The Underpaid: Relative Pain; Here Are Ten Chief Executives Who Run Their Companies Very Well And Yet Earn Relatively Modest Compensation”

By Martin Kihn, Zina Sawaya and Reed Abelson and William Heuslein
27 May 1991

The underpaid: relative pain


WEEP NOT FOR the executives we write about below. All of them do quite nicely on what they earn. Harold Haverty of Deluxe Corp., for example, can live very comfortably in St. Paul on $778,000. Tom Smith of Food Lion lives in rural North Carolina. His $946,000 goes a long way there. That kind of money would guarantee solvency in Beverly Hills or Manhattan but wouldn't be enough for keeping up with the Wall Street and Hollywood Joneses. Nor would it generate the kind of wealth that puts one's name on university buildings.


The point of our list is relativity. Compared with UAL's Stephen Wolf ($18.3 million) and even ITT's Rand Araskog ($7.3 million), the executives who make our list of the 10 lowest paid appear in need of food stamps. Our 10 lowest have an average compensation of $1.1 million, well below the $12 million average of our top 25.


Our list is also one of achievements. All these chief executives have a solid record of performance equal to or better than that of the business in which they compete, while not being at the top of the pay scale in their industry. Put another way, they seem to be good bargains for shareholders.


Here's how we put the list together: We wanted the chief executive to have been in office for at least three years, or chief executive for two years with at least eight years at the company. The company had to have sales of at least $1 billion and profits of $100 million. Our finalists passed our tests for five-year growth in sales and profits and five-year average return of equity. Finally we eliminated anyone who owned more than 10% of his company's stock, because major shareholder/managers are usually so rich they could take a pay cut to $1 a year without giving up the yacht or the Thoroughbreds.


Harold Haverty


Every year, outside compensation consultants suggest that St. Paul, Minn.-based Deluxe Corp., the check people, do a little more for their chief executive, Harold Haverty.


The compensation committee will have none of it. Haverty's just fine, they say, at $778,000. Which means that Haverty takes the honors as lowest-paid chief executive on our selective list of Forbes 500s executives with low compensation relative to corporate performance.


"We've been tempted," says a member of the compensation committee who asked not to be identified. "We've had people telling us we ought to do this and that, and yet our fundamental position is, let's not tip the canoe." This despite the fact that Deluxe's ROE has averaged 27% over the past five years, while earnings climbed 13%, to $172 million, last year over 1989.


Doesn't matter. While acknowledging that Haverty's salary is low relative to other companies and to his performance, the committee isn't about to chase the hyperinflation at work elsewhere. "It's just plain getting gross," says the same committee member. "People have become so greedy in this day and age."


How does Haverty feel about canoe tipping? He's not saying, declining a FORBES interview on the theory that it wouldn't serve Deluxe's shareholders. Like Deluxe's previous chief executives, Haverty, 61, rose steadily through the ranks, after joining up in 1954 as a stock clerk in the company's Chicago printing plant.


He does get a bonus. Last year it was $23,000--tied directly to the company's profits. In line with Deluxe's egalitarian philosophy, every employee with the firm for at least five years gets a cash bonus tied to overall corporate performance rather than to individual performance.


Will this emphasis on group performance rather than individual stardom change? Not likely. Like Haverty's pay, the subject of incentive bonuses comes up every now and again. And it's always shot down. "We don't put a carrot on a stick and say you'll get an extra bonus if you knock yourself out and do something X amount better," says Chairman Eugene Olson. "We feel they'll knock themselves out anyway."


Apparently they do.


Alex Grass


Like his drugstores, Alex Grass is basically no-frills. The chairman and chief executive of Rite Aid Corp. works ten hours at the office and another two to three hours at home each day. He even goes to work every Saturday morning. Not much time for hobbies or long trips.


