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CEOs benefit from stock market's meteoric rise

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Compensation of chief executive officers of large U.S. companies has risen to new heights, paced by another year of stock market advances, according to the annual CEO compensation survey compiled by William M. Mercer Incorporated for The Wall Street Journal.

The survey analyzes and reports the most current compensation information taken from proxy statements of 350 large U.S. companies.

The median increase in CEO cash compensation (base salary plus annual bonus) last year was 11.7 percent, the largest increase since the inception of the survey in 1990. The median increase in CEO total direct compensation amounted to slightly more than 29 percent last year, contrasted with 18 percent in 1996.

Total direct compensation includes, in addition to salary and bonus, the executive's gains from stock-option exercises, as well as the value of restricted stock grants and other long-term incentive payments.

In dollar terms, the median CEO cash-compensation package was worth $1,596,667, up from $1,471,250 in 1996. The median total direct-compensation package among the 350 companies studied amounted to $3,093,018, up from $2,375,620.

For the first time, Mercer added company financial performance measures, including one-year total shareholder return, to the survey; the median one-year total shareholder return was almost 30 percent.

Although 179 CEOs exercised some portion of the stock options they held in 1997 for a median gain of $1,868,268, almost half the survey sample did not exercise any options. The typical CEO now holds paper gains of almost $9 million on outstanding stock options, up 72 percent from 1996.

Confirming the importance of stock-based rewards for executives, the great majority of the CEOs a total of 289 executives received new grants of stock options during the past year, up just slightly from 1996.

Stock options were delivered to a growing number of CEOs of America's largest companies in so-called "mega-grants." These grants have a face value at least equal to three times the CEO's total annual compensation (salary plus bonus). Analyzing the prevalence and types of mega-grants, the survey's findings indicate:

?Mega-grants are no longer anomalies. In 1997, 48 percent of option grants fell into the category of mega-grants, compared with 42 percent a year earlier and just 23 percent five years ago.

?A total of 138 CEOs of the surveyed companies received mega-grants last year; this compares with 118 executives who received such grants in 1996.

?Twenty-four of the mega-grants were performance-based, compared with 21 in 1996.

?The number of restricted-stock mega-grants (in this case, grants having a face value equal to at least the CEO's total annual compensation) rose to 26, compared with 16 in 1996; 12 of the restricted-stock mega-grants were performance-based, compared with 10 in 1996.

?Companies are starting to make multiple mega-grants of restricted stock and stock options. During 1997, 13 CEOs received multiple mega-grants, up from six CEOs who received such rewards in 1996.

"There's no question that both the value of CEOs' pay packages and these executives' stake in their enterprises have grown. At the same time, we've also seen the shareholders' value increase proportionally," said Spencer Fields, a principal and client manager in Mercer's Kansas City office. "More and more companies are listening to shareholders' concerns and are making performance goals particularly long-term goals an important part of executives' pay packages."

Fields said one example is the growing use of mega-grants that carry performance-based restrictions, and he noted that nearly a fourth of CEOs' stock mega-grants now have such performance features.

Using a proprietary analytical system to measure the aggregate value of CEO total direct compensation, outstanding options and other shares owned, Mercer found that the value had jumped almost 44 percent to a median of $25.5 million in 1997.

(The preceding article was provided by William M. Mercer Incorporated, a human resource management consulting firm. Mercer's Kansas City office serves clients throughout the four-state area of Kansas, Missouri, Iowa and Nebraska.)

INSET CAPTION:

The great majority of the CEOs received new grants of stock options during the past year.

CHART:

The Wall Street Journal/William M. Mercer Inc.

CEO Compensation Study

Ten-Year Trends Historical Data

1988-1997

Percentage Increase Over Prior Year

CEO Annual

Year Cash Compensation Corporate Profits Annual CPI

1988 13.9% 23.0% 4.1%

1989 8.0% -4.2% 4.8%

1990 6.7% -8.0% 5.4%

1991 3.9% -15.1% 4.2%

1992 8.1% 22.8% 3.0%

1993 8.1% 18.9% 3.0%

1994 11.4% 28.5% 2.6%

1995 10.4% 14.2% 2.8%

1996 5.2% 11.0% 3.0%

1997 11.7% 8.9% 2.3%[[In-content Ad]]

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