuti said. “As with changes, people like to make their own mark, so the current executives are doing some things that we hadn’t done before and time will tell how it will develop.” n

Washington Trust — Steady Eddie

Joseph J. MarcAurele became CEO of Washington Trust Bancorp Inc., and its subsidiary Washington Trust Co., in 2010 and has led the company to sustained profit growth every year so far, which he attributes – in part – to an effective compensation system.

MarcAurele, who started his career as an educator and athletic director, decided in his 30s to enter into the world of banking. Early in his career with Fleet National Bank he had reservations that he would ever become a branch manager, let alone the top executive of a financial institution. Along the way, however, he found that success comes with earning respect from the industry and the people within it.

“I’ve come in contact with a lot of talented people that I’ve worked with in the past and I’ve been successful to get a number of them to follow me and they produce the results. All I do is put them in a position for them to produce those results,” MarcAurele told PBN. “It is all about the people around you. They will make you look good and make you successful.”

Washington Trust profits have grown steadily since bottoming out in 2009 when the company reported $16 million in net income. Last fiscal year, the company reported $40.9 million, representing a compound annual growth rate of 20.5 percent.

Since MarcAurele became CEO in 2010, the company has reported four consecutive years of record-breaking net income. MarcAurele says Washington Trust’s method of tying pay to performance is “the correct way to do it.”

“I believe executives should be fairly compensated for correct behavior. In banking that means sound growth and profitability without taking undue risk,” MarcAurele said.

Despite the strong profit margins, MarcAurele says the regulatory climate and central bank’s easy-money policies have put stress on the financial industry. He and his fellow executive officers and directors agreed to reduce their equity compensation in order to “improve the corporation’s financial performance,” according to a recent regulatory filing.

MarcAurele’s pay fell 12 percent to $1.1 million in 2014, as profit grew 13 percent to $40.8 million.

Since taking over as CEO, Marc-Aurele’s annual compensation has actually decreased at a compound average growth rate of negative 4.9 percent, though the numbers are slightly skewed by both last year’s reduction and first-year compensation of a $377,300 life insurance plan.

The executives, along with the board of directors, made the decision two years ago to make the 2014 cuts in anticipation of a poorer economic climate. MarcAurele said they outperformed their – and analysts’ – projections, but decided to take the cuts anyway because they had already made that decision.

“We were trying to be proactive and it is in my opinion that it was the right thing to do for shareholders and the company at the time and as it turned out we were able to perform better,” he said.

MarcAurele says a more conservative approach to pay is indicative of the industry. The bank’s philosophy is to pay its executives at the 50th percentile benchmark among its peers in the industry, he added.

“We want to be average and at the same time, I think, the overall nature of the company and the board is always going to be on the conservative side,” MarcAurele said. “Personally, I’m not uncomfortable with that.” n

CVS — A Healthy Approach

Woonsocket-based CVS Health Corp. is Rhode Island’s largest publicly traded company and pays its top executive accordingly.

Larry J. Merlo became CEO in 2011 and was paid $14 million that year.

Last year he received $32.3 million in total compensation. His more than doubled salary over four years coincided with profits growing about $1.2 billion, to $4.5 billion in 2014.

The company says its philosophy on compensation is based on both short- and long-term performance.

“We believe our multifaceted executive-compensation plans provide an effective framework by which progress against our strategic goals may be appropriately measured and rewarded,” the company told PBN in a statement. “We believe that our efforts during the past three years set the stage for our 2014 results and continued strong performance.”

The company in the last decade has grown profits from $919 million in 2004 to $4.6 billion in 2014, representing a compound annual growth rate of 17.6 percent, and the company is rewarding its CEO for making bold business decisions. Timothy M. Ryan, former CEO, received $13.4 million in 2004, which is 141.1 percent less than what Merlo made last year.

CVS last year eliminated the sale of tobacco products in its retail stores and along with it about $2 billion in annual revenue.

“That is a huge gamble,” URI human resource management professor Anthony Wheeler said, noting the decision. “They are incentivizing long-term financial marks for the CEO to hit because there’s no way that he just made that decision without [the board] giving him some assurance.”

In a joint letter to their shareholders, Merlo and David W. Dorman, chairman of the board of directors, said the decision to cut tobacco sales would help drive “long-term growth.”

“It better aligns the company with patients, payers and providers as they search for ways to improve health outcomes and control costs,” they wrote. “Our company is at the forefront of an evolving health care landscape and our new name reflects our broader health care commitment.”

In its first full quarter without tobacco sales – the fourth quarter of last year – CVS recorded a 13 percent increase in sales, finishing at $37.1 billion, which topped analysts’ average projection of $36 billion. The company said 2014 revenue increased 9.9 percent to a record $139.4 billion, from $128.6 billion in 2013. A severe fourth-quarter flu season and growth in prescription drug sales helped make up for the loss in tobacco sales.

A comparison of third-quarter earnings for last year and 2015 should shed more light on how the decision paid off, as the goal was to completely eliminate tobacco sales from all retails stores by Oct. 1 of last year. •

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