For all this, Grass, 63, made less than $900,000 last year, putting him very much on the low end of chief executive salaries. He also owns $140 million in Rite Aid stock, which suggests he could easily dispense with his salary completely and go fishing, but he has no interest in that. He works for the love of it. Rite Aid is the largest retail drugstore chain in the U.S., with sales of $3.4 billion last year. The Harrisburg, Pa.-based company also operates bookstores, dry cleaners and auto parts suppliers. Profits have increased by about 10% annually over the last five years. Even during the current downturn, Grass has managed to keep earnings growing, in part by staying with a strategy of selling only basic health and beauty aids in his Rite Aid stores and staying away from appliances, electronics or sporting goods, carried by some of his less profitable competitors.


A lawyer, Grass went to work for his first wife's family business, then a food wholesaler and retailer, in 1952. Ten years later he opened the company's first discount drugstore. The rest, as they say, is history.


As to his relatively low rank on the pay scale, Grass says: "I would be very uncomfortable to be very substantially above the level of the top executives in the company."


Rite Aid compensates its executives mostly through a base salary and a "modest" stock option program, tied to the company's earnings growth. "If the option becomes more valuable," he says, "the shareholder is clearly benefiting as well."


Grass lives well. He escapes from Harrisburg to apartments in New York or Palm Beach. He enjoys boating, but, characteristically, doesn't own a boat. He prefers sailing with friends. "It's less work and less expensive," he says.


Tom Smith


Like many other chief executives, Tom Smith, 50, is all in favor of pay for performance. That he ranks among the lower-paid bosses on the Forbes 500s does not reflect poor performance. Living in the North Carolina countryside, Tom Smith gets along just fine on his $946,000 total compensation as chairman of Food Lion, the successful supermarket chain (FORBES, Apr. 1). That puts him in line with the rest of the grocery business. Which is right where Smith--and Food Lion's compensation committee--think he should be. "I realize some other industries have higher salaries," he says. "But I think {my pay} should stay within {our} industry.


"Part of my responsibility here," Smith continues, "is to manage this company in a manner that we either reach or exceed the expectations that are set in front of me. If I can't do that, then I'm not reaching the board's expectations--and I should be paid accordingly."


His record so far has been good. Last year the Salisbury, N.C.-based company had profits of $172.6 million on revenues of nearly $5.6 billion--a 3% net margin, well above the industry norm of 1%. Earnings were up 23% on an 18% sales gain.


Smith grew up with the company, starting as a bag boy in high school. A six-year stint with Del Monte helped Smith pay off his college debts and gave him a view of another side of the food industry. He came back to Food Lion in 1970, when there were only 12 stores. Today there are 800. Named chief executive in 1986, he became chairman last year.


Recreation? Smith enjoys the outdoors, hiking and hunting big game. Not far from the bigger cities in North Carolina, Salisbury (pop. 25,000) is "a real nice, friendly little town," says Smith. His own home is "out in the county," as he puts it, where he putters on weekends with a few old Corvettes.


Joe T. Ford


Joe Ford started work at what was then the Allied Telephone Co. on June 1, 1959, smack out of the University of Arkansas, where he studied business administration on an ROTC scholarship. Says Ford matter-of-factly, "I just stayed around for 30 years."


Stayed around and helped Little Rock-based Alltel Corp. grow and grow. It provides telephone service to about 1.2 million customers in 25 states. Back in 1959, Allied had 65 employees and some 5,000 customers. Last year Alltel's earnings rose 25%, to $193 million, on a 28% sales increase to nearly $1.6 billion.


Ford's reward? His total compensation last year came to a shade under $1 million. His base salary has remained the same for three years, but he did get a $27,000 incentive bonus last year.


Ford, 53, has lived in the same two-story Georgian house for 16 years. Little Rock, he says, "may be less expensive than some places, but no place is cheap anymore."


