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Using compensation to court commitment.

I Criticized by the public and taken to task by Washington for overpaying CEOs, companies should push incentive-base pay down in the ranks But performance pay should be used to win commitment and boost productivity, not just to quiet critics.

Given the sluggish performance of some corporations today, it follows that a number of CEOs are overpaid. That's why the Clinton Administration has pushed to strengthen the link between executive pay and performance. Few chief executives would dispute that this is a necessary and positive development. It builds confidence in business and restores our credibility with the public, our shareholders, and even our own organizations.

Fortunately, as noted by Personnel Corporation of America's David R. Meredith in the annual CE compensation survey (see this edition), an increasing number of American companies have come to rely on incentive-based arrangements. But I feel CEOs should push pay reform beyond the executive suite. At COMSAT Corp., for example, we use incentive-based compensation to reshape corporate culture and to energize all of our employees.

In doing so, we've put everyone on common ground. "There's a feeling that we're all standing at the same workbench," one of my staffers said. But besides making good business sense, injecting incentive, risk, and reward into compensation also makes a bold statement about vision and values.


According to USA Today, the average CEO's pay is 156 times as much as a factory worker's compensation. According to Business Week, average compensation for an executive has increased 56 percent in the past year alone. With statistics like these, no wonder employees, politicians, and stockholders are grumbling.

Americans have lost faith in their business, educational, and government institutions partly because these institutions lack accountability for their performance. Putting compensation at risk restores accountability. Everyone has a stake if something goes wrong.

At COMSAT, much of our motivation for compensation reform comes from our board of directors, under the chairmanship of former Defense Secretary Melvin R. Laird. I'm the only insider on our board. I don't serve on the nominating committee, and there are no so-called interlocks on the nominating or compensation committee. The board's independent perspective has been one of our most variable We've set the tone for compensation from the top down. After considering my recommendations and the suggestions of our Compensation and Management Development Committee, the board effectively capped my salary and those top managers.

All of this is outlined in our expanded proxy statement. "More of each executive officer's total compensation will be at risk, producing more incentive to perform," the document notes. As disclosed, my salary was increased January 1, 1993, to $350,000, an 11 percent increase. Since this amount is below our new, self-imposed salary cap of approximately $415,000 for my position, I would be eligible for increases until the cap is reached. Instead, the board's Compensation and Management Development Committee agreed that my base salary be frozen at the $350,000 level for the next three years, "with the difference at risk under the performance-driven annual bonus process." We're applying the same guidelines to all our senior executives, and we're pleased with the results.


Corporate executives should strive to align employee and shareholder interests, to shift both factions to the same side of the table. And compensation should be used to win commitment and productivity, not just to quiet critics.

COMSAT applies this philosophy to the pay of its non-managerial employees through several new or modified stock-related compensation schemes or incentive plans, outlined below.

* Stock options. Until recently, COMSAT's stock plan had been open only to professionals and managers, about 125 people in total. That excluded roughly 1,400 other employees. But effective July 1, the board extended the plan to all employees.

Here's how it works: The number of options awarded depends on an employee's performance rating during the previous 12 months. Thus, superior performers will accrue more options, while mediocre or poor performers will receive fewer. But there's a kicker: If an employee doesn't get at least a competent or average rating, he or she doesn't get any options. This also encourages employees to insist on annual evaluations.

The number of options ranges from 100 to 300. They will vest over three years at 25 percent, 25 percent, and 50 percent, and they will have 15-year lives.

Reaction to the program has been overwhelmingly positive--chatter in the hallways is proof of that. Everyone has a chance to make money based on the performance of our stock, which has moved over the past two years from the low 20s to the low 60s, before being adjusted for a 2-for-1 split in June. Motivation has skyrocketed.

* Stock purchase plan. Any employee who works more than 20 hours a week can buy COMSAT shares through payroll withholding at a minimum 15 percent discount to the market price. Employees can make their purchases in installments and can opt in or out of the program on a monthly basis. This flexible arrangement fits their changing needs.

More than 600 employees--some 42 percent of our work force--participate in the stock purchase plan. That's an increase from 27 percent a few years ago.

* Dividend-matching program. We now match dollar-for-dollar the dividend payments on employee-owned shares. The company's matching contribution is added to an employee's salary. This is an incentive for employees to hold their shares.

These programs are interrelated. Their intent not only is to make employees shareholders, but to keep them shareholders, and happy ones at that. This will strengthen the links between employees' personal interests and the welfare of the corporation as a whole.

