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The compensation question

Federal buy-in draws attention to CEO pay

By Kimberly Blanton
Globe Staff / November 9, 2008
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Ronald Logue, chief executive of Boston financial giant State Street Corp., received nearly $27 million in total compensation last year, and he has a golden parachute - a severance package he would receive if he loses his job in a takeover - worth $112 million. But that was negotiated before the federal government invested $125 billion in taxpayer funds in State Street and eight other banking companies and Congress began scrutinizing executive pay.

State Street's $2 billion share of the federal injection - which gave the government an ownership stake in the bank - a plunging share price, and growing pressures on corporate boards to limit future pay for executives could take a bite out of future compensation for Logue. He was the second-highest-paid chief executive in Massachusetts last year. Ronald Sargent of the office products giant Staples Inc. received $30.3 million.

High CEO salaries leave some workers scratching their heads. "There is no human being worth $30 million" a year, said Mary Ann Hogan, a midlevel manager for a Cambridge high-technology firm. "Two percent of people are making that, but the rest are getting nickled and dimed."

On Oct. 28, as Congress examined CEO pay at financial companies receiving public funds, Representative Henry Waxman, a California Democrat and chairman of the Committee on Oversight and Government Reform, sent a letter instructing State Street and the other eight banks to provide details about the compensation packages of their 10 best paid executives by tomorrow. At State Street, that includes Logue and his heir apparent, company president Jay Hooley.

"You might as well put on your red flannel pajamas and run around in a field of bulls if you're going to pay State Street's CEO more this year than you paid him last year," said Frank Glassner, a consultant with Design Compensation Group in San Francisco.

Waxman's letter followed well-publicized public outrage over excessive CEO pay.

Two of the nation's top-paid CEOs were from companies that were among the most troubled during the recent crisis.

Lehman Brothers Holdings Inc., the giant Wall Street investment bank that filed for bankruptcy protection in September, has paid $484 million since 2000 to its recently departed chief executive, Richard Fuld.

Angelo Mozilo of Countrywide Financial, the foundering subprime lender acquired by Bank of America Corp., received $125 million last year.

State Street spokeswoman Carolyn Cichon said Logue's pay was warranted due to the company's strong performance, including a 30 percent leap in revenue last year to a record $8.3 billion.

Also, he'll receive much of his pay over time, she said. Logue "didn't get a check at the end of year for this," and his actual payout will depend on how State Street performs over the longer term, she said.

Logue declined to comment for this story.

Staples spokesman Paul Capelli said Sargent's compensation package was increased last year as part of a "retention grant," which will not pay him anything until 2012. Nearly two-thirds of the chief executive's compensation is tied to how well Staples does, Capelli said.

The office retailer's sales were up 12 percent in the first half of this year.

Most Americans - 81 percent, according to a 2007 survey released in August by the University of Minnesota and Northwestern University - believe the pay gap between the middle-class and the wealthy is too wide.

Few, however, grasp how much the typical CEO actually earns, said Lawrence Jacobs, the University of Minnesota professor who conducted the survey. The 608 survey respondents estimated that chairmen of large national corporations received $500,000.

Most CEO compensation is higher, and has been rising relentlessly, according to the Corporate Library, a Maine research firm. The median pay for CEOs at the 2,000 largest publicly traded corporations tripled between 1999 and 2007, to $3.2 million. That's 88 times the median pay of full-time US professionals and wage earners - $36,140 - according to the US Bureau of Labor Statistics.

The bigger the company, the more a CEO earns and the larger their pay hikes, said Paul Hodgson, the Corporate Library's senior research associate. CEO pay "has been out of line for a long time," he said.

Compensation specialists said Logue's $27 million 2007 pay is likely to fall in future years.

Even though State Street remains profitable, its stock price has plunged from its high of $85 a share in January to $42.97 on Friday. State Street, which provides trust services to institutional investors, largely avoided damage from the subprime mortgage meltdown, but potentially faces losses of at least $1.5 billion from investments tied to subprime loans, student loans, and other assets.

Jack Dolmat-Connell, a Waltham compensation consultant, said the stock and stock-option awards that accounted for more than half of Logue's 2007 compensation are now worth far less, because the shares are worth less. His bonus could also shrink as the company is bruised by the financial industry's woes, he said.

State Street's board may also take a second look at Logue's retirement package in light of congressional scrutiny and criticism of such plans by large institutional investors. Logue's pension, which is equal to three years worth of salary and bonus and three additional years of service credits, was worth $25 million, the company said.

"Regular employees don't get those, so they need a pension. Executives don't need these supplemental pensions because they have all these other vehicles," Dolmat-Connell said.

Logue's total compensation last year was the third-highest among the nine financial companies receiving federal capital. Lloyd Blankfein at Goldman Sachs Group received the most, $54 million, and John Stumpf of Wells Fargo had the smallest compensation package, at $15 million, according to AFL-CIO's Executive PayWatch Database.

The State Street board's compensation committee will review Congress's restrictions, Cichon said. Legislation passed as part of the government's $700 billion financial industry bailout included proposals for pay "claw-backs," requiring CEOs to return compensation if their companies restate earnings. Logue's $112 million severance may be vulnerable, as lawmakers specifically targeted lucrative golden parachute packages.

State Street is "prepared to make any adjustments" Congress requires, Cichon said.

But the case for restricting pay may be difficult to make in the case of State Street, which remains profitable. In the first nine months of this year, the Boston-based company reported net income of $1.55 billion, up 49 percent.

Some critics have said Congress's actions so far lack teeth, and are "just about pressuring or guilting the companies into doing certain things," said Patrick O'Meara, a compensation specialist for the labor union AFL-CIO.

Another reason it's difficult to regulate CEO pay is that restrictions on one form of compensation spur companies to shift to bonuses or stock rewards. Congress, for example, proposed reducing the tax deduction for executive salaries to $500,000 from $1 million. If it does, that money would instead pop up on larger bonuses or grants of stock, said Dolmat-Connell.

"It'll be a net wash for Logue," he said.

Because State Street is profitable, that also makes it more difficult to justify cutting pay, and Dolmat-Connell said the market will instead do the work.

"The impact of Congress on State Street is going to be incredibly minimal," Dolmat-Connell said. "But the impact of the market will be that their bonuses will be substantially reduced this year."

State Street CEO Ronald Logue could see his compensation reduced in the future.

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