Kmart's board of directors, sharply criticized for not doing enough to prevent the century-old retailer from going bankrupt, showed restraint last month in the terms offered to Julian C. Day, its third CEO in less than a year.
As troubled companies turn over CEO's, not every new one is getting hired on bargain terms, and some experts question whether that is a good approach. But the lavish treatment of top executives is being scrutinized and often reconsidered after last year's string of scandals and bankruptcies.
Day, who held senior positions at Sears and Safeway Inc. before joining Kmart, will earn an annual salary of $1 million. He's guaranteed another $1 million when Kmart emerges from bankruptcy.
In contrast, former CEO Charles Conaway - whose management is now the subject of an internal inquiry - received more than $20 million in loans, cash, shares and bonuses in his first year, and he negotiated the right to fly anywhere he wanted in the company jet.
James Adamson, who succeeded Conaway as CEO, was granted a $2.5 million signing bonus, and will be paid $3.6 million after Kmart emerges from bankruptcy - which the company hopes to do by April 30. Now the board chairman, he arrived as a turnaround expert.
Conaway's package may not have been considered extravagant at the time, but many would find it outrageous in today's climate. At least five of last year's bankruptcies - WorldCom, Conseco, Global Crossing, UAL and Adelphia - rank among the 10 largest in U.S. history.
Not everyone agrees that cutting back on executive compensation is advisable when companies need a leader with skill, experience and credibility. A chief who can successfully guide a company through the bankruptcy jungle, experts say, is probably worth every cent they make.
After WorldCom filed for Chapter 11 last July, striding past Enron to become the largest bankruptcy in U.S. history, Michael Capellas was named CEO. When the corporate board proposed he be paid $25 million over three years, court-appointed monitor and former SEC Chairman Richard Breeden objected, and a bankruptcy judge knocked it down to $20 million.
While it may take years to unravel the accounting scandals and strategic missteps that led to WorldCom's fall, Capellas has expressed hope it could emerge from bankruptcy in the spring.
"In a world where football players are making $15 to $20 million, I'm not at all troubled that a guy like Capellas is making $20 million over three years to save one of the largest telecom companies in America," said Harlan Platt, a finance professor at Northeastern University's College of Business Administration.
"On the other hand," Platt added, "There are a lot of corporate executives who are making millions of dollars and they don't deserve it."
A princely compensation package that doesn't seem to match performance could indicate a corporate board has fallen under the influence of the chief executive, Platt said.
Corporate governance experts advocate the independence of boards, which are responsible for evaluating executive performance and allocating compensation. Recent legislation calls for them to be at least 50 percent independent - meaning half the members should have no prior relationship with the chief executive or the company.
"CEO compensation is a strong signifier of the strength of the board," said Paul Hodgson, an executive compensation expert at The Corporate Library.
Companies will often bring professional crisis managers in to help with a restructuring. WorldCom named two principals from turnaround firm AlixPartners to top management posts. AlixPartners also has members of its team in senior jobs at Kmart and Enron.
Ken Hiltz, a partner with the Southfield, Mich.-based firm, said getting new faces into management roles can be a key to changing a company's direction, but like anything else, good corporate management doesn't come cheap.
"You wouldn't want to find a bargain basement CEO any more than you would want to find a bargain basement heart surgeon if you were having heart failure," Hiltz said.
By Meg Richards