What does he do in his spare time? Last year Ford and his wife traveled to Ireland to see ancestral family homes. Ford's a golfer with a 13 handicap, and when he gets the chance, quail hunting in Georgia ranks high on his list. Making Wall Street-level earnings ranks low on his list. "I've never complained about my pay," Ford says. "I started out making $400 a month, and I was happy then."


Emerson Kampen


Great Lakes Chemical Corp. Chairman and Chief Executive Emerson Kampen, 63, is hardly living in poverty. Last year he earned $1.1 million in total compensation.


That's on the low side for the head of a $1 billion (sales) company. But it's a seeming fortune for the son of European immigrants who had nine siblings. Kampen's family was so poor that, for the offspring, getting a job to help support the family took priority over getting an education.


Thanks to a dedicated teacher who recognized his talent and encouraged him to pursue his studies, Emerson Kampen finished high school and college, earning a degree in chemical engineering at the University of Michigan. None of the other nine young Kampens went to college.


In 1951 Kampen joined Great Lakes. It was a small company with $130,000 in chemical sales. "I thought, boy, if I could ever earn $100 a week I would have it made," says Kampen. But there were tough times when he didn't get his paycheck because there wasn't enough money to meet the payroll.


Later he was given 1,500 stock options at the equivalent of 4 cents a share. Those shares are trading now at around 81, with a market value of $968,000. Kampen is rich but not superrich.


He has made a lot of others rich, too, with stock options. "We estimate 30 or 40 employees, some who have no education beyond high school, have become millionaires through the appreciation of their stock at Great Lakes," says Kampen.


Some years ago, another company offered him the head job for twice what he was making at Great Lakes. But he turned it down, realizing that money isn't everything. Taking the new job would have required moving away from his hometown, West Lafayette, Ind. Kampen says a house there costs a third of what you'd pay on the East Coast.


The Lafayette area counts about 100,000 residents, but there's an array of cultural events thanks to Purdue University. Kampen can be entertained by leading symphonies and ballet troupes for about a fifth of New York prices. He spends weekends and summers with his extensive family at his lake house, an easy drive from West Lafayette.


Richard Ayers


Only last month did Stanley Works, the New Britain, Conn. maker of tools and hardware, get around to offering substantial stock options to its top people. Now 175 executives are entitled to acquire shares at 30 1/8.


It's not that Richard Ayers, 48, feels his pay scale is inadequate--even though, at $1.1 million last year, it is quite low for a chief executive of a $2 billion (1990 sales) company. "I think that perhaps as a group, chief executives are overpaid," he says.


Why, then, the new option plan? "A portion of almost everyone's compensation should be at risk and based on the performance of the business . . . because that way they're more motivated," he says.


To motivate executives, there is also a bonus tied to the company's return on equity. No goodies if the return is less than 9%. But last year's return of 15.6% brought Ayers a bonus of $325,000, about one-third of his total compensation.


Ayers, who previously was vice president of manufacturing at Britton Corp., joined Stanley in 1972 as a project manager. The MIT graduate became chief executive in 1987 and chairman two years ago. Since 1985 the company's sales have almost doubled, to $2 billion last year. Profits have increased nearly as rapidly as sales, to a record $118 million in 1989. Weak housing starts caused earnings to drop to $107 million last year, but the decline was relatively moderate, all considered, and bonuses were aid, though modest ones.


Off the job, Ayers uses some of his Stanley products to fiddle around with do-it-yourself projects at his spacious house in Avon, Conn. He recently completed a recreation room in the basement for his two young children. Since Ayers travels extensively for his job, he prefers to vacation at home rather than traveling abroad. The one frill this summer, he concedes, will be taking his children to Disney World. "It's one of my favorite places," he says.


Norman Augustine


At $1.2 million, Norman Augustine's pay at Martin Marietta doesn't rank him very high on the FORBES executive compensation list. Says Augustine: "Our objective should be to pay a fair salary right at the middle of the pack, and offer other attractions to keep people--such as a nice place to work, interesting things to do and good people to work with."


