When chief executives talk about compensation, they frequently complain that critics fail to take into account the marketplace--the "war for talent" within industries and the benchmarks set by their peers.
To try to assess how compensation for Chicago-area CEOs stacked up against their peers last year, the Tribune drew a sample of 10 companies among the 100 biggest local firms by market capitalization--one from each group of 10 in the rankings--and compared the chief executive's package with those from its peer-group companies, as identified by its proxy statement or the Standard & Poor's classification system.
Measuring total compensation, which includes cash, bonus and long-term incentive pay such as stock options, the five who outpaced their industry peer group were William Osborn of Northern Trust, John Edwardson of CDW Computer Centers, Richard Vie of Unitrin, Louis Nicastro of WMS Industries and Neil Novich of Ryerson Tull.
Pay experts report that board compensation committees generally examine peer-group data when setting performance goals and salaries for executives, but there is a wide disparity in what constitutes a peer group.
Further, with most companies aiming to pay their executives in the 50th to 75th percentile of the peer group--akin to the Lake Wobegon syndrome, where everyone is above average--overall pay targets keep shooting higher.
"If everybody does it, you get this ratcheting effect, and pay keeps going up and up," said Andrew Goldstein, a pay consultant with Watson Wyatt Worldwide in Chicago.
The biggest winner in the sample of 10 local companies was former UAL Corp. executive Edwardson, who received a package valued at more than $43 million for his first year on the job at CDW. That puts Edwardson at the top of the pay heap in Chicago, but he's also far ahead of his peer group.
That group, however, points to the difficulty in identifying peer companies. S&P classifies CDW--which sells mainly through catalogs and its Web site and does relatively little consumer business--as a computer and electronics retail firm; others in that category closest to CDW in market capitalization are Best Buy, Circuit City and Radio Shack. Those executives earned an average $22.8 million in total compensation last year.
A CDW spokesman said Edwardson's pay was part of a negotiated employment contract when he joined the firm in January 2001 but declined to elaborate. Pay experts said it is common for companies to front-load hefty pay packages for an incoming CEO to compensate them for giving up retirement and other long-term pay perks at previous employers.
At Chicago-based Ryerson Tull, a metals distributor that was a former Inland Steel unit, CEO Novich received a pay package worth $2.03 million, far above the $658,081 peer average. Of the total, $1.45 million came in the form of stock options.
"The stock option grant in 2001 [for most top executives] was really a two-year program. We were in the midst of a downturn in our industry, and we wanted to make sure we retained management. There will be no options grant in 2002," said company spokesman Terence Rogers, who added Novich hasn't received an increase in base pay in three years.
"When we compete for talent, we look across a broad spectrum of competitors, and among those we come out in the lower end of the comparison."
Short on cash
Looking just at cash in the bank, however, eight of the local CEOs were below their peers' average. Only Unitrin's Richard Vie and Ryerson Tull's Novich received more cash compensation than their peers.
And one local executive came in way below his peers: new UAL CEO John Creighton.
The former CEO of timber giant Weyerhaeuser took over Oct. 28, when James Goodwin resigned after warning that the airline could perish.
Creighton took just $11,364 for 2001--less than the $12,760 annual average for dishwashers, according to the Bureau of Labor Statistics--because of United's financial woes. And that wasn't even for his work as CEO--it's cash to cover a tax obligation on travel he received as an outside UAL director.
But he also got something not available to most dishwashers--options. His total long-term incentive package for 2001 was valued at $3.6 million.