Off to the Races Again, Leaving Many Behind(NYTimes, 4/9/06)

April 9, 2006
Executive Pay: A Special Report
Off to the Races Again, Leaving Many Behind
By ERIC DASH
OMAHA
IN 1977, James P. Smith, a shaggy-haired 21-year-old known as Skinny, took a job as a meat grinder at what is now a ConAgra Foods pepperoni plant. At $6.40 an hour, it was among the best-paying jobs in town for a high school graduate.
Nearly three decades later, Mr. Smith still arrives at the same factory, shortly before his 3:30 a.m. shift. His hair has thinned; he has put on weight. Today, his union job pays him $13.25 an hour to operate the giant blenders that crush 3,600-pound blocks of pork and beef.
His earnings, which total about $28,000 a year, have not kept pace even with Omaha's low cost of living. The company eliminated bonuses about a decade ago. And now, almost 50, Mr. Smith is concerned that his $80,000 retirement nest egg will not be enough — especially since his plant is on a list of ones ConAgra wants to sell.
"I will probably have to work until I die," Mr. Smith said in his Nebraskan baritone.
Not so for Bruce C. Rohde, ConAgra's former chairman and chief executive, who stepped down last September amid investor pressure. He is set for life.
All told, Mr. Rohde, 57, received more than $45 million during his eight years at the helm, and was given an estimated $20 million retirement package as he walked out the door.
Each year from 1997 to 2005, when Mr. Rohde led ConAgra, he was awarded either a large cash bonus, a generous grant of stock or options, or valuable benefits, such as extra years' credit toward his guaranteed pension.
But the company, one of the nation's largest food companies with more than 100 brands, struggled under his watch. ConAgra routinely missed earnings targets and underperformed its peers. Its share price fell 28 percent. The company cut more than 9,000 jobs. Accounting problems surfaced in every one of Mr. Rohde's eight years.
Even when ConAgra restated its financial results, which lowered earnings in 2003 and 2004, Mr. Rohde's $16.4 million in bonuses for those two years stayed the same.
Mr. Rohde turned down repeated requests for an interview. Chris Kircher, a ConAgra spokesman, said that Mr. Rohde received no bonuses in 2001 and 2005, evidence that his compensation was based in part on performance. He added that Mr. Rohde's severance was negotiated 10 years ago, when he was first hired, not as he left. The whole package was "negotiated under a different board, a different point in the company's history, and in a different environment," Mr. Kircher said.
The disparity between Mr. Rohde's and Mr. Smith's pay packages may be striking, but it is not unusual. Instead, it is the norm.
Even here in the heartland, where corporate chieftains do not take home pay packages that are anywhere near those of Hollywood moguls or Wall Street bankers, the pay gap between the boss and the rank-and-file is wide.
New technology and low-cost labor in places like China and India have put downward pressure on the wages and benefits of the average American worker. Executive pay, meanwhile, continues to rise at an astonishing rate.
The average pay for a chief executive increased 27 percent last year, to $11.3 million, according to a survey of 200 large companies by Pearl Meyer & Partners, the compensation practice of Clark Consulting. The median chief executive's pay was somewhat lower, at $8.4 million, for an increase of 10.3 percent over 2004. By contrast, the average wage-earner took home $43,480 in 2004, according to Commerce Department data. And recent wage data from the Labor Department suggest that workers' weekly pay, up 2.9 percent in 2005, failed to keep pace with inflation of 3.3 percent.
Many forces are pushing executive pay into the stratosphere. Huge gains from stock options during the 1990's bull market are one major reason. So is the recruitment of celebrity C.E.O.'s, which has bid up the compensation of all top executives.
Compensation consultants, who are hired to advise boards, are often motivated to produce big paydays for managers. After all, the boss can hand their company lucrative contracts down the road.
Compensation committees, meanwhile, are often reluctant to withhold a bonus or stock award for poor performance. Many big shareholders, such as mutual funds and pension plans, have chosen not to cast votes critical of management. The results have been a growing gap between chief executives and ordinary employees, and often between the boss and managers one layer below.
The average top executive's salary at a big company was more than 170 times the average worker's earnings in 2004, up from a multiple of 68 in 1940, according to a study last year by Carola Frydman, a doctoral candidate at Harvard, and Raven E. Saks, an economist at the Federal Reserve.
"We need to bring some reality back," said John C. Bogle Sr., the founder and former chairman of the Vanguard Group, the mutual fund company, and an outspoken critic of executive compensation practices. "That is something that in the long run is not good for society. We have the haves and the have-nots."
Supersized salaries, bonuses and benefits, long controversial, are now drawing scrutiny from the Securities and Exchange Commission and have become part of the national political debate. About 81 percent of Americans say they think that the chief executives of large companies are overpaid, a percentage that changes little with income level or political party affiliation, according to a Los Angeles Times/Bloomberg survey in February. Many shareholders, moreover, are just plain angry.
"It's not just ConAgra — it is really in most corporations that executives are paid too much," said Don D. Hudgens, a small investor in Omaha who has submitted shareholder proposals to rein in executive pay at ConAgra and other companies. "I am a conservative Republican. I believe in the free market. But sometimes the payment of the chief executive isn't involved in that free market."