Taking any other position, he adds, is "irresponsible. If everyone says, 'We want to pay in the top ten percentile,' the salaries become unstable."


The defense industry is clearly into difficult times, even for a company like Martin Marietta, whose profits last year increased by 7%, to $328 million, on a nearly 6% gain in revenues, to $6.1 billion. Augustine, 55, acknowledges the problems. "We're in the sixth year of a declining defense budget," he says. With more on the way, "we're just getting splashed by the wave that's coming."


Though Martin Marietta does 80% of its business with the U.S. government, its profitable stone and gravel business balances defense contracting. Unfortunately, the aggregates business is tied to construction--which is suffering right now, too.


Though he works long hours, the energetic Augustine doesn't neglect his hobbies. Fishing is one; another is building elaborate doll houses. Adventure travel is a passion with him: dogsledding, rafting, sailing, hot air ballooning.


Augustine, an aeronautical engineer by training, with undergraduate and graduate degrees from Princeton, has been at Martin Marietta for 14 years. Prior to joining Martin Marietta as a vice president, he spent ten years in government service, including a stint as the under secretary of the Army, a job that paid around $30,000. "I'd like to think they got their money's worth," he says.


Is he bothered that other heads of companies Martin Marietta's size make more than he does? "I love what I'm doing, and I haven't missed a meal in years."


Robert Cizik


"Maybe it's not that I'm underpaid, maybe it's that they're overpaid," says Robert Cizik, Cooper Industries' chief executive for the past 16 years. He doesn't envy the Steve Rosses and the Paul Firemans. Cizik thinks he's amply paid with $1.4 million.


At Cooper pay is tied to performance, and top executives are awarded stock options. Last year, as a group, they got nearly 25,000 options. Cizik views these as strong incentives: Over the past five years Cooper's stock has risen to around 50 from a split-adjusted 21. But Cizik is critical of pay formulas that tie compensation to return on equity or to sales. "Those formulas are subject to a great deal of manipulation; they're also subject to an almost antagonistic attitude developed between the person being measured and the person doing the measuring," he argues. "Compensation is not a science, it's an art."


In his success, Bob Cizik has never forgotten that he is the son of a coal miner whose family lived, if not in poverty, certainly in straitened circumstances. His main inheritance was a strong sense of the work ethic, which he has applied with a vengeance to Cooper. He joined in 1961 as head of strategic planning after having served in the Air Force. Cooper was then a one-product company, selling compressors. Cizik embarked on a diversification program to lessen its vulnerability to energy cycles. The company now sells everything from oil drilling equipment to hardware.


And profitably. Cooper's earnings growth is outpacing that of most manufacturing companies, despite a drop in demand for capital goods. Since Cizik took over as chief executive in 1975, sales have grown to over $6 billion from less than $500 million, while earnings have quadrupled to almost $3 a share.


As for his own relatively modest compensation, he says: "There's {only} so much you can do with money. After that there are more interesting things in life." He has time to relax after work by watching a basketball game at home in Houston, and on most weekends he and his wife escape to their beach house in Galveston. Every March he sets aside a week or so for a ski vacation. He says: "I'm having just a hell of a lot of fun."


Scott McNealy


Outside the office--and the hockey rink--Scott McNealy leads a quiet life. He lives alone in a 30-year-old house in Portola Valley, Calif. more notable for its seclusion than for its size. His modesty is demonstrated by the fact that his ego doesn't demand an extravagant salary. Although Sun Microsystems, the computer company he cofounded in 1982, had 1990 sales of almost $3 billion, his salary and bonus last year came to just $1.4 million, a substantial sum, especially for a 36-year-old, but a tiny fraction of Sun's revenues and profits. "I've made more money than I'll ever be able to spend," he says. "I mean, how many hockey sticks can you buy?"


