At most Indiana public firms, CEO pay hasn’t fallen with stock

Twice each week, Stephen Russell meets Celadon Group Inc.'s new truck drivers, fresh from their mandatory training class.
Most CEOs would delegate the task. But in an industry rife with turnover, Russell finds it boosts retention.

He peppers his presentation with humor and salty language that narrows the distance between the big rigs and the boardroom.
It comes naturally to Russell, 67, the son of an immigrant New York cab driver. Bearded, bald and self-deprecating, he clearly
has a rapport with them.

Russell grins as he explains the company's structure, answers questions and stresses the need for drivers to shut engines
off when parked at truck stops. Unnecessary idling costs Celadon $18 million in wasted fuel each year. Drivers who help the
company boost its efficiency are eligible for pay incentives. Those who ignore corporate performance risk losing their jobs.

Celadon holds its top managers to the same standard.

In fiscal 2006, for example, Russell's total compensation amounted to more than $4.2 million as the company's stock
soared. But last year, when Celadon struggled with rising fuel prices and declining demand for its services, his pay–like
the company's shares–plunged; he made $848,954.

Most public companies say they tie executive compensation to performance, but an IBJ review of pay data from 65
Indiana-based firms shows few are as diligent as Indianapolis-based Celadon.

Last year, more than two-thirds of Indiana-based public companies saw their share prices decline as the economy slipped toward
recession. Yet many continued to award eye-popping compensation to their executives.

Ninety Hoosier executives received one-year raises of $100,000 or more as median pay increased from $472,184 in 2006 to $571,569
last year, according to the companies' filings with the U.S. Securities and Exchange Commission. About half as many company
leaders took pay cuts of $100,000 or more.

Russell's was the second-highest individual executive pay cut in the state. Only J. Raymond Elliott, who retired as chairman
of Warsaw-based orthopedics firm Zimmer Holdings Inc., saw a bigger reduction.

"Frankly, the pay levels are not discretionary. They're based on how we perform versus our budget or business plan,"
Russell told IBJ. "Pay should be consistent with performance, regardless of industry conditions or external
factors. If the stockholders don't benefit, then management shouldn't benefit."

"And in good years, our management has done very, very well," he added.

Pay for performance?

It's notoriously difficult to measure whether executives are earning their pay, particularly in recessionary economic
conditions.

When times are tough, it is possible for executives to post impressive performances even when they fall short of their goals,
said David Denis, a professor at Purdue University's Krannert Graduate School of Management.

"They may have done a great job limiting the losses," he said. "As a board member, you'd want that to
be rewarded."

Public companies generally establish a framework for executive compensation after evaluating pay at similar firms. Their
boards then set performance targets and come up with packages that blend guaranteed income–such as salary and sign-on bonuses–with
pay that's based on performance, such as stock options. Such at-risk compensation could lose value if the company doesn't
do well.

Celadon's Russell still recalls his first experience with performance-based pay. As CEO of another logistics firm in
the late 1970s, he earned stock options that had a $4 million value on paper at one time. But before Russell could sell his
shares, high inflation forced a stock tumble and their value evaporated to nothing.

"Did you ever hear the Kenny Rogers song? 'You've got to know when to hold 'em and know when to fold 'em.'"
Russell said. "Well, I didn't."

For most executives, performance-based compensation is now the largest part of their total earnings, said executive-pay expert
Charles M. Elson, who chairs the University of Delaware's John L. Weinberg Center for Corporate Governance. That's
because companies increasingly tend to hire independent consultants who can negotiate pay packages and explain their rationale
to shareholders.

"[Public companies are] much more concerned about criticism of pay. And one way to avert it is to create a process that
is less likely to be challenged by investors," Elson said. "Which means using compensation consultants who do not
work for the company."

And executives themselves are sensitive to appearances. Emmis Communications Corp. CEO Jeffrey Smulyan, 61, opted to forgo
his salary during fiscal 2007, accepting only $1 in guaranteed pay at a time when shares of the Indianapolis-based company
were swooning. With a $339,375 performance-based bonus plus stock and options, he made $1.4 million.

Indianapolis-based Steak n Shake, meanwhile, froze former CEO Peter Dunn's fiscal 2007 salary at the previous year's
level because of disappointing financial results. The company's compensation committee weighed his pay mix toward performance-based
bonuses and stock options.

Even so, he made almost $1.8 million in cash and stock last year despite resigning in August, up 182 percent from 2006. The
restaurant chain's stock slid 11 percent in fiscal 2007.

