Ken Silverstein EnergyBiz Insider Editor-in-Chief

The move toward more inquiry into salary negotiations is essential to restoring investor confidence. Because boards tend to be made up of other high-ranking corporate officials that must also seek compensation increases from their directors, those members have been accused of setting performance measures purposefully low and being too amenable to healthy pay raises. They furthermore cite the need to hire the best and the brightest, noting that to do so they must pay in the top quartile of peer companies. If all companies use the same reasoning, pay scales invariably keep going up.

The idea underlying compensation design is to meet certain goals, such as achieving revenue targets, maintaining market share or increasing shareholder value. Total pay is generally made up of salary, cash bonuses and long-term incentives. Many companies have stopped providing stock options that give executives the right -- but not the obligation -- to buy stock at a fixed price at some point in the future.

According to Forbes, the top people at America's 500 biggest companies received an aggregate 54 percent pay raise last year. The media group pegs the total compensation at $5.1 billion compared to $3.3 billion in fiscal 2003. Meantime, utility execs saw their pay jump 15.8 percent, which is double that of the year before, says a study by the Conference Board. Utility heads made on average $1.7 billion in 2004.

"Being a regulated industry, that would impede the latitude of top executives," says Charles Peck, compensation specialist with the New York-based Conference Board and in an interview with EnergyBiz magazine.

According to the Hay Group that specializes in compensation issues, corporate boards must assure that pay standards are transparent and the process to assign compensation is fair and does not conflict with employee benefit policies that apply to everyone else. The firm also says that such packages must be appropriately balanced between short-term and long-term interests as well as reflect the entire scope of the operations. The pay strategy must reward ethical behavior and correlate total salary with performance. Shareholders, in fact, display antipathy for CEOs that get richly rewarded for mediocre performance.

Consider Alliant Energy: Its annual financial statement says that base salaries are set up to be in line with similar companies, or those of the Standard & Poors Midcap 400 Utilities Index. Increases to base salaries are driven primarily by market adjustments for a particular salary level, it says, which generally limits across-the-board increases. The company's annual incentive program promotes pay-for-performance and gives incentives for cash bonuses.

Getting the Message

Undeniably, besides aligning executive rewards with how others in the company are paid, companies need to curb expenses while maintaining good customer relations. Meanwhile, pay should be tied to that of the competition. Pay must also be part of an overall business strategy and therefore be linked to where firms want to go in the future. Those standards communicate to workers throughout the business that performance counts and that everyone is important.

"Boards of directors and their compensation committees clearly have heard the messages delivered by investors, the government, and the general public over the past few years regarding executive compensation," says Peter Chingos, with Mercer Human Resources Consulting. The current figures show some restraint on the part of boards, he says.

Duke Energy says that the compensation package given to its CEO, Paul Anderson, is paid in stock and stock options -- a method of aligning his pay with shareholder interests. Duke values that pay at $2 million per year. Anderson would receive no golden parachute if his reign does not work out.

Utilities have different strategic objectives and the criteria used to assess performance therefore vary. Executives running regulated enterprises would be evaluated differently from those overseeing unregulated ones. In each case, the idea is to meet certain goals, such as achieving revenue targets, maintaining market share or increasing shareholder value. And bonuses may be tied to long-term performance. So, if utilities showed good results in two of the last three years, then executives may have met their aims and would be rewarded for it.

Some executives may be making too much and some may be making too little. Seattle City Light's Advisory Board says its top managers should earn as much as Tacoma Public Utilities and Snohomish County PUD. The utility commissioned Mercer, which found that the median salary for a variety of jobs at comparable public utilities was 15 percent more than the maximum salaries permitted at Seattle Light. The investor-owned median is 42 percent higher than the current median at the Seattle utility.

"Competitive compensation will allow (us) to attract quality staff in key areas such as power management, risk management and systems operations," says the advisory board.

In some cases, though, the top brass is earning close to 500 times as much as the best paid blue collar workers, which engenders a lot of antipathy. Along these lines, FPL Group's board fumbled the ball. In 2003, it had refused to block $62 million in executive payouts tied to the now-failed merger with Entergy Corp. After an outcry, they gave some of it back to shareholders.

"Everyone is on to this particular game now, whether it is the leading pension funds in the country, the leading investors or the labor unions," says John Olson, with Sanders Morris & Harris in Houston. "This is a very sore point ..."

Executives must be concerned about the messages that their compensation deals are sending to employees and shareholders. It's particularly true in the aftermath of an economic recession when companies had cut expenses and laid off staff. Workers don't mind seeing their CEOs get rewarded for good work. But, they too, want to be compensated if they meet their standards and the utility grows as a result.

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