Fare shares: CEOs keep pulling down princely pay packages, but one is just taking stock, betting a fortune on its performance.

• Author: Maley, Frank
• Position: FEATURE

Duke Energy Corp. was about to wrap up one of its worst years. When the bean counters closed the books on 2003, the Charlotte-based utility had to record a billion-dollar loss. Less than three months before the year ended, however, the board made a bid to turn things around by bringing back a former employee who already had played a key role in the company's development.

The unusual pay package it gave him would make Paul Anderson one of the most overpaid CEOs of 2003--according to BUSINESS NORTH CAROLINA's annual ranking of CEO pay at the state's 75 largest public companies--and the most underpaid in 2004. The ranking is compiled by the Charlotte office of human-resources consultants Findley Davies.

Duke had a good idea what it was getting in Anderson. As chief executive of Houston-based PanEnergy Corp. in the mid-'90s, he helped engineer the deal that transformed Duke Power Co. from an old-school electric utility into a major player in natural gas. After Duke bought PanEnergy in 1997, he stayed on for a year as the merged company's president and chief operating officer before leaving to become CEO of BHP, a struggling Australian mining conglomerate.

Under CEO Rick Priory, Duke expanded to places such as Indonesia and France. But by 2003, the growth started by the PanEnergy deal had soured, and the board was looking for answers. Meanwhile, Anderson had returned BHP to profitability, merging it in 2001 with London-based Billiton to create BHP Billiton, which reported revenue of nearly $14 billion his last year there. He made nearly $5 million that year and retired in 2002 with a $5.1 million severance package. On Australian radio in July 2003, he said CEO pay was out of control. "I don't think CEOs should be paid as much as they are, but I don't know how you back off of that and still maintain a good management team."

At Duke, he would have a chance to set a better example. He agreed to run the company for about three years without the security blankets of salary or bonus. He did, however, receive a package of stock grants and options in 2003 to keep his interests aligned with those of shareholders. By BUSINESS NORTH CAROLINA'S calculation, it was worth almost $19 million, making his compensation second-highest among CEOs of the state's 75 largest public companies.

In 2004, he got nothing--at least nothing this magazine counts in determining CEO pay. Soon after returning to Duke, he began selling poorly performing assets and refocusing on what it did best: generating electricity and processing and transmitting natural gas. Revenue grew just 2% in 2004, but he cut operating expenses more than $3 billion. The company ended the year $1.5 billion in the black. A $2.5 billion swing from red ink to profitability. For free. That made him the year's best CEO bargain.

Runner-up to Anderson, the man on the list paid the least, was Bank of America's Ken Lewis, the one paid the most. Nobody came within $7 million of his $28.6 million package. His compensation grew more than most--17.6%, compared with the median of 14.0% and a median of 11.5% for CEOs who were also on last year's list--but his company's total return, measured from the first day of the fiscal year to the last, out-stripped the median 23.6% to 18.1% (18.3% for returning CEOs). BofA earned nearly $495 for every dollar it paid him in 2004.

By that measure, Lewis had earned the title of best CEO bargain last year and the year before. Laura Hanf, a senior consultant at Findley Davies, says that while Duke's turnaround was impressive, Lewis may be more valuable because he and his team have performed well for several years. "They've created such a brand for themselves and have created the critical mass to continue being a superstar in the future."

Comparing CEO pay with net income is just one measure of performance, and it's not perfect. It favors CEOs who run mammoth companies, says Tony Plath, associate professor of finance at UNC Charlotte. "There are a lot of little companies out there that do a hell of a lot better at providing shareholder value. But because they're small, the magnitude of the numbers doesn't add up as much."

Few CEOs, especially at big companies, are worth their fat pay packages, he says. "These guys make way too much money. Rather than outsourcing labor, I'd like to see us outsource CEOs. I could find some guy in Bombay who could work for one-tenth of what Ken Lewis is making or what any of these big CEOs are making."

Anderson doesn't exactly qualify as a charity case. He got $365,296 in what the company calls "other annual compensation." BNC doesn't count that when calculating CEO compensation because it typically includes reimbursements and noncash benefits. For Anderson, it included $159,363 for his move to Charlotte and use of a company jet for personal travel, which cost Duke $134,507. His stock grant of 2003 paid off handsomely, too. When Anderson took over, some thought he might cut Duke's $1.10 annual dividend. But he already held Duke stock, and his pay plan was designed to keep him thinking like a long-term investor. With no salary or bonus, if he cut the dividend, he'd cut his chief source of compensation that year and diminish the stock's value. In 2004, he raked in $709,500 in dividend-equivalent payments on his 2003 stock award, even though he won't actually get that stock until his employment at Duke ends.

