Oink, oink: even when companies go bust and investors lose a bundle, executives usually do just fine. (Executive Compensation).

Another major issue that surfaced in the corporate world amidst all the scandals is the fancy compensation packages chief executives enjoy, even when the companies they run are on their beam-ends.

The numbers might be described as disgusting. The comparison with pigs feeding at the trough is a common one in articles about the excesses of some corporate big wigs:

* Global Crossing was a telecommunications giant that collapsed in 2002 with debts of more than $12 billion (U.S.) and a lot of grieving investors. It is a good example of why some people are riled: the company's founder and chairman cashed out $734 million (U.S.) in stock before the company folded;

* Executives of Qwest Communications International Inc., the biggest provider of local phone service in 14 Western states, made about $500 million (U.S.) selling company stock from 1999 to 2001. At the same time, profit figures were inflated by improper accounting;

* In June 2002, Enron disclosed that before collapsing the year before it paid out $744 million (U.S.) in salary, bonuses, and stock grants to the company's 140 senior officers--an average of $5.3 million (U.S.) each;

* In August 2001, Air Canada laid off 4,000 staff on top of 3,500 job cuts announced the previous December. But, the airline's chief honcho got an 8.7% raise in 2001 for a base salary of $1,086,667. However, President Robert Milton and the company's other senior executives didn't receive any performance bonuses for the year, which saw Air Canada's stock value plunge by 63%;

* And, not forgetting Nortel Networks Corporation, the Brampton, Ontario-based telecommunications giant whose shares hit a record price of almost $120 in July 2000. That was around the time the company's now-retired CEO John Roth sold millions of dollars worth of his shares. Within 18 months, Nortel shares were changing hands for less than a dollar each. When Mr. Roth left the company in November 2001 he continued to receive his base salary and collect service time toward his company pension. He even received a raise the previous May, 10 days before announcing he would be leaving (from $1.25 million U.S. to $1.5 million a year).

A Globe and Mail survey, which reviewed 100 of the largest companies on the Toronto Stock Exchange, shows total compensation for chief executive officers climbed 54% in 2001. This included a 25% increase in short-term compensation, such as salaries and bonuses, and a massive boost from cashing in stock options. Even when their companies lost hundreds of millions of dollars, some of them walked away with millions. When the Ontario government legislated mandatory disclosure of executive compensation in 1993, the Ontario Securities Commission said the disclosure would make more companies link pay to performance. But 2001 saw the largest decline in corporate profits since 1993, and there was no matching decline in compensation.

Another survey compared bonuses handed out to more than 100 long-serving chief executive officers over a five-year period with the total return to their shareholders and made similar findings: in some years, more than a third of CEOs heading companies that lost shareholder value still received bonuses that averaged more than 70% of base pay. The study examined the annual bonuses paid to CEOs of Toronto Stock Exchange 300 companies between 1995 and 1999. Here are some examples of what it found:

* In 1999, Vancouver-based Methanex Corp. CEO received a bonus of $410,000, 60% of his base pay, while the company's stock price went down 50%;

* In 1996, the head of Rogers Communications Inc. received a bonus of $260,110, 43% of his base pay, and the company's shares dropped 34%;

* In 1999, Ballard Power System's CEO got a bonus of more than $2.2 million, 649% of his salary, when the company lost money;

* Shaw Communications' chairman did even better: while the company's shares dropped dramatically, his annual bonus was $3.6 million in 2000, $4.6 million in 2001, and $6.3 million in 2002. (His compensation contract allows him an annual bonus of between half and 1% of operating profit, which is calculated before a host of items such as interest payments, taxes, and other major costs are accounted for.)

Part of the problem is that many companies tie executive bonuses to meeting budget targets rather than company performance. Who sets the budget? The chief executives do. It doesn't take a genius to figure out that such a system might encourage management to put forward budgets that are easy to beat.

A lot of critics are zeroing in on the treatment of stock options, often a huge chunk of total compensation. But, because options aren't subtracted as expenses from a company's current earnings as other wages and benefits are, the result is overstated profit. One American study suggests that treating options as expenses would have cut earnings per share for the top 500 American companies by an average of 9% in 2000. Another study suggests that options in 2000 amounted to an average of 19.7% of the profits of big American firms--and a staggering 72.8% in the case of information-technology companies.