Most experts are more interested in the shape of executive-pay packages than the salaries themselves. Many companies still
end up guaranteeing more pay than shareholders would like given the demand for proven talent, said Peter Oppermann, an executive-compensation
expert for New York-based human resources consultancy Mercer.

Supply is limited, he said, and executives know it.

"It's great to set goals. It's great to pay performance," Oppermann said. "But you really still need
something to have a hook in some of these executives."

Big business, big bucks

Most of Indiana's best-paid executives work for its largest companies. Median pay for leaders of the state's five
large-capitalization firms was $3.6 million last year.

"There's a strong correlation between revenue and compensation," Oppermann said. "Bigger companies have
bigger pay packages because of complexity of the job."

Given that, it's little surprise that the executive leading the best-paid list also is leading the state's largest
public company, Indianapolis-based health insurer WellPoint Inc.

WellPoint CEO Angela Braly's compensation amounted to $14.9 million last year, the largest portion in stock options and
performance-based stock. Braly, 46, was one of 19 women among the 314 top executives named in Indiana companies' proxy
statements. It was the first time a woman has led the list.

Braly declined IBJ's request for an interview for this article, but executive-compensation expert Heather Slavkin
was quick to put it in perspective: The vast majority of Indiana executives still are male.

"Any improvement in the equality of pay among the sexes is something [we're] pleased to see," said Slavkin,
senior legal and policy adviser for the Washington, D.C.-based AFL-CIO. "But given women's increasing role in the
workplace and educational attainment, clearly we have a long way to go."

Despite the milestone, WellPoint takes issue with Braly's spot atop the highest-paid list. Spokeswoman Cheryl Leamon
objected to the methodology IBJ used to calculate compensation, calling it misleading.

Developed by the Associated Press, the formula included the present value of stock and option awards, as calculated by companies
in their own proxy statements. The AP method emphasizes the value of such awards at the time they are granted, not the amount
an executive finally collects. And, as Russell learned three decades ago, the two may not be the same.

Nevertheless, Leamon insisted Braly's 2007 compensation was "far less" than $14.9 million since it includes
stock grants that will not vest for several years.

"A significant portion of her compensation will only be earned if the price of the company's stock increases"
and earnings targets are reached, Leamon wrote via e-mail.

Braly wasn't the only well-compensated WellPoint executive. Six of Indiana's 20 highest-paid individual executives
worked for the health insurer last year. Their median compensation: $3.7 million.

Arlington, Va.-based executive-pay consultancy Watson Wyatt Worldwide helped set compensation at WellPoint, along with a
quarter of Indiana's Fortune 1,000 firms.

WellPoint's proxy shows Watson Wyatt concentrated on benchmarking pay against firms ranked 11 to 60 on Fortune's
list–the likes of Berkshire Hathaway and JP Morgan Chase–as well as 23 direct competitors. WellPoint ranks 33rd on the Fortune
list.

"It's important to look at what the marketplace is suggesting," said Sanjay Patel, compensation practice leader
in the consultant's Chicago office.

Still, some complain that it's far too difficult for outsiders to influence the size and shape of executive-pay packages.
The AFL-CIO's Slavkin pointed to a proposal that would have required WellPoint to hold an annual shareholder vote on executive
pay. It failed at WellPoint's annual meeting last month.

"WellPoint has stood out to us," Slavkin said. "It's a company that has been identified as having a disconnect
between pay and performance."

Watchdogs seldom bark about executive pay at well-performing companies. Stock shares for Columbus-based engine-maker Cummins
Inc., for example, appreciated 116 percent last year, compared with WellPoint's 12-percent rise.

As a result, Cummins CEO Theodore Solso, 60, saw his pay jump 15 percent, to $10.8 million. Company spokesman Mark Land said
83 percent of Solso's annual pay is performance-based.

In fact, compensation for every Cummins employee is tied in part to annual results, he said. Outstanding years bring outsized
rewards for everyone.

"Everyone has some pay tied to the company's performance," Land said. "And the higher you rise, the larger
that stake is."

Small cap, large pay

Indiana has only a handful of big public companies, but many of its firms pay executives as if they were running much larger
organizations.

That doesn't surprise compensation expert Paul Hodgson, a senior research associate for the Portland, Maine-based Corporate
Library.

"I think we're not on a particularly steep slope of improvement," he said. "I think things are getting
better, but they're not getting better particularly quickly. And there are companies who are taking backward steps."

Median pay for executives of Indiana's small-cap companies in 2007 was $587,643, yet 31 of their top executives made
more than $1 million.

Relatively large pay packages for small companies don't grab as much attention as the blockbuster compensation of executives
who lead Wall Street giants.