The answer is: quite a few. His 1.8 million shares of Sun stock have a recent market value of $59 million. At a recent 37, Sun's stock is trading near its alltime high. It didn't get there the easy way. Sun has had some rough innings. A fourth-quarter 1989 loss, a result in part of inventory tracking problems, caused analysts to wonder publicly whether McNealy was up to his job. But he buckled down, cutting costs, introducing cheaper models of Sun's powerful 32-bit workstation and concentrating on building market share. Sun now controls an estimated 38% of the workstation market.


McNealy has a knack for leading successful teams. In 1972 he captained his suburban Detroit high school tennis team to a state championship. The hockey team, of which he was assistant captain, lost in the semi-finals--to the eventual state champs. His golf game was ranked twelfth in the state. Now his local hockey league is starting its summer season. "We're just a bunch of local Joe Six-packs," says the affable McNealy.


Non-A students rejoice: McNealy's school record displayed few signs that he would do well in life. "They called me the illiterate genius: I could think real good but I couldn't talk real good," he says, haltingly. He got a perfect score on the math portion of the SAT, but his verbal score was in the low 600s. Even after graduating with an economics degree from Harvard, it took him three tries to get into Stanford business school. In the meantime, he toughed it out as a foreman in a UAW shop in Centralia, Ill. "What the biz schools do is take proven performers, give them a degree and take credit for whatever happens thereafter," he says.


From the beginning, McNealy has run Sun more like a frat house than like a multibillion-dollar high-tech company. There are beer blowouts. Every April Fool's Day employees try to top last year's pranks. (For 1991 they moved a vice president's entire office into an aquarium.) Not surprisingly, McNealy believes that the tie is "one of the most dysfunctional articles of clothing ever invented." He adds: "The only dress code we have is that you must."


Joho Woodhouse


John Woodhouse doesn't believe in high executive salaries, but he does believe in bonuses tied to performance. Woodhouse's base salary represented less than half of his total $1.5 million compensation last year. He claim he purposely underpays his managers, offering them bonuses tied to their divisions' performance.


Those incentive bonuses can be substantial. President Bill Lindig got $217,000 in shares, almost as much as Woodhouse's $255,000. "I don't know how you justify paying the chief executive twice as much as anybody else," he says. "No one can possibly be that much more important."


Since cofounding Sysco in 1969, Woodhouse has helped turn it into the country's largest distributor of food and related items to restaurants, hospitals and prisons. Sales last year were close to $8 billion. ROE has averaged 15.7% since 1986, and the stock has had a 55% price runup since last year's low--to a recent 39 3/4.


Woodhouse, 60, grew up in Delaware. In high school he was a 178-pound left guard who made the all-state team. He opted for Wesleyan instead of Dartmouth, where his father was a trustee and his brother had gone. "I'd have been just another Woodhouse at Dartmouth," he says.


His first job was as an officer at the Canadian Imperial Bank of Commerce. But the track there was too slow for him. "At 39 my boss looked awfully healthy," he says. After five years at Ford, Woodhouse was wooed by Robert Cizik to Cooper Industries. By the time he became Cooper's treasurer, he was talking to an older entrepreneur, John Baugh, about Baugh's vision of a national company made up of food service distributors. Together, they founded Sysco.


Woodhouse lives in Houston, where Sysco is headquartered, with his wife of 36 years. The couple makes an annual two-week pilgrimage into the wilderness of northern California. And Woodhouse owns a small house on 5 acres in New Hampshire. But work is his main avocation. "I've only been inside the place four times in the last ten years," he says of his New England retreat.


ILLUSTRATION: portrait CAPTION: Harold Haverty. (portrait) - Alex Grass. (portrait) - Tom Smith. (portrait) - Joe T. Ford. (portrait) - Emerson Kampen. (portrait) - Richard Ayers. (portrait) - Norman Augustine. (portrait) - Robert Cizik. (portrait) - Scott McNealy. (portrait) - John Woodhouse. (portrait)