The divide between executives and ordinary workers was not always so great. From the mid-1940's through the 1970's, the pay of both groups grew at about the same rate, 1.3 percent, according to the study by Ms. Frydman and Ms. Saks. They analyzed the compensation of top executives at 102 large companies from 1936 to 2003.
But starting in the 1980's, executive compensation began to accelerate. In 1980, the average chief executive made about $1.6 million in today's dollars. By 1990, the figure had risen to $2.7 million; by 2004, it was about $7.6 million, after peaking at almost twice that amount in 2000. In other words, executive pay rose an average of 6.8 percent a year.
At the same time, the growth rate slowed for the average worker's pay. That figure rose to about $43,000 in 2004 from about $36,000 in 1980, an increase of 0.8 percent a year in inflation-adjusted terms.
CORPORATIONS, meanwhile, projected that their own earnings would grow by an average of 11.5 percent a year during that 24-year stretch, by Mr. Bogle's calculations. In reality, he said, they delivered growth of 6 percent a year, slightly less than the growth rate of the entire economy, as measured by gross domestic product.
Chief executives "aren't creating any exceptional value, so you would think that the average compensation of the C.E.O. would grow at the rate of the average worker," Mr. Bogle said. "When you look at it in that way, it is a real problem."
The problem was certainly real at ConAgra. Mr. Rohde's arrival there in 1996 coincided with three of the most powerful forces propelling executive pay and hourly workers' wages in opposite directions. Stock options were being used to reward managers richly, the food industry's rapid consolidation pushed down workers' pay and the introduction of new machinery improved productivity but cost many jobs.
Today, ConAgra, whose products include Chef Boyardee canned goods, Hunt's ketchup and Healthy Choice dinners, began in 1919 as a small food processor, grew rapidly under Charles M. Harper, a former Pillsbury executive who went by the name Mike. In the mid-1970's, he drew up an ambitious expansion strategy to establish ConAgra as a major player from "dirt to dinner," as a corporate slogan later put it. ConAgra would snap up more than 280 businesses in the next two decades. From 1980 to 1993, investors saw total returns of over 1,000 percent, or 22 percent a year.
Wall Street fell in love with Con-Agra's growth story. And the pay of Mr. Harper, who consistently hit the board's performance targets, reflected the admiration. In 1976, his pay was $1.3 million in today's dollars. By the end of his tenure, in the early 1990's, it was about $6 million a year.
"Under Mike Harper, they were a company that paid very little cash and a lot of long-term" stock, said Frederic W. Cook, who was a compensation consultant to ConAgra's board until 2002. "There were rules you could never sell the stock. They lived poor and they died rich."
By the mid-1990's, though, Con-Agra's growth strategy was running out of steam. Its market share and sales were flat. And its decentralized approach — essentially letting its 90 subsidiaries operate like independent companies — no longer worked in an industry dominated by Wal-Mart and other large supermarket buyers.
Mr. Rohde — who had been Con-Agra's chief outside lawyer, advising Mr. Harper on more than 200 deals — was hired in 1996 to help the company reorganize. He became chief executive the next year.
ConAgra's stock price was near a record high, and Mr. Rohde was paid handsomely. His first year's total compensation was $7.9 million, including an initial $4.3 million restricted stock grant, vested over 10 years, and a $500,000 long-term performance payout.
Mr. Rohde tried to centralize many of ConAgra's main operations and integrate dozens of its businesses. But analysts said he let the company's brands stagnate and struggled to execute his plans.
From mid-1999 to mid-2001, Con-Agra struggled amid a sweeping overhaul. The company incurred $1.1 billion in restructuring charges. It terminated more than 8,450 employees and closed 31 plants. And analysts began complaining that ConAgra did not invest enough in its brands to keep profits up.
Mr. Rohde continued to be well-compensated. During that two-year period, he received cash and stock option grants of more than $8.7 million, even as ConAgra's board withheld his annual bonus and all long-term equity awards for 2001 because of weak results.
But what the board took away with one hand, it gave back with the other. In July 2001, it granted Mr. Rohde 300,000 stock options. The reason, according to proxy filings, was that an unnamed independent consultant's compensation report indicated that his equity-based pay was not competitive. "There's nothing wrong at all conceptually with giving someone options after a bad year," said Mr. Cook, who was the unnamed consultant. "An option is an incentive for the future. It is not a reward for the past."
Still, Mr. Cook said he recognized that people say "they rewarded him for failure."
"Financially," he added, "it's hard to argue with that."
TWO months later, ConAgra's compensation committee piled on 750,000 more stock options. Based on a review of option grants, a proxy filing said, Mr. Rohde's option position had been "below competitive levels for a number of years." And the board wanted to recognize "the results achieved in repositioning the company for the future."
Then Mr. Rohde hit the jackpot in 2003 and 2004, with the board awarding him $16.4 million in bonus money and the part of his long-term incentive plan he had earned. The payments were based largely on earnings targets. But in March 2005, ConAgra announced that it would have to restate earnings for 2003 and 2004, reducing them by a total of up to $200 million for the two years after poor internal controls led to income tax errors.