"In many cases, unless there's a clear abuse, compensation levels don't register in the same way," he said.
"They don't hit the radar the way larger companies do. There's less scrutiny from shareholders, the press and
regulators."

Small companies should use the same performance-based measures, Hodgson said, but they're often not as rigorously applied.

Jasper-based Kimball International Inc., for example, paid CEO James Thyen $3.3 million in fiscal 2007, 32 percent more than
he made the year before. Yet Kimball's stock sank 29 percent.

Public Relations Director Martin Vaught was surprised to learn that Kimball, with a market value of about $360 million, had
the 15th-highest median executive pay in the state, approaching the levels of much larger firms such as Cummins. Compensation
for Thyen, 64, ranked 24th among all Indiana executives.

Kimball researched peer companies "a couple of years ago," Vaught said, and found that its executives were relatively
underpaid. Since then, he said, Kimball has been increasing compensation to "get in line."

Vaught said the market hasn't yet embraced Kimball's two-tiered business model. The company produces both office
furniture and electronics.

"As Jim [Thyen] himself will say, stock is a performance measure, and we are not happy with where it is," Vaught
said. "We've gone through the last five years a lot of cost restructuring, getting out of non-core businesses. We
had gotten very diversified in 50 years."

It's important for companies to revisit executive-pay issues frequently, said Brian Tobin, an executive-compensation
practice leader for the Philadelphia-based Hay Group. It's not enough to establish policies once or twice a decade, because
market conditions–and the company–can change dramatically from year to year.

"A key question is always, 'Where is your company with respect to its life cycle?' There's a big difference
in designing a plan for a high-growth company versus one that's in decline or in a turnaround situation. You focus on
different metrics," Tobin said. "That's why I'm a little concerned when an organization says, 'We've
always used this method, and it works well.' Are you the same organization you were four or five years ago?"

A look ahead

It may be some time before the U.S. economy begins to gain steam again. As a result, most compensation experts expect to
see more executives' performance-based pay decrease this year and beyond.

Watson Wyatt's Patel predicts most companies will make their major adjustments in concession to the national economy
by adjusting future pay, not reshaping current compensation packages.

"Some companies have taken the route of [immediately] adjusting performance goals," he said. "[But] most of
these plans make grants every year and pay out over the course of a couple years. If you have some down cycles or down economies,
you'll get a reset at the new levels."

Don't expect public companies to cut too close to the bone, though, particularly outside the executive suite. Most analysis
of executive pay focuses on the outsized compensation at the top. But Hay Group's Tobin said it's just as important
for companies to pay close attention to how they pay the rest of their employees, particularly in the tier just below senior
management.

Those are the people who should be groomed for future top slots.

"Leaders of tomorrow, we want to make sure they're hearing the right message for doing the right things, on a long-term
basis," Tobin said. "It all gets back to keeping your talent pipeline fully stocked. Because it's too easy in
an economy like this to get discouraged."

In the days to come, executives should expect to see increased attempts by outside stakeholders to wrest away at least some
control over executive pay. AFL-CIO's Slavkin said that, in the United Kingdom, companies are required to put pay proposals
up for shareholder approval.

The vote isn't binding, but it does increase pressure on the board to keep pay in check. The union would like to see
the same requirement here.

"It's almost a public-relations issue for management," she said. "They reach out to shareholders even
as they're setting compensation packages, so they don't have to worry about fallout if shareholders are angry."

To get it and measures like it approved, institutions such as the AFL-CIO have a trump card they're increasingly willing
to play: the assets of their retirement plans. Slavkin said the union increasingly leverages its $5 trillion in pension funds
to influence the direction of companies in which it holds substantial shares.

Part of their motivation is the increasing gap between pay for executives and rank-and-file workers. According to the Indiana
Department of Workforce Development, the average working Hoosier made $36,412 last year. At that rate, it would take most
people more than three decades to earn the average compensation for an Indiana top executive: $1.1 million.

It would take them more than four centuries to earn Braly's pay.

"I think it's ridiculous that, in one of the wealthiest countries in the world, a worker can work 40 hours per week
and not provide health care for his children, not put food on the table, and not take care of his basic needs," Slavkin
said. "There needs to be a stronger focus on the impact of a company on all the stakeholders, and a recognition [that]
they don't just include upper management."

Celadon's Russell couldn't agree more. He said his company has three constituencies it must serve equally: its employees,
its customers and its shareholders, because they're all traveling the same road together.

"The reality is, you need to make all three happy," he said. "In 1851, Friedrich Nietzsche said, 'That
which does not kill you makes you stronger.' We're going to be much stronger because of what's going on now."