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Options Abound

When the Financial Accounting Standards Board in 2005 began requiring companies to list their stock option grants as expenses, many predicted the imminent death of such perks.

September 21, 2006
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When the Financial Accounting Standards Board in 2005 began requiring companies to list their stock option grants as expenses, many predicted the imminent death of such perks.

    But a glance at the 30 highest-paid HR executives at publicly traded companies in 2005 proves that the death of option grants was greatly exaggerated.

    According to the list, which was compiled for Workforce Management by New York-based consultancy ExecPay, 21 of the 30 highest-paid HR executives received options.

    "Options aren’t going away. They make way too much sense," says Alan Johnson of Johnson Associates, a New York-based executive compensation consultancy.

    The list, which is based on proxy filings with the Securities and Exchange Commission of the 2,000 largest companies as of July 15, shows that although more companies are offering restricted stock to executives, many are still offering option grants. In fact, eight HR executives on the list received stock option grants and no restricted stock.

    "Stock option grants are the easiest way for companies to motivate executives to work toward getting the stock price higher," Johnson says. The problem with restricted stock is that it is usually granted to employees for just staying with the company, he says. "Employees just get restricted stock for breathing."

    Companies can align restricted stock with performance goals, but it can be an onerous task, Johnson says. "It’s often hard to pick the performance goals to base it on, and companies’ strategies are often changing, so those goals have to be revisited," he says.

    Crawford W. Beveridge, chief human resources officer at Sun Microsystems, received the most option grants among those on the list, getting 400,000 shares. Second is Edward A. Evans, executive vice president and chief personnel officer of Allied Waste Industries, who received 150,000 shares. But Beveridge and Evans made $1.59 million and $1.65 million, respectively, in total compensation—putting them toward the bottom of the list of the highest-paid HR execs in 2005.

    "This begs the question of what is the real value of an executive’s compensation package," says Andrew Oelbaum, president of ExecPay. The question is up for debate, particularly since the value of the options is determined by whatever formula the company decides to use, he says.

    But top executives like Evans at Allied Waste say stock options provide them with a greater sense of control over their compensation. "Having a variable compensation component, like stock option grants, gives people the ability to create incredible value for themselves," Evans says. "Stock options make a lot of sense in publicly traded companies, and I believe you will see more of it."

    The top earner on this year’s list is Dennis Donovan, executive vice president of human resources at Home Depot, marking the second consecutive year he has ranked No. 1.

    Donovan’s $6.6 million raised some eyebrows given the public outrage regarding the compensation of his boss, CEO Robert Nardelli. The chief executive has been the source of much controversy at Home Depot because he has made more than $245 million in compensation in his five years as CEO, a period during which the company’s stock declined 12 percent.

    But it’s times like these that companies need a good HR person to make sure the organization continues to attract and retain talent, says Bill Coleman, senior vice president of compensation at Salary.com. "My feeling is that he is earning his keep," he says of Donovan.

    Given that service is a key component of a customer’s experience at Home Depot, it makes sense that the company would put a premium on its head of HR, says Joe Vocino, principal consultant in Mercer Human Resource Consulting’s performance measurement and rewards practice.

    The companies on this year’s list are those in need of high-quality talent, he says. Energy, construction and manufacturing organizations were dominant. That makes sense because these companies tend to not only be labor intensive, but many have a large union presence, which raises the premium of their HR leaders, Vocino says.

    Overall, the number of HR executives landing among the five highest-paid executives at large companies has nearly doubled since 1999, from 13 to 25, according to Mercer.

    Consultants expect this trend to continue, particularly as companies continue grappling with issues related to pension costs, health care, an aging workforce and what companies perceive as a shortage of top talent.

    "There is no other discipline that is growing among the top five rank the same way that HR is," Vocino says. "This trend will only continue."

Workforce Management, September 11, 2006, p. 29 -- Subscribe Now!

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