"That works out to nearly 20 cents per share annually, or between 10 percent and 15 percent of earnings," John M. McMillin, an analyst at Prudential Equity Group, wrote at the time. ConAgra "is in the process of restating earnings for both years and we ask, why not restate the bonus for the C.E.O.?"
Mr. Kircher, the ConAgra spokesman, said the restatement did not have a material impact on the way Mr. Rohde's bonuses were calculated.
With the accounting issues clouding the company's future and more layoffs and financial challenges ahead, Mr. Rohde announced last May that he planned to step down. In 2005, the board gave him only his $1.2 million salary.
But through it all, Mr. Rohde managed to take home more than $45 million in pay, including salary, bonuses and restricted stock grants. He did not sell any of his stock while chief executive but stands to benefit if he sells his shares now.
Carl E. Reichardt, the former head of Wells Fargo, led the compensation committee that approved Mr. Rohde's pay every year of his tenure, and continues in that role today. Mr. Reichardt also declined to comment.
One former member of the compensation committee found it difficult to explain the pay-for-performance link. Looking back, said Clayton K. Yeutter, a former United States trade representative who served on the compensation committee from 1997 to 2001, "I can understand what you are getting to, because the compensation became pretty generous, because the stock did not perform very well." He said he could not recall any meeting details.
MR. SMITH, the meat grinder, can only dream about such generosity. His wages have grown at a pace of 2.7 percent a year for the last 28 years. But, adjusted for inflation, his $13.25 an hour salary today is roughly two-thirds his $6.40-an-hour starting wage.
Mr. Rohde's salary alone rose at 8 percent a year, and he collected more than $22 million in cash compensation during almost nine years at the company. Since stepping down in September, he started collecting $2.4 million in severance pay, twice his most recent salary, as well as full health benefits, which he will have through 2009. ConAgra shareholders are footing the bill for a secretary and an office near his home. And that $984,000 annual pension? It reflects 20 years of service, even though he was a ConAgra executive for not quite nine. In July, Mr. Rohde told The Omaha World-Herald that he hoped to spend part of his retirement flying his helicopter between his home and his family's Minnesota getaway home.
Mr. Smith, on the other hand, envisions spending his golden years hunting mallards and casting for catfish at a nearby riverfront cabin. He will have to make do on the $80,000 in his 401(k) plan, as well as his Social Security checks and a pension of $106 a month that was frozen almost a decade ago. But to hear Mr. Smith tell it, he is not angry at Mr. Rohde or, more broadly, at the widening gap between executive and worker pay. Instead, his feelings are somewhere between disappointment and disbelief.
"If the stock keeps going up, maybe they deserve it. If the stock is going down to the bottom, they should get nothing," Mr. Smith said. "My opinion."
Last May, ConAgra directors began looking for a new chief executive. In a few months, they identified their man: Gary M. Rodkin, a 53-year-old PepsiCo executive with 25 years of food-industry experience, including more than a decade overseeing PepsiCo's core brands. But he did not come cheap.
Even before his first day of work, Mr. Rodkin was given a $1 million salary and a guaranteed $2 million bonus for this year, according to his employment contract. He was granted 1.48 million stock options, with a projected value of $5.8 million today, exercisable over the next three years. "We wanted to get him aligned with the interests of shareholders of the company," Steven F. Goldstone, ConAgra's chairman and the former chief executive of RJR Nabisco, told Bloomberg News at the time. "The idea is to increase shareholder value. If he increases shareholder value, he makes money, too."
If Mr. Rodkin does not increase shareholder returns, his stock options will decline in value, as will the $1.6 million in ConAgra stock he recently bought with his own cash.
Still, ConAgra has already agreed to take care of Mr. Rodkin when he leaves. Based on his employment agreement, he will walk away with at least $6 million in severance, a prorated bonus and a $129,000 pension supercharged with three years of credit for each year he worked.
And though he took the job at ConAgra, PepsiCo is still honoring a $4.5 million, two-year consulting contract it gave him when he left. "If the new guy is the right guy, he is worth his weight in gold," said Brian Foley, an independent compensation consultant in White Plains, who reviewed Mr. Rohde's and Mr. Rodkin's employment agreements and other compensation documents. "If he is the wrong guy, you have a severance package that is substantially more expensive."
ConAgra's board, in the meantime, agreed to ease Mr. Rodkin's transition by flying him each week, for up to two years, from his home in White Plains to its Omaha headquarters.
Mr. Smith commutes to work in his green 1998 Chevy pickup truck.
Amanda Cox contributed reporting for this article.

Advice on Boss's Pay May Not Be So Independent(NYTimes, 4/10/06)

April 10, 2006
Advice on Boss's Pay May Not Be So Independent
By GRETCHEN MORGENSON
For Ivan G. Seidenberg, chief executive of Verizon Communications, 2005 was a very good year. As head of the telecommunications giant, Mr. Seidenberg received $19.4 million in salary, bonus, restricted stock and other compensation, 48 percent more than in the previous year.
Others with a stake in Verizon did not fare so well. Shareholders watched their stock fall 26 percent, bondholders lost value as credit agencies downgraded the company's debt and pensions for 50,000 managers were frozen at year-end. When Verizon closed the books last year, it reported an earnings decline of 5.5 percent.
