Tribune chief's pay outpaces company performance
2004 was a tough year for Tribune Co., owner of the Chicago Cubs and publisher of the Chicago Tribune. Readership dwindled at some of the company's most prestigious newspapers, executives grappled with a circulation-fraud scandal, and profits fell 38 percent.
For Tribune CEO Dennis FitzSimons, though, 2004 was not quite as grim.
His $11.3 million compensation package placed him 21st among executives at Chicago-area publicly traded companies.Meanwhile, Tribune Co. posted a negative 17 percent return to investors, the second-worst fiscal performance in the region.
To analyze the relationship between executive pay and return to investors at the 100 largest Chicago-area companies, the Daily News ranked them on both measures and then examined the difference between the rankings.
The analysis relies on company financial reports filed with the federal Securities and Exchange Commission for 2004, the most recent year for which data is available.
The analysis highlighted companies that pay their executives top salaries but have poor return to investors, as well as those that pay low salaries but perform well.
The Tribune's pay vs. performance rating was the second worst in the Daily News analysis.
FitzSimons was also the highest-paid executive among those whose companies showed a negative return to investors in 2004.
The Tribune's compensation rating illustrates a common complaint among shareholders and corporate governance advocates: A CEO's paycheck often has little to do with how well the company performs.
The Daily News ran common statistical tests to detect a correlation between executive pay in Chicago and total return to investors, and found no evidence of a connection.
That conclusion is supported by many academics who have studied compensation.
'There isn't very much evidence that clearly indicates a causality between executive pay and performance,' said B. Espen Eckbo, director of the Center for Corporate Governance at Dartmouth College's Tuck School of Business.
The picture can be clouded by many factors.
Some companies, including the Tribune, have tried to link the CEO's pay and shareholder returns by granting stock options to executives. But stock prices fluctuate for reasons that may have little to do with how well a CEO runs his company.
Similarly, an otherwise well-run company can have an off year, leading to lower investor returns and a greater disparity between pay and performance. And some executives receive one-time grants of stock options, which means a year's worth of pay may not have much to do with their compensation over time.
Even so, the fact remains that some companies post horrible results while delivering gold-plated compensation packages to their CEOs. Others reward investors while skimping on the CEO's paycheck.
Brian Gamache ran one of the best-performing large companies in Illinois in 2004, but wasn't paid like it.
Gamache, CEO of gaming-machine manufacturer WMS Industries, Inc., earned $1.7 million, making him one of the area's lowest-paid executives.
Meanwhile, Waukegan-based WMS had the fourth-highest return to investors.
WMS's chief financial officer, Scott Schweinfurth, said the CEO's salary was set after the company checked pay levels for executives at similar companies.
Gamache's pay may seem disconnected to performance because the company had a remarkable year in 2004, Schweinfurth said.
'Revenues increased dramatically,' he said. 'The company has performed very well.'
WMS shares, whose value heavily influences total return to investors, rose 29 percent over the year.
The board is likely to take that into account when deciding on future compensation for Gamache, said Schweinfurth.
'He has done a great job turning the company around,' Schweinfurth said.
John Bucksbaum, CEO of Chicago-based General Growth Properties, a real-estate investment trust, took home just $235,000 in 2004, making him the lowest-paid CEO in the top 100. The company ranked 26th in return to investors.
General's proxy notes that the company set Bucksbaum's salary at a 'subjective' level before an initial public offering in 1993, and at his request has been adjusted only slightly since then. Bucksbaum declined a salary increase or bonus for the past three years, the report said.
Bucksbaum did not return a call seeking comment on his salary.
At Tribune Co., spokesman Gary Weitman declined to discuss how FitzSimons' pay is set. He referred a reporter to the company's proxy statement, which says compensation is set based on pay levels at a selection of 100 media companies.
He noted that FitzSimons' 2004 compensation was based on Tribune's 2003 performance. The company's return to investors was better that year than in 2004.
FitzSimons' pay package of $11.3 million included a salary and other cash compensation of $1.4 million, as well as stock options worth just under $10 million at the time they were granted.
His total compensation dropped 21 percent between 2003 and 2004.
The company with the worst pay-to-performance rating was Deere & Co., where CEO Robert Lane made $16.4 million as the company posted a return to investors of less than one percent.
A company spokeswoman declined to discuss Lane's pay and referred a reporter to Deere's proxy statement.
The proxy says the company designs its executive compensation packages so that they attract high-caliber executives. Total pay is designed so that executives are paid in step with those in similar positions at other companies if Deere meets its performance goals, and higher pay if goals are exceeded.
In a perfect world, companies would determine exactly how much value a CEO brought to the table and pay them close to that amount.
But calculating out how much money a particular manager adds to the bottom line is a complicated task. So many companies compensate executives by finding out what competitors are paying. A new CEO typically receives compensation placing him in the top half or third of people who hold similar positions.
That, say some experts, leads to a pay spiral, where those who are paid below the average one year get raises, and the average climbs because of it.
'That's why you see these numbers jump every year,' said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. 'It's a bizarre game. You wind up with the dog chasing the tail.'
Doug Friske, a managing principal at compensation consultants Towers Perrin, sees the rising average as less of a problem. What truly drives salaries upward, he said, is the trouble directors and managers have in defining and acting upon poor performance.
Because of that, he said, executives get compensated well even when their companies have a bad year.
"It's a lot easier to say, 'Hey, you're doing a great job,''' he said. "You end up with the Lake Wobegone effect, where we think all of our people are above average and should be paid above average."