Putting a value on Kilts

Does Gillette Co. chief executive James M. Kilts deserve the outsized payout he will receive for selling the Boston shaving giant to Procter & Gamble Co. for $57 billion?

Kilts's compensation has set off a heated debate into whether the company needed to be sold, and whether the millions of dollars Kilts will receive because of the deal colored his decision. Secretary of State William F. Galvin has launched an inquiry into the matter.

To answer the first question, Galvin and others will need to determine another, more fundamental fact: What, exactly, will Kilts earn from the deal?

Despite that the Securities and Exchange Commission requires companies to disclose the compensation paid to their highest-paid executives as well as the payments they will receive if their companies are sold, the fact remains that the required filings are anything but transparent. Published estimates of Kilts's payout have ranged from $153 million to $185 million; a new analysis of the payments, conducted for The Boston Globe by The Wilson Group, executive compensation specialists in Concord, pegs the value of the payment at $173 million.

What stands out most about Kilts's package, according to Thomas B. Wilson, managing director of The Wilson Group, is the sheer number of stock options granted. ''It struck me as a lot of shares," he said. ''Two million when he was hired and almost 1 million a year since then."

Calculating the total value of Kilts' package is difficult, because the details are contained in several different documents, and require a strong understanding of employment contracts and options pricing. One document that modifies Kilts's original pay package hasn't been released by Gillette.

Jesse M. Fried, professor of law at Boalt Hall School of Law at the University of California in Berkeley and coauthor of ''Pay Without Performance: The Unfulfilled Promise of Executive Pay," said the mere fact that Kilts's pay is so hard to decipher from company filings suggests Gillette's board didn't want the package to be scrutinized. ''If the board were proud of what they are paying him, they'd disclose it more fully," he said. ''The fact it's being disclosed in this way suggests they're trying to hide something."

Academics and activists critical of excessive executive pay argue that what's really wrong with Kilts's payday is that he may not have earned much of it. Gillette shares grew appreciably during Kilts's four-year tenure, but not all of the growth is attributable to the CEO's actions. Moreover, nearly $50 million of the pay package is triggered by the actual merger itself, not the company's performance leading up to the merger.

''There is the possibility the pay package provides perverse incentives for a sale that is not necessarily for the right price and not at the right time for shareholders," said Lucian Bebchuk, professor and director of the Program on Corporate Governance at Harvard Law School.

Gillette stands by its $173 million man. ''Jim Kilts's record speaks for itself," said Gillette spokesman Eric Kraus. ''He turned around a chronic, underperforming company; he saved hundreds of manufacturing jobs and was on the way to creating the best consumer products company in the world prior to this merger. He also more than doubled shareholder value since he took over in February 2001."

The sale to P&G gave shareholders a 17 percent premium, based on the closing prices of both companies the day before the transaction was revealed. Such a premium is modest by the standards of most large corporate acquisitions.

''The mere willingness to sell the company for a premium which is hardly dramatic is not a remarkable performance that should be rewarded in such a disproportionate way," Bebchuk said. ''Selling the company for a 17 percent premium, he said, ''does not on its face appear to be a particularly dramatic accomplishment."

Bebchuk also criticizes the elements of Kilts' pay package that are related to the merger itself. First, he gets three times his base Gillette salary because of a change in control of the company. In addition, P&G is awarding Kilts' roughly $8 million in restricted stock, stock options with a current market value of about $19 million, long-term incentives of $3 million, and a $7 million bump in his pension, according to an analysis of the deal by The Wilson Group. Kilts is expected to manage Gillette for a year after the transaction closes.

Such payments are like a kickback, according to Bebchuk, coauthor of ''Pay Without Performance." ''There's a worry that the CEO will trade a lower price for shareholders for better treatment for himself," he said.

Gillette disclosed the deal, then worth about $57 billion, on Jan. 28. P&G has plans to lay off about 6,000 workers from the combined companies; Gillette already has laid off about 6,000 workers worldwide since 2000.

Some compensation specialists -- even those keen to criticism of excessive pay packages -- said there's nothing exceptional about Kilts's pay.

''This doesn't seem to be outside of the ordinary for similar-sized companies as well as for an executive that has added such significant value to the company," said Frank B. Glassner, chief executive of Compensation Design Group Inc., a national executive pay consulting firm in New York.

Adds Wilson of The Wilson Group, which also advises firms on compensation, ''This is not out of bounds of what I see in normal compensation packages. When Warren Buffett is on your board of directors, you know it's going to be appropriate." Buffett, head of Berkshire Hathaway Inc., was a member of Gillette's board when Kilts was hired and left the board in late 2002.

Executive pay without stock options won't attract devoted, exceptional performance from an executive, argues Alan Hoffman, associate professor of strategic management at Bentley College in Waltham. ''If you give a high salary with no additional incentive, he can just collect the salary and not perform," said Hoffman.

Kilts' base salary of $1 million a year rose to $1.5 million last year, according to company filings.

Aside from boosting Gillette's performance, Kilts deserves credit for merely attracting a corporate suitor at a time when the company isn't in dire straits, said Espen Eckbo, director of the Center for Corporate Governance at Dartmouth College's Tuck School of Business.

Jeffrey Krasner can be reached at krasner@globe.com.