By John Byczkowski
Enquirer staff writer

Omnicare Inc. isn't the biggest company in Cincinnati, or the most profitable, and its stock isn't the best performer, either.

You wouldn't know that, however, by looking at how the Covington-based pharmacy manager rewards its executives. In an Enquirer survey of the highest-paid public company executives in 2003, Omnicare had four of the top 13, and six of the top 22.

CEO Joel Gemunder was the highest-paid executive in Greater Cincinnati last year. He took home more than $25 million, capping off 10 years during which he received nearly $78 million in salary, bonuses, stock and options, as disclosed in regulatory filings. Five other Omnicare executives each took home between $6.2 million and $7.6 million in 2003.

No doubt, Omnicare had a great 2003. Sales were up by a third, profits were up by half, the company completed the biggest acquisition in its history, and the stock price was up 69 percent.

But Gemunder made more than the CEOs of Fifth Third Bancorp, Cintas Corp. or Multi-Color Inc. - local companies whose stock produced better returns over 10 years than Omnicare.

Welcome to the world of executive compensation, where there are few standard rules of engagement.

Executive pay packages are big and getting bigger, and in the wake of excesses at Enron and Tyco, they are attracting more scrutiny from shareholders and lawmakers. CEO pay packages often are laden with bonuses, stock and long-term incentive packages, but analysts say very little of this has been proven to improve the performance of companies.

"There's a weak link between annual incentive payments, annual benefits and annual performance," said Paul Hodgson, a compensation analyst for the Corporate Library, a Portland, Maine-based independent research firm. "But there isn't any link at all between long-term incentives and long-term performance, which, it seems to me, is the most important element of it and the most important to get right."

CEOs disagree, for a simple reason: Poor performance in the front office means more than smaller bonuses. "Trust me, if I didn't perform, I'd be out of this job," said James Rogers, CEO at Cinergy Corp. since 1988.

But even executives agree the numbers are getting big. In Greater Cincinnati and Northern Kentucky, 72 executives in public companies and insurance companies earned more than $1 million in 2003, according to an Enquirer study. That compares to 40 in 1995.

Nationally, the salary and bonus of the average manufacturing CEO more than tripled from 1977 to 2003, to $844,000, rising faster than median household incomes over that time, according to the Conference Board, a New York-based nonprofit business research group. And that doesn't count the value of stock options awarded to executives, said analyst Charles Peck. Options weren't common in 1977 - in the middle of a nine-year-long bear market - but today they can add millions to a CEO's compensation.

In 2003, the median increase in CEO compensation was 15 percent, to $1.85 million, according to a study of 1,429 CEOs by the Corporate Library.

Does the money matter to CEOs? Yes and no, said Rogers, whose compensation in 2003 totaled $14.7 million.

"My career has not really been driven by money. It's been driven by challenges and opportunities," he said. A native of Danville, Ky., and a graduate of the University of Kentucky, Rogers said he never imagined himself as a CEO. A half -dozen times he took pay cuts to go after new jobs with better opportunities.

"I love what I do. love the people that I work with. I love the challenges that I have. I love working with regulators and the investment community. I love this industry," he said.

The pay, however, comes with the territory. "You pay a CEO what the market requires," he said. "I've had an opportunity the last five years to leave three times to go run other companies, and to get paid as much or more."

Rogers calls the money "a blessing," and said he'd work just as hard if he made half as much. "But the reality of life is somebody would beat on my door and say, 'We can double your amount and you can have the same job,'" he said. "I would listen because, it would translate to me that they value me more than the people here value me."

The money CEOs make may be less a motivator than a sign of respect, recognition and admiration, said Roger Weber, a corporate lawyer with Taft Stettinius & Hollister in Cincinnati, who's represented CEOs and boards of directors in negotiating pay packages.

CEOs take a lot of risks, Weber said. "If things go wrong, they're going to get sued, they're going to be held accountable, they're going to get blamed. They're really hanging out there," he said. "You talk about people who are taking risks, and rewards are presumably commensurate with risks."

