April 9, 2006

EXECUTIVE PAY: A SPECIAL REPORT

Off to the Races Again, Leaving Many Behind

OMAHA

IN 1977, James P. Smith, a shaggy-haired 21-year-old known as Skinny, took a job as a meat grinder at what is now a ConAgra Foods pepperoni plant. At $6.40 an hour, it was among the best-paying jobs in town for a high school graduate.

Nearly three decades later, Mr. Smith still arrives at the same factory, shortly before his 3:30 a.m. shift. His hair has thinned; he has put on weight. Today, his union job pays him $13.25 an hour to operate the giant blenders that crush 3,600-pound blocks of pork and beef.

His earnings, which total about $28,000 a year, have not kept pace even with Omaha's low cost of living. The company eliminated bonuses about a decade ago. And now, almost 50, Mr. Smith is concerned that his $80,000 retirement nest egg will not be enough — especially since his plant is on a list of ones ConAgra wants to sell.

"I will probably have to work until I die," Mr. Smith said in his Nebraskan baritone.

Not so for Bruce C. Rohde, ConAgra's former chairman and chief executive, who stepped down last September amid investor pressure. He is set for life.

All told, Mr. Rohde, 57, received more than $45 million during his eight years at the helm, and was given an estimated $20 million retirement package as he walked out the door.

Each year from 1997 to 2005, when Mr. Rohde led ConAgra, he was awarded either a large cash bonus, a generous grant of stock or options, or valuable benefits, such as extra years' credit toward his guaranteed pension.

But the company, a food giant with more than 100 brands, struggled under his watch. ConAgra routinely missed earnings targets and underperformed its peers. Its share price fell 28 percent. The company cut more than 9,000 jobs. Accounting problems surfaced in every one of Mr. Rohde's eight years.

Even when ConAgra restated its financial results, which lowered earnings in 2003 and 2004, Mr. Rohde's $16.4 million in bonuses for those two years stayed the same.

Mr. Rohde turned down repeated requests for an interview. Chris Kircher, a ConAgra spokesman, said that Mr. Rohde received no bonuses in 2001 and 2005, evidence that his compensation was based in part on performance. He added that Mr. Rohde's severance was negotiated 10 years ago, when he was first hired, not as he left. The whole package was "negotiated under a different board, a different point in the company's history, and in a different environment," Mr. Kircher said.

The disparity between Mr. Rohde's and Mr. Smith's pay packages may be striking, but it is not unusual. Instead, it is the norm.

Even here in the heartland, where corporate chieftains do not take home pay packages that are anywhere near those of Hollywood moguls or Wall Street bankers, the pay gap between the boss and the rank-and-file is wide.

New technology and low-cost labor in places like China and India have put downward pressure on the wages and benefits of the average American worker. Executive pay, meanwhile, continues to rise at an astonishing rate.

The average pay for a chief executive increased 27 percent last year, to $11.3 million, according to a survey of 200 large companies by Pearl Meyer & Partners, the compensation practice of Clark Consulting. The median chief executive's pay was somewhat lower, at $8.4 million, for an increase of 10.3 percent over 2004. By contrast, the average wage-earner took home $43,480 in 2004, according to Commerce Department data. And recent wage data from the Labor Department suggest that workers' weekly pay, up 2.9 percent in 2005, failed to keep pace with inflation of 3.3 percent.

Many forces are pushing executive pay into the stratosphere. Huge gains from stock options during the 1990's bull market are one major reason. So is the recruitment of celebrity C.E.O.'s, which has bid up the compensation of all top executives.

Compensation consultants, who are hired to advise boards, are often motivated to produce big paydays for managers. After all, the boss can hand their company lucrative contracts down the road.

Compensation committees, meanwhile, are often reluctant to withhold a bonus or stock award for poor performance. Many big shareholders, such as mutual funds and pension plans, have chosen not to cast votes critical of management. The results have been a growing gap between chief executives and ordinary employees, and often between the boss and managers one layer below.

The average top executive's salary at a big company was more than 170 times the average worker's earnings in 2004, up from a multiple of 68 in 1940, according to a study last year by Carola Frydman, a doctoral candidate at Harvard, and Raven E. Saks, an economist at the Federal Reserve.

"We need to bring some reality back," said John C. Bogle Sr., the founder and former chairman of the Vanguard Group, the mutual fund company, and an outspoken critic of executive compensation practices. "That is something that in the long run is not good for society. We have the haves and the have-nots."

Supersized salaries, bonuses and benefits, long controversial, are now drawing scrutiny from the Securities and Exchange Commission and have become part of the national political debate. About 81 percent of Americans say they think that the chief executives of large companies are overpaid, a percentage that changes little with income level or political party affiliation, according to a Los Angeles Times/Bloomberg survey in February. Many shareholders, moreover, are just plain angry.