Toronto business professor John Crispo says executive compensation has become so excessive that drastic measures are needed to correct the situation: measures such as "limits on the total amount any executive could be paid (as) an allowable business expense. Anything above that limit would not be deductible from (company) income and would therefore come out of the company's after-tax profits--the figure shareholders care about most."

He also agrees that stock options, "should be treated as an expense like any other form of compensation ... (for) more accurate company financial statements," and to curb accounting abuses by managers who enrich themselves by propping up their company's share price.

Many critics of the current system say managers should have to hold their company shares for a long period as well, say five years. This would reduce the temptation to fiddle the books to boost profits in the short term and then cash out.

American investment guru, billionaire Warren Buffett (known as the Oracle of Omaha due to his investment savvy) once asked, "If stock options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world do they go?"

Mr. Buffett also says "the acid test for (corporate) reform will be CEO compensation ... What many will fight ... is a hard look at their own pay and perks. In recent years, compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees."

SUGGESTED ACTIVITIES:

1. Review the book Wealth by Stealth: Corporate Crime, Corporate Law, and the Perversion of Democracy, published by Between the Lines in January 2003.

2. Toronto Star columnist David Olive recently wrote that: 'There's no sign yet ... that CEOs and their boards have gotten religion about a genuine pay-for-performance culture ..." Discuss what you think is fair payment for executives.

FACT FILE

New rules from the International Accounting Standards Board will require companies to treat stock options as expenses from 2004, and it is expected that the rules will apply to all European public companies by 2007.

Websites

Executive Paywatch--http://www.aflcio.org/corporateamerica/paywatch/

Shareholder Association--http://www.share.ca/

RELATED ARTICLE: Rewarding work for some.

According to Business Week, the ratio of CEO pay to factory worker pay at the biggest 365 U.S. companies was 326 to 1 in 1997, up from 44 to 1 in 1965. In Japan in 1995, the equivalent ratio was 16 to 1, and in Germany, 21 to 1. Some of the biggest CEO pay raises have been awarded right after huge layoffs, leading to criticism that top executives are being rewarded for eliminating American jobs. A more recent compensation survey calculated that in 2000 the ratio of average CEO pay to average pay of U.S. blue-collar worker is 531 to 1, and that CEO pay between 1990 and 2000 (before adjusting for inflation) increased 571%.

A Financial Times study in July 2002 showed the executives and directors of the 25 largest U.S. public companies to go bankrupt since January 2001 made $3.3 billion U.S. in the two years leading up to the bankruptcies. Meanwhile, since early 2000, the U.S. bear market wiped out $5 trillion U.S. of investor wealth on paper, and swept away almost 100,000 jobs. Not surprisingly, a lot of people think top bosses are overpaid. According to a survey by public affairs firm GPC International, 67% of Canadians think so, and 27% say annual reports and financial statements are "somewhat or completely inaccurate."

Going back almost a century, there was no golden handshake for Annie Caton. A Turkish-bath attendant on the SS Titanic, Ms. Caton survived the 1912 disaster. When she got to the New York offices of the ship's owners, she learned that her employment had been terminated. It was normal for a crewmember's salary to cease at the end of a voyage, and she was discharged at the precise moment when the liner sank.

RELATED ARTICLE: It ain't easy.

Some economists say most senior executives are worth every nickel they're paid, Their jobs are tough ones and the failure rate is staggering: between 30% and 40% of costly new corporate executives either quit, significantly under-perform, or get fired within a year or two of being hired, says a team of management psychologists with RHR International Co. of Toronto. Why? Often they get little help from the organization and are left to integrate into the new firm on their own, and if they're hired from outside the firm, they can be up against internal resistance from employees who were overlooked for the job.

A 2002 global survey also found that the average chief executive officer lasts only three years at the top before resigning, retiring, or getting pushed out. CEOs stayed in office for 10 years on average in the late 1980s and when they left it usually was to retire, but those days seem to be history. The report was based on a survey of 481 public and private organizations in 25 countries, including Canada, and it found that there are no second chances for a lot of CEOs. They perform to the satisfaction of the board of directors or they're out. And, they're often not given the 18 months many experts say they need to sort out the new operation, leaving them too little time to address long-term challenges. That's partly why they focus on short-term results.