As the economy limped along in 2002, many Americans saw meager pay raises and little or no annual bonuses. And locally, that pain extended to the corporate boardroom too.
The number of million-dollar executives in the Lehigh Valley region dropped from 11 in 2001 to six last year, according to a Morning Call analysis of bigwig pay at 17 local public companies.
And nearly half of the executives whose pay information was available in both 2001 and 2002 28 of 63 saw an overall pay freeze or pay cut.
Numbers for the local executive compensation study were crunched by the Philadelphia office of Mercer Human Resource Consulting, which advises companies on how much they should pay their executives.
The strategy behind paying an executive is to provide a financial reason to do good things for the company and owners of its stock. Meanwhile, board of directors want to make the pay package lucrative enough that good executives aren't lured away to higher-paying jobs elsewhere.
''I think we see one major theme coming out of all this, which is there is a very pronounced relationship overall between pay at the executive level and company performance,'' said Steven H. Slutsky, a consultant who oversaw the study Mercer completed for The Morning Call.
''The goal is making sure that executives are compensated based on creating shareholder value, and I think we see that here.''
Indeed, compared to national pay statistics, companies in the Lehigh Valley were rather frugal.
Locally, median profits among the companies rose 13 percent, but cash compensation to executives salary plus bonus rose 6 percent. That's less than the 10 percent in Mercer's pay analysis of CEO pay at the largest U.S. companies.
Maybe more telling in the aggregate numbers is that shareholders made out better than executives did. Median shareholder return for the local companies was almost 11 percent, far better than those companies' competitors, whose returns were just 0.2 percent.
Total pay to all 76 local executives in the analysis rose just 3.2 percent.
Still, the top dogs at the local companies weren't going hungry. None of the 76 execs earned less than $100,000, and the median was about $215,000, meaning half earned less and half earned more than that.
Among the big earners, the most striking numbers come not from Fortune 500 companies PPL and Air Products and Chemicals. Instead, Harleysville Group, a relatively small regional insurance company with less than $1 billion in revenue, had eye-popping pay increases for its executives.
In fact, all five top executives at Harleysville ranked among the best-paid dozen executives in the region. The firm is named for the small Montgomery County community of 9,000 people it's located in, about 25 miles south of Allentown.
Walter R. Bateman, chairman and chief executive officer at Harleysville, saw his pay rise 742 percent, to $6.25 million, making him the top-paid executive in the region last year.
Bateman's compensation may seem high because it reflects a change in his incentive plan, combined with excellent corporate results in which Harleysville Group outperformed its competitors in the insurance industry during 2002, said spokesman Randy Buckwalter.
Bateman's pay breaks down into his salary of $560,000, about a 7 percent increase, and a bonus of about $202,000. The bonus, calculated according to a formula, was based on the company achieving and in several cases surpassing corporate performance goals, according to a company report to the Securities and Exchange Commission.
But the biggest chunk, nearly $5.5 million, came from what's called a long-term incentive payout. Part of the reason it was so big is he got two payouts in the same year because the company changed its cycle for paying long-term incentives from four years to three years. So in 2002, the payments overlapped. Bateman received one payout from the 1999-2002 period and one from the 2000-2002 period.
The other reason it was so high is Harleysville Group did well during those periods, which boosted the amount of the incentive. The company's stock price rose almost 86 percent, and shareholders saw their investments more than double. Most of the incentive payout, about $4.6 million, was in stock, with about $660,000 in cash. The rest was in stock options.
The same reasons a change in incentive plan and great company performance accounted for large increases in total compensation for the other Harleysville Group executives.
''The total payouts are driven by performance,'' Buckwalter said. This year has been a different story for Harleysville, which three times has lowered its quarterly profit expectations and lost $3.2 million in its first quarter.
Besides Harleysville, the highest-paid executives were from the largest companies, Air Products and PPL, both about $5.5 billion companies last year. They are the biggest companies in the region and among the largest employers.
Their respective CEOs, John Jones and William Hecht, each earned more than $2 million.
Jones at Air Products got a 5 percent increase in salary and bonus, and about 8 percent more in total compensation.
Hecht and most of the PPL executives saw their total pay decrease, but not because their salaries went down in fact, salaries and bonuses rose significantly. The overall numbers decreased because they were especially high last year, reflecting the fact that executives cashed in stock options in 2001, the year the PPL stock price hit an all-time-high.
The only other company to place an executive in the top 10 was now-defunct Bethlehem Steel. Its CEO, Robert S. Miller Jr., earned $900,000 last year. Miller brokered a deal earlier this year with International Steel Group, which bought Bethlehem Steel's plants and most of its assets.
Among the most notable pay cuts was for John Dickson, chief executive at Agere Systems. In the year the Allentown semiconductor-maker started a shocking restructuring that would end all local manufacturing and put thousands out of work, Dickson's compensation amounted to $680,000. That reflects most of a 20 percent voluntary cut to his cash compensation he started in January 2002.
While nearly $700,000 sounds like good money, it's a big drop from $4.3 million in 2001 and $7.3 million in 2000. He ranked second-highest paid locally for both those years. But in 2002, with a salary cut, no bonus and no exercised stock options, he ranked 16th.
The pay of other Agere executives also tumbled about 70 percent.
It's an example of how pay-for-performance cuts both ways. Agere's executives shared the pain with holders of their stock, who suffered a loss in the value of their shares of 72 percent, as company losses increased 61 percent.
In corporate America, that's happening more now, especially in light of the corporate scandals of recent years, Slutsky said. The pay of top executives is being scrutinized by boards of directors.
''We are hearing that boards are continuing to ensure that there is a pay-for-performance linkage so that executives who create shareholder value get rewarded for that and executives who don't, do not,'' he said.
''I think boards are taking a much harder look to ensure that programs are operating the way they are intended.''
Want to see detailed information about executive pay at a particular public company? On the Internet, go to www.freeedgar.com and search for the ''proxy'' statement, generally called filing DEF 14A.
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