And yet, according to the committee of Verizon's board that determines his compensation, Mr. Seidenberg earned his pay last year as the company exceeded "challenging" performance benchmarks. Mr. Seidenberg's package was competitive with that of other companies in Verizon's industry, shareholders were told, and was devised with the help of an "outside consultant" who reports to the committee.
The independence of this "outside consultant" is open to question. Although neither Verizon officials nor its directors identify its compensation consultant, people briefed on the relationship say it is Hewitt Associates of Lincolnshire, Ill., a provider of employee benefits management and consulting services with $2.8 billion in revenue last year.
Hewitt does much more for Verizon than advise it on compensation matters. Verizon is one of Hewitt's biggest customers in the far more profitable businesses of running the company's employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. According to a former executive of the firm who declined to be identified out of concern about affecting his business, Hewitt has received more than half a billion dollars in revenue from Verizon and its predecessor companies since 1997.
In other words, the very firm that helps Verizon's directors decide what to pay its executives has a long and lucrative relationship with the company, maintained at the behest of the executives whose pay it recommends.
This is the secretive, prosperous and often conflicted world of compensation consultants, who are charged with helping corporate boards determine executive pay that is appropriate and fair, and who are often cited as the unbiased advisers whenever shareholders criticize a company's pay as excessive.
It is a world where consulting fees can reach $950 an hour, rivaling those of the nation's top lawyers. And it has grown into a substantial industry where there is little disclosure about how executive pay is determined.
Marc C. Reed, executive vice president for human resources at Verizon, declined to identify the company's compensation consultant, noting that the Securities and Exchange Commission did not require it. "We understand the potential perception issue," he said in an e-mail message, "but we think it's important to honor the confidentiality of our advisers, and we have always ensured there have been no conflicts of interest."
Suzanne Zagata-Meraz, a spokeswoman for Hewitt, said in a statement: "Hewitt Associates has strict policies in place to ensure the independence and objectivity of all our consultants, including executive compensation consultants. In addition, Hewitt adheres to strict confidentiality requirements and a strong Hewitt code of conduct."
Because much of what goes on in compensation consulting stays in the hushed confines of corporate boardrooms, the roles of these advisers in determining executive pay have been hidden from investors' view. Nevertheless, corporate governance experts say, the conflicts bedeviling some of the large consulting firms help explain why in good times or bad, executive pay in America reaches dizzying heights each year.
Warren E. Buffett, the chief executive of Berkshire Hathaway and an accomplished investor, has noted the troubling contributions that compensation consultants have made to executive pay in recent years.
"Too often, executive compensation in the U.S. is ridiculously out of line with performance," he wrote in his most recent annual report. "The upshot is that a mediocre-or-worse C.E.O. — aided by his handpicked V.P. of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet & Bingo — all too often receives gobs of money from an ill-designed compensation arrangement."
How Much Is Too Much?
Executive pay has been a subject of criticism for decades. Even though last year's pay figures showed slower growth than in previous years, the fact that executive compensation often has little relationship to the performance of the company has contributed to a growing sense among investors that pay is diminishing shareholder returns. "Everybody should have an interest in controlling this explosion in executive pay," said Frederick E. Rowe Jr., chairman of the Texas Pension Review Board who is also chairman of Greenbrier Partners, a money management firm in Dallas. "The wealth of America has been built through the returns of our public corporations, and if those returns are being redirected to company managements, then the people who get the short end of the stick are the people who hope to retire someday."
The median compensation for chief executives at roughly 200 large companies rose modestly to $8.4 million last year, from $8.2 million in 2004, according to Equilar Inc., a compensation analysis firm in San Mateo, Calif. The median was $7.2 million in 2003.
There are those who defend the current levels of executive pay, saying that the packages are set by the market and reflect the rising value of executives in an increasingly complex and competitive arena.
In an interview with The Wall Street Journal on March 20, John W. Snow, secretary of the Treasury, characterized executive pay this way: "In an aggregate sense, it reflects the marginal productivity of C.E.O.'s." Mr. Snow added that he trusted the marketplace to reward executives. Mr. Snow was a member of the Verizon board from 2000 to 2002 and on its compensation committee in 2001.
But defenders of executive pay are increasingly being drowned out by investors and workers who see some packages not only as an unjustified cost but also as a potentially divisive social issue.
Any discussion of executive pay quickly leads to compensation consultants, because they are the experts relied upon by company directors trying to balance their fiduciary duties to shareholders and their desire to keep management happy. Directors look to consultants for their knowledge about prevailing pay practices as well as the tax and legal implications of different types of compensation. Yet the consultants' practices have received little scrutiny.
Consultants help select the companies to be used in peer groups for comparison purposes in judging an executive's performance. Picking a group of companies that will be easy to outperform is one way to ensure that executives can clear performance hurdles. Another is to structure an executive's pay so that it is always at or near the top of those in his industry regardless of his company's performance. This pushes up pay simply when others in the industry do well.
Consultant creativity is behind some of the pay practices that have generated huge windfalls for executives in recent years. Some of the most costly practices involving stock options, like mega-grants and automatic reloads of options when others are cashed in, have vanished under pressure as accounting rules have changed. But innovative practices continue to crop up and spread quickly because comparisons with what other executives receive is a central factor driving executive pay.
