overview

Malik M. Hasan, chairman and chief executive of Foundation Health Systems Inc., received a compensation package worth more than $18 million in 1997. But the number is a bit misleading. The highest-paid executive in the San Fernando Valley Business Journal’s survey of executive compensation, Hasan received a mere $983,000 in salary. The remaining $17.3 million represents stock options that, so far at least, are worthless to Hasan. The reason? Hasan’s option-to-buy price, at $32.50 a share, is higher than the price at which the company is trading. The continuing trend to pad corporate executives’ compensation packages with stock options totaling millions even tens of millions of dollars has been criticized in some circles, because stock performance may outshine an executive’s real success at managing the company. But Hasan’s situation illustrates how these options are intended to work. Since it was formed last April by the merger of Foundation Health Corp. and Health Systems International Inc., Foundation Health Systems lost $67.8 million from continuing operations. The poor performance struck directly at the pockets of Hasan and the three other senior executives of the nation’s fourth-largest publicly traded managed care organization, who otherwise stood to rank among the 10 top-earning corporate executives in the San Fernando and neighboring valleys. “Our board wanted to incentivize management for long-term shareholder value,” said David Olson, vice president of investor relations at Foundation Health. “We think that’s the most appropriate way to align the interests of executive performance with the shareholders.” Foundation Health isn’t the only company taking that tack. For the top 10 executives on the Business Journal’s list, 75 percent of their compensation comes from stock options. “That’s a trend that you are going to see continue as compensation is increasingly tied to performance,” said Joshua Lurie, chief executive of Joint Information Inc., a New York compensation research firm that compiled the list for the Business Journal. The list is dominated by health care and biotechnology executives 13 out of the top 25 because the Valley is home to some of the largest of these companies in the nation, Lurie said. Foundation Health executives held four spots on the Business Journal’s list; Wellpoint Health Networks Inc. held five spots; and Amgen Inc., the world’s largest biotechnology company, held three spots. While these companies are major players in their industries reason enough for their top executives to command big salaries the work they do also contributes to the pay awarded, experts said. “Amgen spends one-quarter of its revenues on research and development. If you spend that much money on R & D;, the people who run these companies better know what they are doing.” Lurie said. Discounting stock options, Michael Eisner, chairman and chief executive of Walt Disney Co., is the Valley’s highest-paid executive, at $10.7 million. That’s a sharp drop from a year earlier, when stock options brought his total 1996 compensation to $204 million. Even considering Eisner’s diminished income, compensation experts say that 1996’s mega-payout has lifted the bar for other companies that are trying to figure out how much to pay their top brass. “You would be amazed how many people in companies that have absolutely nothing to do with entertainment say that they need to add Eisner’s income to the pool when computing comparable compensation for their own executives,” said Kevin Murphy, a USC professor who sits on the National Association of Corporate Directors’ committee on executive compensation. Experts say that the granting of large numbers of options when executives join a company also contributes to a spiraling of compensation packages. To attract top talent, “you almost have to buy them out now,” said Ron Bottano, a principal with SCA Consulting LLC, an executive compensation consultancy in Los Angeles. “Another company sees that and says, ‘We’ve got to pay our executives more to keep them.’ ” Such is the case in the biotechnology industry where “so many biotech executives are splitting off and forming their own biotech companies,” said Robert Apfelberg, whose turnaround consulting practice, Woodland Hills-based Commerce Partners, deals with compensation issues. “Companies tie these executives in with stock options so these people can’t afford to go away.” Denis R. Brown, president and chief executive of Pinkerton’s Inc., got the biggest salary boost this year, to $4.7 million in total compensation from $1.7 million last year. In 1997, Brown received $3.6 million in stock options; only $524,000 of his compensation came from options last year. Brown, who joined the Encino-based security firm in 1994 when the company was hit with a loss of over $10 million, has expanded Pinkerton’s vertically so that it now fills the full gamut of security needs, from supplying guards to detecting white-collar crime. In 1997, the company’s income rose by nearly 18 percent, to $14.7 million from $12.5 million in 1996. “It strikes me that when you have a company that went from serious financial difficulty to marvelous success, then you pay the people who did that,” said Apfelberg. “What I object to is people who caused the problem being paid more to solve the problem they caused.” Foundation Health is the only company on the list that lost money in 1997. Of the other companies on the list, only Litton Industries Inc. and Dole Food Co. made the list last year. Great Western Financial Corp., which had five executives on the list last year, has since been acquired and is no longer represented.