"It's not just ConAgra — it is really in most corporations that executives are paid too much," said Don D. Hudgens, a small investor in Omaha who has submitted shareholder proposals to rein in executive pay at ConAgra and other companies. "I am a conservative Republican. I believe in the free market. But sometimes the payment of the chief executive isn't involved in that free market."

The divide between executives and ordinary workers was not always so great. From the mid-1940's through the 1970's, the pay of both groups grew at about the same rate, 1.3 percent, according to the study by Ms. Frydman and Ms. Saks. They analyzed the compensation of top executives at 102 large companies from 1936 to 2003.

But starting in the 1980's, executive compensation began to accelerate. In 1980, the average chief executive made about $1.6 million in today's dollars. By 1990, the figure had risen to $2.7 million; by 2004, it was about $7.6 million, after peaking at almost twice that amount in 2000. In other words, executive pay rose an average of 6.8 percent a year.

At the same time, the growth rate slowed for the average worker's pay. That figure rose to about $43,000 in 2004 from about $36,000 in 1980, an increase of 0.8 percent a year in inflation-adjusted terms.

CORPORATIONS, meanwhile, projected that their own earnings would grow by an average of 11.5 percent a year during that 24-year stretch, by Mr. Bogle's calculations. In reality, he said, they delivered growth of 6 percent a year, slightly less than the growth rate of the entire economy, as measured by gross domestic product.

Chief executives "aren't creating any exceptional value, so you would think that the average compensation of the C.E.O. would grow at the rate of the average worker," Mr. Bogle said. "When you look at it in that way, it is a real problem."

The problem was certainly real at ConAgra. Mr. Rohde's arrival there in 1996 coincided with three of the most powerful forces propelling executive pay and hourly workers' wages in opposite directions. Stock options were being used to reward managers richly, the food industry's rapid consolidation pushed down workers' pay and the introduction of new machinery improved productivity but cost many jobs.

ConAgra, whose products include Chef Boyardee canned goods, Hunt's ketchup and Healthy Choice dinners, began in 1919 as a small food processor, grew rapidly under Charles M. Harper, a former Pillsbury executive who went by the name Mike. In the mid-1970's, he drew up an ambitious expansion strategy to establish ConAgra as a major player from "dirt to dinner," as a corporate slogan later put it. ConAgra would snap up more than 280 businesses in the next two decades. From 1980 to 1993, investors saw total returns of over 1,000 percent, or 22 percent a year.

Wall Street fell in love with Con-Agra's growth story. And the pay of Mr. Harper, who consistently hit the board's performance targets, reflected the admiration. In 1976, his pay was $1.3 million in today's dollars. By the end of his tenure, in the early 1990's, it was about $6 million a year.

"Under Mike Harper, they were a company that paid very little cash and a lot of long-term" stock, said Frederic W. Cook, who was a compensation consultant to ConAgra's board until 2002. "There were rules you could never sell the stock. They lived poor and they died rich."

By the mid-1990's, though, Con-Agra's growth strategy was running out of steam. Its market share and sales were flat. And its decentralized approach — essentially letting its 90 subsidiaries operate like independent companies — no longer worked in an industry dominated by Wal-Mart and other large supermarket buyers.

Mr. Rohde — who had been Con-Agra's chief outside lawyer, advising Mr. Harper on more than 200 deals — was hired in 1996 to help the company reorganize. He became chief executive the next year.

ConAgra's stock price was near a record high, and Mr. Rohde was paid handsomely. His first year's total compensation was $7.9 million, including an initial $4.3 million restricted stock grant, vested over 10 years, and a $500,000 long-term performance payout.

Mr. Rohde tried to centralize many of ConAgra's main operations and integrate dozens of its businesses. But analysts said he let the company's brands stagnate and struggled to execute his plans.

From mid-1999 to mid-2001, Con-Agra struggled amid a sweeping overhaul. The company incurred $1.1 billion in restructuring charges. It terminated more than 8,450 employees and closed 31 plants. And analysts began complaining that ConAgra did not invest enough in its brands to keep profits up.

Mr. Rohde continued to be well-compensated. During that two-year period, he received cash and stock option grants of more than $8.7 million, even as ConAgra's board withheld his annual bonus and all long-term equity awards for 2001 because of weak results.

But what the board took away with one hand, it gave back with the other. In July 2001, it granted Mr. Rohde 300,000 stock options. The reason, according to proxy filings, was that an unnamed independent consultant's compensation report indicated that his equity-based pay was not competitive. "There's nothing wrong at all conceptually with giving someone options after a bad year," said Mr. Cook, who was the unnamed consultant. "An option is an incentive for the future. It is not a reward for the past."

Still, Mr. Cook said he recognized that people say "they rewarded him for failure."

"Financially," he added, "it's hard to argue with that."

TWO months later, ConAgra's compensation committee piled on 750,000 more stock options. Based on a review of option grants, a proxy filing said, Mr. Rohde's option position had been "below competitive levels for a number of years." And the board wanted to recognize "the results achieved in repositioning the company for the future."