An increasingly common practice of consultants is to use the same performance benchmark to generate both short-term and long-term pay. This arrangement rewards executives twice for a single achievement, noted Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm in Portland, Me.
A recent study by the Corporate Library, "Pay for Failure: The Compensation Committees Responsible," identified 11 major companies whose shareholder returns had been negative for five years, but whose chief executives' pay had exceeded $15 million during the last two years combined. "The disconnect between pay and performance is particularly stark" at these companies, the study noted. They include AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent Technologies, Merck, Pfizer, Safeway, Time Warner and Wal-Mart.
Directors Help Each Other
Verizon is the other company on the list. Mr. Seidenberg's $75 million total pay for five years looked especially high against a total shareholder loss of more than 26 percent in the period, the study said. Verizon's board received a grade of D in effectiveness from the Corporate Library.
Robert A. Varettoni, a Verizon spokesman, pointed out that Mr. Seidenberg had received the first increase in base salary last year since the company was formed in 2000. "During this particularly tumultuous time in the telecom industry," Mr. Varettoni said in an e-mail message, "Verizon has maintained its financial health and infrastructure investments, increased its dividends, lowered its debt, transformed its revenue growth profile, and provided customers with a steady stream of product innovations, such as wireless broadband services and fiber-optic-based TV services."
Doreen A. Toben, chief financial officer of Verizon, sits on the board of The New York Times Company and on its audit committee. Hewitt Associates is the compensation consultant for The New York Times, said Catherine Mathis, a spokeswoman for the Times, but does not handle other business for the company.
Consultants are not alone in driving executive pay. Corporate boards are often composed of other chief executives with an interest in keeping executive pay high. Even though stock exchange regulations require compensation committee members to be independent of the executives whose remuneration they oversee, their connections with those people can run deep.
Verizon's compensation committee, for example, consists entirely of chief executives or former chief executives. Three of the four members sit on other boards with Mr. Seidenberg. When he was on Wyeth's board, Mr. Seidenberg helped set the pay of one member of Verizon's compensation committee, John L. Stafford, previously the chairman and chief executive of Wyeth.
Human resources officials often work closely with the compensation consultants and report directly to the chief executives. Then there are the executives themselves, who have been known to make quiet suggestions to their directors about their pay, according to board members and compensation experts who spoke about their experiences but said they feared retribution if they were identified.
Mutual fund and pension fund managers, too, regularly vote their shares in favor of large grants of stock options or restricted stock.
The potential for conflicts in consulting arrangements can be difficult for outsiders to spot. Even if the consultant is identified, the other work that a consultant's company performs for the compensation client is hard to plumb.
"I wish we could figure out how to flesh out the conflicts that pay consultants have in the same way we were successful in fleshing out the conflicts in Wall Street research," said Richard H. Moore, who as treasurer of North Carolina oversees $70 billion. "This is one of the last pieces that are pure unadulterated conflicts that neither the board nor the shareholder is well served by."
Room for Potential Conflicts
The only reference to Hewitt Associates in any Verizon filing, for instance, is a letter sent by the company to institutional shareholders and attached to a 2004 proxy filing. The letter, written by a Hewitt official, details the supplemental executive retirement plan in response to a shareholder proposal that would have required stockholder approval of any "extraordinary benefits for senior executives" at Verizon.
Last year, Verizon's directors described the compensation adviser as an "independent, outside consultant." In this year's proxy, the word "independent" is missing.
The Securities and Exchange Commission has proposed rules on compensation disclosure that would require compensation consultants to be identified. But the rules would not force companies to disclose details of other services provided by the consulting firm or its affiliates.
The potential for conflict is reminiscent of that among auditing firms that were performing lucrative consulting services related to information technology and tax issues for the same companies whose financial results they were certifying. When the S.E.C. required companies to disclose how much they were paying in consulting as well as audit fees, the industry was compelled to separate these businesses.
"Auditors' giving companies tax advice while acting as their independent auditors was clearly crossing the line into bad corporate governance in the cases of Enron and Hollinger," said Mr. Hodgson of the Corporate Library. Referring to pay consultants, he added: "The perception has been growing that it is better that there be a clear line of distinction between the people the board hires and the people hired by the corporation."
The Conference Board, a nonprofit organization that conducts research and conferences for business leaders, issued a report in January suggesting, among other practices, that boards hire their own compensation consultants, who have not done work for the company or its current management. The report quoted a former chief justice of Delaware, E. Norman Veasey: "Compensation committees should have their own advisers and lawyers. Directors who are supposed to be independent should have the guts to be a pain in the neck."
But according to consultants and directors, compensation committees typically employ a consultant who also works with a human resources executive, the company's chief executive and the chief financial officer. In many cases, a company's chief executive is present at meetings where the compensation consultant and the human resources executive hash out the terms of a package.
Some compensation committees have started hiring their own pay consultants who do no other work for their companies. James F. Reda & Associates, a small pay consultant in New York, founded in 2004, works with some of the nation's largest companies on executive compensation issues. But such independence is uncommon.
