$800 Million in CEO Pay - Is That Reasonable?

Paul Hodgson is Senior Research Associate of The Corporate Library

From the number of articles and reports I write about Conseco, it might seem like persecution, but really, the board deserves it.

Recently, I calculated that the last three CEOs at Conseco together were paid a modicum less than $800,000,000. The table below gives the annual amounts.

CEO name	Fiscal year	Total compensation	Notes
William Shea	2004	$23,225,751	Estimated figure. Includes estimated severance benefit of $13.5 million
	2003	$19,451,401
Gary Wendt	2002	$8,199,650	Mostly $8 million bonus for keeping the stock price below $10
	2001	$719,898	Mostly split dollar life insurance
	2000	$111,270,919	Mostly golden hello
Stephen Hilbert	2000	$80,975,287	Mostly golden goodbye
	1999	$32,494,772	Does not include $45,654,000 option profit
	1998	$59,351,304	Does not include $53,887,916 option profit
	1997	$54,240,079	Does not include $99,866,620 option profit
	1996	$20,829,029	Does not include $23,450,000 option profit
	1995	$14,278,651
	1994	$39,266,460	Does not include $106,970,930 option profit
	1993	$21,953,231	Does not include $25,054,447 option profit
	1992	$10,435,779
	1991	$6,491,300
Subtotal		=SUM(ABOVE) $503,183,511
	Estimated total compensation 1979 -1990	$275,475,377	Includes option profits from 1993-1996 as these were from options granted prior to 1991
Total		$778,658,888

I have broken with my normal practice and have calculated total compensation on the basis of estimating the grant date value of awards of stock options and restricted stock/stock units. This has been done to reflect the board’s intended level of compensation rather than any resulting compensation. I wanted to get at what the board really wanted to pay the CEOs.

After all, when you slide into bankruptcy, even a CEO’s stock options might go underwater, restricted stock/stock units might actually lapse. In addition, compensation for years prior to 1991 has had to be estimated because electronic filings are only available for years following. Total compensation for this period has been estimated based on actual compensation immediately following that year and evidence of option grants. In addition, Shea’s total compensation for 2004 has also been estimated based on 2003 compensation and the company’s indication of the value of his severance package.

While Hilbert earned the most – having the longest tenure – Gary Wendt, has the dubious honor of having earned both the least amount and the highest amount in any one year. In 2001, he really earned nothing. That $700,000 odd listed for 2001 represents mostly the cost of a split-dollar life insurance policy, and a few other benefits – corporate jet usage and so on. But in 2000, the year of probably the highest golden hello ever paid, he received, or rather he cost the company, over $111,000,000.

This includes an amount that even I had previously been unaware of. It was not disclosed in his contract, nor in any proxy statement, but only in a tiny paragraph in a massive pre-bankruptcy 10-K (http://www.sec.gov/Archives/edgar/data/719241/000071924103000008/final.txt).

In order to buy Wendt out of a non-competition clause, Conseco issued a warrant to a GE subsidiary (remember Wendt had worked for GE Capital before going it alone and then being hired by Conseco) to purchase 10,500,000 Conseco shares. The cost of this was approximately $21 million. This was written down as an extraordinary item – accountants really know when to call a spade a spade sometimes – and has now been duly added into his extraordinary golden hello.

You would think that nearly $780 million would be enough, but even here it did not stop.

Under the terms of his contract, William Shea is due a retirement benefit of $500,000 a year. And Wendt is also receiving $1,500,000 a year retirement benefit, plus life insurance (this was valued at approximately $800,000 a year when he was in employment) and “other benefits.”

This does not stop when he dies, Wendt’s contract contains a 100 percent survivor annuity clause, indicating that if he predeceases his wife, she will continue to receive the full $1,500,000. Hilbert does not appear to have been covered by any pension plan, nor did he have a contract with the company until three weeks before his termination. After termination, he was due to receive consultancy fees of $1,000 per month for three years and, during this period, health and dental insurance, corporate aircraft usage and reimbursement for out of pocket expenses.

For the record, here are the members of Conseco’s compensation committee from the earliest available record:

Pre-bankruptcy

Michael G. Browning

M. Phil Hathaway

Louis P. Ferrero

James D. Massey

Dennis E. Murray, Sr.

Arthur M. Gerber

David R. Decatur

Robert S. Nickoloff

Julio A. Barea

Samme Thompson

Post-bankruptcy

Michael S. Shannon

R. Glenn Hilliard

Michael T. Tokarz

Hathaway, Massey and Murray were the longest serving, signing off on Hilbert’s severance. While Hathaway and Nickoloff agreed to the golden hello for Wendt. In almost every proxy statement, there were related party transactions and/or interlocks registered for compensation committee members. These included real estate transactions and investments in Conseco limited partnerships. Hathaway even had an interest-free loan to buy Conseco stock.

Would you want this lot on your board? Well, if you were a CEO. . .

Other articles and reports about Conseco by Paul Hodgson:

Conseco Bankruptcy: No surprise here (http://www.thecorporatelibrary.com/Governance-Research/spotlight-topics/spotlight/compensation/PH_CONSECO.html)

Forgiving loans in secret code: Conseco’s work-down plans (http://www.thecorporatelibrary.com/Governance-Research/spotlight-topics/spotlight/compensation/conseco/secret-codes.pdf)

Conseco does it again (http://www.boardanalyst.com/boardbriefs/Vol2_No15.asp)

Conseco directors: what is the matter? (http://www.boardanalyst.com/boardbriefs/Vol3_No13.asp)

A compensation policy comparison (http://www.thecorporatelibrary.com/Products-and-Services/store/publications/default.asp)