* Savings and profit sharing. Our plan allows an employee to invest up to 10 percent of his or her salary. The first 6 percent is matched by the company, 100 percent on the first 2 percent and then varying from 25 percent up to 100 percent or more based on a formula tied to operating income.

Within this combined savings/profit-sharing plan, one can invest in five vehicles: three equity-linked mutual funds, a portfolio of guaranteed investment contracts, and a COMSAT stock fund--another vehicle an employee may use to buy and own company stock.

Though not solely the result of our incentive plans, productivity rose about five-fold in the past decade: Revenue per employee jumped to almost $350,000 from $75,000. At the same time, corporate general and administrative expenses declined as a percentage of revenues--to under 4 percent from just over 6 percent. In 1982, COMSAT had 3,400 employees and about $280 million in revenues. In 1993, we've set a goal of almost $700 million in revenues with fewer than 1,500 employees. Just as important has been a change in attitude that extends to our headquarters staff. In 1980, there were 525 people on the corporate staff. Two years ago, there were 225. Today, there are 95.


Other companies, too, are driving incentive and risk into compensation at all levels of the organization. Among the pacesetters is Phillips Petroleum in Bartlesville, OK. "We don't achieve our compensation potential unless shareholder-return targets are met," stresses C.J. (Pete) Silas, Phillips, chairman and CEO, in a letter to shareholders in the annual report.

"A new compensation plan taking effect this year makes more domestic salaried employees--8,000 of them--eligible for additional compensation based on shareholder return, in addition to safety and financial performance," adds Silas, who recently was elected to the COMSAT board of directors. "It's the first time such a large group of employees has had its pay based, in part, on how the stock does."

Besides his aggressive stance on pay-for-performance, Silas astutely grasps that the annual report can help to communicate a company's compensation policies. COMSAT's annual report was revamped a year ago and is now easier to read. We consider it an important vehicle to help change a corporate culture, shape the temperament of management, and articulate to constituents issues and policies the company deems important, particularly in terms of compensation.

Tredegar Industries in Richmond, VA, also uses the annual report in this manner, citing performance-based compensation as one of the requirements for success. In the report's financial review, the company compares in graphic form the "total cash compensation" of its president and CEO, John D. Gottwald (combined 1992 bonus and salary: $384,000), with (1) the company's earnings per common share and (2) its return on average equity and "total return on Tredegar stock versus selected measures"--the S&P 500 and the S&P manufacturing (diversified industries).

Meanwhile, Fortune reports that the salary of Avon Products CEO James E. Preston is frozen by the board of directors at $610,000 until his retirement in seven years. The target bonus is cut from 65 percent to 50 percent, but Preston gets a one-time grant of options on 50,000 shares in return for giving up seven years of pay raises. Those raises "would have lifted his salary to nearly $1.1 million by retirement," the magazine said.

The government, of course, maintains its scrutiny of compensation. The new SEC rules on executive pay--including those requiring a more detailed disclosure in the proxy statement--are constructive changes. Like the annual report, the proxy statement is a good platform to continue the mission of changing the corporate culture and influencing important constituents. This year, I was especially active in preparation of the proxy.


Though the evidence is far from overwhelming, indications are that the relationship between pay and performance is being strengthened at an increasing number of companies. Apparently, however, the linkage and trend are lost on most of the business press. Consider the language used by supposedly "objective" publications in reporting on CEO pay. In a recent article, for example, The Washington Post described continuing efforts by the Clinton Administration to "curb runaway pay for corporate chieftains."

The press also misleads the public by making much of pay packages pumped up in any given year by the exercise of stock options earned over time. The lumping together of all pay compounds the credibility problems business faces with the public, the policy-makers, and other audiences in the U.S. Observers should stay focused on the real issue: whether CEOs shepherd our respective operations to the benefit of the company's owners, the stockholders. The key questions are: Do we bear the consequences when we fail? And will our employees be with us along the way?

COMSAT isn't the only company taking progressive steps on compensation or on communicating more effectively about it through the proxy and the annual report. But it is among the vanguard that's determined to make better use of these tools. Without question, pushing incentive, risk, and reward throughout the company is effective. It can reap tremendous benefits for employees, customers, shareholders, and burnish the reputation of corporate America.

Bruce L. Crockett is president and chief executive of COMSAT Corp., a $564 million international communications, information, and entertainmnet-distribution services company based in Bethesda, MD. The company offers on-demand entertainment and information services to the hospitality industry.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Work Force
Author:Crockett, Bruce L.
Publication:Chief Executive (U.S.)
Date:Sep 1, 1993
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