In a comment letter to the S.E.C. on its proposed disclosure rules, Mr. Reda noted that all but one of the nation's large compensation consultants offered other services. "Most diversified H.R. consulting firms earn more on selling other services than on performing compensation consulting services," he wrote.
Hewitt; Watson Wyatt; Towers Perrin; Pearl Meyer & Partners, a unit of Clark Consulting; and Mercer Human Resources Consulting, a unit of Marsh & McLennan, all provide a vast array of services to corporate clients.
Hewitt, for example, conducted mostly actuarial work when it was founded in 1940. Now, it is much more diversified, operating in 31 countries and providing things like investment services. Of the $2.8 billion in revenues at Hewitt in 2005, 71 percent came from its outsourcing business; 29 percent came from its human resources consulting unit.
Typically, only a fraction of a firm's sales come from compensation consulting. Mr. Reda estimates that compensation consulting generates less than 2 percent of a diversified firm's revenues.
Verizon is not the only Hewitt compensation client that uses the firm for actuarial, administrative, investment advice or other services. According to filings with the Labor Department, Hewitt has worn two hats in its work for Boeing, Maytag, Genuine Parts, Procter & Gamble, Toro, Morgan Stanley and Nortel Networks.
Because few companies identify their compensation consultant, this list is by no means comprehensive.
At Verizon, Hewitt is ubiquitous. The company operates Verizon's employee benefits Web sites, where its workers get information about their pay, health and retirement benefits, college savings plans and the like. Labor Department filings show that Hewitt is actuary for three of Verizon's pension plans. Hewitt also performed extensive work for the two companies — Bell Atlantic and GTE — that merged to become Verizon in 2000. Immediately after the merger, Verizon employed Hewitt to help it assess overall human resources costs. Over the years, Hewitt's Web site has offered testimonials from Verizon officials about its services.
These multiple relationships are no accident. Hewitt calls its offerings "total human resources solutions" that help clients manage the costs of their work force efficiently.
Towers Perrin, Watson Wyatt and Mercer Human Resources make the same pitch. They contend, as Wall Street firms once did about stock analysts and investment bankers, that potential conflicts can be managed properly. In a working group report written by corporations and consultants last year for the Conference Board, they argued that companies and boards are best served by using a single compensation consultant — less adversarial and lower cost — and that the consultant should work closely with the company's management in devising executive pay. This argument was rejected in the Conference Board's subsequent report.
A 'One-Two Punch'
Brian Foley, an executive compensation expert who operates his own independent consulting firm in White Plains and who does not work for Verizon, analyzed Mr. Seidenberg's pay for this article. "If you were a shareholder looking at how Ivan did financially, in terms of new stuff, if you didn't know the facts, you would have sworn they had a really good year," Mr. Foley said. "Bonus up 23 percent and a 40 percent salary increase — that's a one-two punch in a year when stockholders are down."
According to Verizon's proxy, Mr. Seidenberg received his raises last year in part because the company expanded "its customer base through innovative products in wireless, broadband, data, video and long-distance services," according to the company's proxy statement. In addition, Verizon made significant investments in its network and enlarged its market share. Verizon's annual consolidated operating revenue increased 6 percent, driven by 16.8 percent revenue growth at Verizon Wireless and 10.5 percent revenue growth in wireline data revenues.
Mr. Reed noted that last year Verizon's board canceled 209,660 restricted shares Mr. Seidenberg was to receive. "Ivan and the board have made a series of strategic business choices that are designed to create sustainable long-term shareholder value," he said in an e-mail message. "In 2006, these plans have begun to take root, and our shareholders have begun to benefit accordingly."
But Mr. Foley pointed to several aspects of Mr. Seidenberg's pay that seem out of sync. One is the low level of performance — beginning at the 21st percentile of other companies — that generates an incentive stock payout. "If you have 100 companies in the sample, as long as you beat 20 of them you start making money," Mr. Foley said. "That hurdle is so low it's almost embedded in the ground."
Another surprise, Mr. Foley said, was Verizon's contributions to Mr. Seidenberg's retirement plan in recent years. "They've put in almost $6 million in four years in new contributions — that goes beyond holy cow," he said. "I look at this in the context of all the retrenchment Verizon has made in retiree benefits and medical for the rank-and-file guys." Verizon has frozen future benefits to be paid under Mr. Seidenberg's retirement plan, which had grown to $15.2 million by the end of last year.
Each year that Mr. Seidenberg has been Verizon's chief executive, a shareholder proposal has appeared on the company's proxy that is critical of its executive pay. At this year's meeting, scheduled for May 4, shareholders will vote on a proposal that would require that at least three-quarters of stock option and restricted share grants to executives be "truly performance-based, with the performance criteria disclosed to shareholders."
The company's directors say its incentive pay plans already "provide aggressive and competitive performance objectives that serve both to motivate and retain executives and to align their interests with those of the company's shareholders."
But the Corporate Library study concurred with Mr. Foley in questioning Verizon's practice of paying bonuses even when the company's performance lags well behind that of most companies in its comparison groups. "This is not even logical," the study asserted.
Mr. Reed of Verizon noted that the consultant used by the compensation committee did not certify board actions, "but its perspective — which board members may or may not agree with — is one of many inputs considered before the board reaches its independent decision."