High-paid CEOs want to do well, he said, because "they have to justify what they're being paid." But they also have big egos, and are sensitive to what other CEOs make, he said.

"The fact that they're making less than some competitors might be viewed by somebody (as a sign) they're less appreciated," Weber said.

John Schiff Jr., CEO at insurer Cincinnati Financial Corp., agrees. "I do think if you're doing a good job and you're not being recognized for that, there's a disconnect," said Schiff, who reviews Rogers' pay as a member of Cinergy's board. "I think it's not appropriate for the board of directors or the compensation committee to allow that to endure any more than if you're doing a poor job and you continue to get rewarded for doing a poor job."

But keying CEO pay to what other CEOs get is what has led to the rapid rise in compensation, said Graef Crystal, a compensation expert in San Diego. Most companies compare their executives' compensation to a peer group of competitors. They should aim to be in the middle of that group, at the median, he said. Procter & Gamble, for instance, pegs CEO A.G. Lafley's salary to the median of a peer group of 25 companies.

Instead, many aim for the average, which is almost always higher than the median, pulled up by the biggest pay packages in the group, Crystal said.

Or, about a third of companies put their executives pay in the 75th percentile - as Cinergy does - paying above average to attract and retain the best people. But that creates a leapfrogging effect as companies jump over each other to stay at the 75th percentile, pulling up the entire group, he said. This has been accelerated in recent years by the Internet, because data on what CEOs make is easier than ever to find.

Another factor has been stock options, which became a popular form of compensation during the bull markets of the 1980s and '90s. Analysts said the obsession with options not only inflated CEO pay, but it also skewed how companies were run. A stock's price "can too often depend on unrelated events that have nothing to do with a company's performance," said Peck, of the Conference Board. Too many CEOs, he said, were tempted to manipulate quarterly earnings to boost share prices.

But companies are reducing option awards, for two reasons. First, the weak stock market from 2000 to 2002 meant options didn't pay off as well. Second, the Financial Accounting Standards Board and others have called for options to be recognized for what they are - a form of compensation - and be charged as an expense against a company's earnings.

That doesn't mean compensation is dropping, because companies have to replace options with something worth just as much, Peck said.

Omnicare, for instance, is reducing option awards but replacing them with restricted stock. Gemunder, the CEO, in 2002 received options worth $9.4 million and restricted stock worth $5.5 million. Last year, the option award was smaller, at $7.2 million, but he was given more restricted stock - $14.1 million worth, which will vest to him over seven years.

Experts do see signs that the increases may be moderating. The Securities and Exchange Commission and the New York Stock Exchange are both requiring more and better disclosure by public companies, forcing boards of directors to explain how executives are paid. Congress got into the act, banning company loans to executives in the Sarbanes-Oxley Act of 2002.

The courts are also getting involved: Shareholders sued the board of directors Walt Disney Co. in 1997 over a $120 million severance package paid to president Michael Ovitz. A court in Delaware last year refused to dismiss the suit, and it's scheduled for trial in October.

The sum of this is to force boards of directors to take their responsibilities more seriously. Peck said he sees more CEOs getting zero bonus because they didn't hit their performance targets.

At Midland Co., a Cincinnati-based insurer, bonuses are tied to improving the book value of the company, because that's been proven as a good measure of an insurance company's worth, said chairman Joseph Hayden III. "I don't think that executives can or should take credit for how their stock performs," he said.

Schiff's formula at Cincinnati Financial is "get shares into the hands of the executive." Executives won't get rich on salary alone, because taxes eat up so much of it, he said. Building wealth through stock ownership is key , he said.

But which measures are best? "It's hard to figure out some times," said Richard Antoine, P&G's global human resources officer. When P&G wanted officers to start paying attention to cash flow in their business, the company pegged part of their bonuses to meeting cash flow targets. "Then people really started paying attention to it. It changed things significantly," he said.

E-mail johnb@enquirer.com