Then Mr. Rohde hit the jackpot in 2003 and 2004, with the board awarding him $16.4 million in bonus money and the part of his long-term incentive plan he had earned. The payments were based largely on earnings targets. But in March 2005, ConAgra announced that it would have to restate earnings for 2003 and 2004, reducing them by a total of up to $200 million for the two years after poor internal controls led to income tax errors.

"That works out to nearly 20 cents per share annually, or between 10 percent and 15 percent of earnings," John M. McMillin, an analyst at Prudential Equity Group, wrote at the time. ConAgra "is in the process of restating earnings for both years and we ask, why not restate the bonus for the C.E.O.?"

Mr. Kircher, the ConAgra spokesman, said the restatement did not have a material impact on the way Mr. Rohde's bonuses were calculated.

With the accounting issues clouding the company's future and more layoffs and financial challenges ahead, Mr. Rohde announced last May that he planned to step down. In 2005, the board gave him only his $1.2 million salary.

But through it all, Mr. Rohde managed to take home more than $45 million in pay, including salary, bonuses and restricted stock grants. He did not sell any of his stock while chief executive but stands to benefit if he sells his shares now.

Carl E. Reichardt, the former head of Wells Fargo, led the compensation committee that approved Mr. Rohde's pay every year of his tenure, and continues in that role today. Mr. Reichardt also declined to comment.

One former member of the compensation committee found it difficult to explain the pay-for-performance link. Looking back, said Clayton K. Yeutter, a former United States trade representative who served on the compensation committee from 1997 to 2001, "I can understand what you are getting to, because the compensation became pretty generous, because the stock did not perform very well." He said he could not recall any meeting details.

MR. SMITH, the meat grinder, can only dream about such generosity. His wages have grown at a pace of 2.7 percent a year for the last 28 years. But, adjusted for inflation, his $13.25 an hour salary today is roughly two-thirds his $6.40-an-hour starting wage.

Mr. Rohde's salary alone rose at 8 percent a year, and he collected more than $22 million in cash compensation during almost nine years at the company. Since stepping down in September, he started collecting $2.4 million in severance pay, twice his most recent salary, as well as full health benefits, which he will have through 2009. ConAgra shareholders are footing the bill for a secretary and an office near his home. And that $984,000 annual pension? It reflects 20 years of service, even though he was a ConAgra executive for not quite nine. In July, Mr. Rohde told The Omaha World-Herald that he hoped to spend part of his retirement flying his helicopter between his home and his family's Minnesota getaway home.

Mr. Smith, on the other hand, envisions spending his golden years hunting mallards and casting for catfish at a nearby riverfront cabin. He will have to make do on the $80,000 in his 401(k) plan, as well as his Social Security checks and a pension of $106 a month that was frozen almost a decade ago. But to hear Mr. Smith tell it, he is not angry at Mr. Rohde or, more broadly, at the widening gap between executive and worker pay. Instead, his feelings are somewhere between disappointment and disbelief.

"If the stock keeps going up, maybe they deserve it. If the stock is going down to the bottom, they should get nothing," Mr. Smith said. "My opinion."

Last May, ConAgra directors began looking for a new chief executive. In a few months, they identified their man: Gary M. Rodkin, a 53-year-old PepsiCo executive with 25 years of food-industry experience, including more than a decade overseeing PepsiCo's core brands. But he did not come cheap.

Even before his first day of work, Mr. Rodkin was given a $1 million salary and a guaranteed $2 million bonus for this year, according to his employment contract. He was granted 1.48 million stock options, with a projected value of $5.8 million today, exercisable over the next three years. "We wanted to get him aligned with the interests of shareholders of the company," Steven F. Goldstone, ConAgra's chairman and the former chief executive of RJR Nabisco, told Bloomberg News at the time. "The idea is to increase shareholder value. If he increases shareholder value, he makes money, too."

If Mr. Rodkin does not increase shareholder returns, his stock options will decline in value, as will the $1.6 million in ConAgra stock he recently bought with his own cash.

Still, ConAgra has already agreed to take care of Mr. Rodkin when he leaves. Based on his employment agreement, he will walk away with at least $6 million in severance, a prorated bonus and a $129,000 pension supercharged with three years of credit for each year he worked.

And though he took the job at ConAgra, PepsiCo is still honoring a $4.5 million, two-year consulting contract it gave him when he left. "If the new guy is the right guy, he is worth his weight in gold," said Brian Foley, an independent compensation consultant in White Plains, who reviewed Mr. Rohde's and Mr. Rodkin's employment agreements and other compensation documents. "If he is the wrong guy, you have a severance package that is substantially more expensive."

ConAgra's board, in the meantime, agreed to ease Mr. Rodkin's transition by flying him each week, for up to two years, from his home in White Plains to its Omaha headquarters.

Mr. Smith commutes to work in his green 1998 Chevy pickup truck.

Amanda Cox contributed reporting for this article.