On the matter of disclosing the consultant's identity, "We'll continue to look at this issue," he said, "even if the S.E.C. does not adopt new guidelines."
Gary Lutin, an investment banker at Lutin & Company in New York and an adviser in corporate control contests, said: "Paying some friendly consultant $100 million to help you justify the diversion of shareholder wealth to managers is just adding another $100 million to the diversion. If you're really trying to be a responsible director, you'd never rely on an expert who can't be considered objective."
Shareholders Speak Up
Verizon's compensation committee is led by Walter V. Shipley, former chief executive of the Chase Manhattan Corporation, and is made up of Richard L. Carrión, chief executive of Banco Popular de Puerto Rico; Robert W. Lane, chief executive of Deere & Company; and Mr. Stafford, formerly of Wyeth.
None of Verizon's directors agreed to be interviewed for this article.
Many of the Verizon directors who are on its compensation committee have also met Mr. Seidenberg at board meetings of other public companies. At Wyeth meetings, Mr. Seidenberg encounters Mr. Shipley, who is the chairman of Verizon's compensation committee and who is a member of Wyeth's committee, sitting with Mr. Carrión, at least until 2006.
Mr. Seidenberg sees Mr. Stafford when the board of Honeywell International meets. Mr. Stafford is chairman of Honeywell's compensation committee, which includes Mr. Seidenberg.
C. William Jones, the president and executive director of BellTel Retirees, a group of 111,500 people, has had many meetings with Verizon executives to discuss pay.
BellTel Retirees have placed four shareholder proposals relating to executive compensation on Verizon proxies in recent years; the organization has won significant concessions from the company after the proposals attracted shareholder support.
Mr. Jones said Verizon executives had always treated him with respect. But the dialogue stops on the subject of Verizon's consultant. "I spoke to a senior vice president of human resources and said, 'Who is it?' " recalled Mr. Jones, who retired in 1990 with 30 years' service. "He said, 'We have a policy that we do not disclose that information.' I don't know what the secret is."

Politics Faces Sweeping Change Via the Web(NYTimes, 4/2/06)

April 2, 2006
Politics Faces Sweeping Change Via the Web
By ADAM NAGOURNEY
WASHINGTON, March 31 — The transformation of American politics by the Internet is accelerating with the approach of the 2006 Congressional and 2008 White House elections, prompting the rewriting of rules on advertising, fund-raising, mobilizing supporters and even the spreading of negative information.
Democrats and Republicans are sharply increasing their use of e-mail, interactive Web sites, candidate and party blogs, and text-messaging to raise money, organize get-out-the-vote efforts and assemble crowds for a rallies. The Internet, they said, appears to be far more efficient, and less costly, than the traditional tools of politics, notably door knocking and telephone banks.
Analysts say the campaign television advertisement, already diminishing in influence with the proliferation of cable stations, faces new challenges as campaigns experiment with technology that allows direct messaging to more specific audiences, and through unconventional means.
Those include Podcasts featuring a daily downloaded message from a candidate and so-called viral attack videos, designed to trigger peer-to-peer distribution by e-mail chains, without being associated with any candidate or campaign. Campaigns are now studying popular Internet social networks, like Friendster and Facebook, as ways to reaching groups of potential supporters with similar political views or cultural interests.
President Bush's media consultant, Mark McKinnon, said television advertising, while still critical to campaigns, had become markedly less influential in persuading voters that it was even two years ago.
"I feel like a woolly mammoth," Mr. McKinnon said.
What the parties and the candidates are undergoing now is in many ways similar to what has happened in other sectors of the nation — including the music industry, newspapers and retailing — as they try to adjust to, and take advantage of, the Internet as its influence spreads across American society. To a considerable extent, they are responding to, and playing catch up with, bloggers who have demonstrated the power of their forums to harness the energy on both sides of the ideological divide.
Certainly, the Internet was a significant factor in 2004, particularly with the early success in fund-raising and organizing by Howard Dean, a Democratic presidential contender. But officials in both parties say the extent to which the parties have now recognized and rely on the Internet has increased at a staggering rate over the past two years.
The percentage of Americans who went online for election news jumped from 13 percent in the 2002 election cycle to 29 percent in 2004, according to a survey by the Pew Research Center after the last presidential election. A Pew survey released earlier this month found that 50 million Americans go to the Internet for news every day, up from 27 million people in March 2002, a reflection of the fact that the Internet is now available to 70 percent of Americans.
This means, aides said, rethinking every assumption about running a campaign: how to reach different segments of voters, how to get voters to the polls, how to raise money, and the best way to have a candidate interact with the public. In 2004, John Edwards, a former Democratic senator from North Carolina and his party's vice presidential candidate, spent much of his time talking to voters in living rooms in New Hampshire and Iowa; now he is putting aside hours every week to videotape responses to videotaped questions, the entire exchange posted on his blog.
"The effect of the Internet on politics will be every bit as transformational as television was," said Ken Mehlman, the Republican national chairman. "If you want to get your message out, the old way of paying someone to make a TV ad is insufficient: You need your message out through the Internet, through e-mail, through talk radio."