He won't have long to wait. Earlier this year, Duke agreed to buy Cincinnati-based Cinergy for $9 billion. The deal should close in mid-2006, with Cinergy CEO Jim Rogers becoming Duke's CEO. Anderson plans to stay on as chairman for a year after that. Meanwhile, he could make more than in 2004. In June, Duke raised its dividend.

RELATED ARTICLE: BEST BANG FOR THE BUCK

It's hard to argue with free. Duke Energy netted $1.5 billion last year but paid its CEO no salary, bonus or stock options.

Net income per dollar Total comp. of CEO CEO, company (000s) comp. 1 Paul M. Anderson, Duke Energy $0.0 nm 2 Kenneth D. Lewis, Bank of America 28,586.5 $494.7 3 Susan M. Ivey, Reynolds American 1,486.0 463.0 4 Robert P. Ingle, Ingles Markets 101.1 284.5 5 John A. Allison IV, BB & T 5,899.9 264.1 6 Robert L. Tillman, Lowe's 8,471.6 256.9 7 G. Kennedy Thompson, Wachovia 20,632.4 252.7 8 Daniel R. DiMicco, Nucor 6,195.7 181.0 9 William A. Long, Yadkin Valley Bank and 504.0 158.7 Trust 10 Robert B. McGehee, Progress Energy 4,962.6 152.9 PAY VS. PERFORMANCE 2005 CEO COMPENSATION rank Exchange- Base 2004 CEO/ Ticker/ salary rank Company City (000s) Change 1 Kenneth D. Lewis (N-BAC) $1,500.0 0.0% 1 Bank of America Charlotte 2 G. Kennedy Thompson (N-WB) 1,000.0 0.0 3 Wachovia Charlotte 3 David C. Swanson (N-RHD) 575.0 8.9 17 R.H. Donnelley Cary 4 Robert L. Tillman (1) (N-LOW) 1,000.0 0.0 4 Lowe's Mooresville 5 Mackey J. McDonald (N-VFC) 990.0 0.0 11 VF Greensboro 6 Thomas P. Mac Mahon (N-LH) 885.4 4.7 14 Laboratory Corp. of Burlington America 7 Daniel R. DiMicco (N-NUE) 690.0 3.0 27 Nucor Charlotte 8 John A. Allison IV (N-BBT) 900.0 1.4 13 BB & T Winston-Salern 9 Robert B. McGehee (2) (N-PGN) 915.8 na -- Progress Energy Raleigh 10 Marshall O. Larsen (N-GR) 825.0 11.1 21 Goodrich Charlotte 11 Howard R. Levine (N-FDO) 726.8 3.8 18 Family Dollar Stores Matthews 12 Dennis R. Glass (2) (N-JP) 950.9 na -- Jefferson-Pilot Greensboro 13 Richmond D. McKinnish (N-CSL) 800.0 10.3 19 Carlisle Charlotte 14 J. Frank Harrison III (Q-COKE) 718.2 4.0 16 Coca-Cola Consolidated Charlotte 15 Stephen P. Zelnak Jr. (N-MLM) 860.0 5.3 12 Martin Marietta Materials Raleigh 16 Fredric N. Eshelman (Q-PPDI) 648.8 4.1 35 PPD Wilmington 17 Matthew J. Szulik (Q-RHAT) 377.1 7.7 6 Red Hat Raleigh 18 O. Bruton Smith (3) (N-SAH) 1,050.0 0.0 30 Sonic Automotive Charlotte 19 Steven D. Skolsky (2,4) (Q-TRMS) 450.0 na -- Trimeris Morrisville 20 Frank M. Drendel (N-CTV) 593.1 6.9 26 CommScope Hickory 21 John T. Casey (4,5) (Q-MDTH) 550.0 7.6 23 MedCath Charlotte 22 John R. Plachetka (Q-POZN) 395.6 5.5 25 Pozen Chapel Hill 23 John P. Derham Cato (N-CTR) 818.8 4.3 48 Cato...