Michael Cornfield, a political science professor at George Washington University who studies politics and the Internet, said campaigns were actually late in coming to the game. "Politicians are having a hard time reconciling themselves to a medium where they can't control the message," Professor Cornfield said. "Politics is lagging, but politics is not going to be immune to the digital revolution."
If there was any resistance, it is rapidly melting away.
Mark Warner, the former Democratic governor of Virginia, began preparing for a potential 2008 presidential campaign by hiring a blogging pioneer, Jerome Armstrong, a noteworthy addition to the usual first-wave of presidential campaign hiring of political consultants and fund-raisers.
Mr. Warner is now one of at least three potential presidential candidates — the others are the party's 2004 presidential and vice presidential candidates, Senator John Kerry of Massachusetts and Mr. Edwards — who are routinely posting what aides say are their own writings on campaign blogs or on public blogs like the Daily Kos, the nation's largest.
Analysts said that the Internet appeared to be a particularly potent way to appeal to new, young voters, a subject of particular interest to both parties in these politically turbulent times. In the 2004 campaign, 80 percent of people between the age of 18 and 34 who contributed to Mr. Kerry's campaign made their contribution online, Carol Darr, director of the Institute for Politics, Democracy and the Internet at George Washington University.
Not incidentally, as it becomes more integrated in American politics, the Internet is being pressed into service for the less seemly side of campaigns.
Both parties have set up Web sites to discredit opponents. In Tennessee, Republicans spotlighted what they described as the lavish spending habits of Representative Harold E. Ford Jr. with a site called http://www.fancyford.com/. That site drew 100,000 hits the first weekend, and extensive coverage in the mainstream Tennessee press, which is typically the real goal of creating sites like this. And this weekend, the Republicans launched a new attack site, http://www.bobsbaggage.com/, that is aimed at Senator Robert Menendez of New Jersey and focused on ethics accusations against him.
For their part, Democrats have set up decoy Web sites to post documents with damaging information about Republicans. They described this means of distribution as far more efficient than the more traditional slip of a document to a newspaper reporter.
A senior party official, who was granted anonymity in exchange for describing a clandestine effort, said the party created a now-defunct site called D.C. Inside Scoop to, among other things, distribute a document written by Senator Mel Martinez, Republican of Florida, discussing the political benefits of the Terri Schiavo case. A second such site, http://capitolbuzz.blogspot.com/, spread more mischievous information: the purported sighting of Senator Rick Santorum, a Pennsylvania Republican, parking in a spot reserved for the handicapped.
On the left in particular, bloggers have emerged as something of a police force guarding against disloyalty among Democrats, as Steve Elmendorf, a Democratic consultant, learned after he told The Washington Post that bloggers and online donors "are not representative of the majority you need to win elections."
A Daily Kos blogger wrote: "Not one dime, ladies and gentlemen, to anything connected with Steve Elmendorf. Anyone stupid enough to actually give a quote like that deserves to have every single one of his funding sources dry up." Asked about the episode, Mr. Elmendorf insisted the posting had not hurt his business, but added contritely: "Since I got attacked on them, I read blogs a lot more and I find them very useful." One of the big challenges to the campaigns is not only adjusting to the changes of the past two years but also to anticipate now the kind of technological changes that might be on hand by the next presidential campaign. Among those most cited are the ability of campaigns to beam video campaign advertisements to cell phones.
"All these consultants are still trying to make sense of what blogs are, and I think by 2008 they are going to have a pretty good idea: They are going to be like, 'We're hot and we're hip and we're bloggin',' " said Markos Moulitsas, the founder of the Daily Kos. "But by 2008, the blogs are going to be so institutionalized, it's not going to be funny."
Bloggers, for all the benefits they might bring to both parties, have proved to be a complicating political influence for Democrats. They have tugged the party consistently to the left, particularly on issues like the war, and have been openly critical of such moderate Democrats as Senator Joseph I. Lieberman of Connecticut.
Still, Democrats have been particularly enthusiastic about the potential of this technology to get the party back on track, with many Democratic leaders arguing that the Internet is today for Democrats what talk radio was for Republicans 10 years ago. "This new media becomes much more important to us because conservatives have been more dominant in traditional media," said Simon Rosenberg, the president of the centrist New Democratic Network. "This stuff becomes really critical for us."
For all the attention being paid to Internet technology, there remain definite limitations to its reach. Internet use declines markedly among Americans over 65, who tend to be the nation's most reliable voters. Until recently, it tended to be more heavily used by middle- and upper-income people.
And while the Internet is efficient at reaching supporters, who tend to visit and linger at political sites, it has proved to be much less effective at swaying voters who are not interested in politics. "The holy grail that everybody is looking for right now is how can you use the Internet for persuasion," Mr. Armstrong, the Warner campaign Internet adviser, said.
In this age of multitasking, voters are not as captive to a Web site as they might be to a 30-second television advertisement, or a campaign mailing. That was a critical lesson of the collapse of Mr. Dean's presidential campaign, after he initially enjoyed great Internet success in raising money and drawing crowds.
"It's very easy to look at something and just click delete," said Carl Forti, a spokesman for the National Republican Congressional Committee. "At least if they are taking out a piece of mail, you know they are taking it out and looking at it on the way to the garbage can."