Firms Measure a CEO's (Net) Worth

Last year, directors of fund manager Waddell & Reed Financial Inc. looked at the roughly $70 million Chief Executive Henry Herrmann had collected in stock, pension benefits and deferred compensation over his 36-year career, and deemed it "sufficient" for retirement, according to its proxy statement. The board stopped extra contributions to Mr. Herrmann's retirement fund.

Waddell & Reed is among a growing number of companies scrutinizing how much they have paid executives over time. Nearly 15% of Fortune 500 firms said they took such "accumulated wealth" into account in setting 2007 executive pay, up from 8.4% in 2006, according to data tracker Equilar Inc. Part of the increase is due to the Securities and Exchange Commission, which is encouraging companies to disclose the role of historical pay in their compensation decisions. Few acknowledge reducing CEO pay or benefits, as Waddell & Reed did.

The sums involved can be significant. The median CEO in Equilar's study of 338 large companies held $56.7 million in stock, outstanding stock options and accumulated retirement benefits. Its analysis doesn't include gains from stock-option exercises, another big source of wealth.

"Compensation committees are all wrestling with the question of how much is too much," says Miles Meyer, vice president for human resources at Kellogg Co.

In vetting 2007 pay for CEO David Mackay, directors of the cereal maker looked at his $24 million of previously accumulated shares, which they projected would grow to $65 million in five years with equity grants and increases in Kellogg's share price. They compared that with potential shareholder returns and the compensation of CEOs running similar companies with similar performance, says Mr. Meyer. Ultimately, the compensation committee didn't adjust Mr. Mackay's pay, which included $3.2 million in salary and bonus and stock options valued at $3.7 million.

"Intuitively, there's some point at which you'd say, 'Gee, that seems like enough wealth accumulated for the time being,' " says Mr. Meyer. He says the committee hasn't discussed where that point might be.

Some proponents view accumulated-wealth analyses as a way to curb executive pay and forestall blowups, like the 2003 outcry over former New York Stock Exchange CEO Dick Grasso's $187 million retirement package. Many of the exchange's then-directors said they didn't realize how big Mr. Grasso's total payout was.

When directors realize how much they have given executives, there are "eye-opening, 'Holy Cow' moments," says Jesse Brill, a San Francisco lawyer who advocates "turning off the hose" for some CEOs. Others, including pay consultants Deloitte & Touche LLP and proxy adviser RiskMetrics Group Inc., recommend that boards use wealth analyses to compare pay with performance over the long term.

Once executives accumulate a significant amount of equity, "you can ask very legitimately, 'Why should you pile more of that on top?' " says Thomas Theobald, chairman of the compensation committee at real-estate firm Jones Lang LaSalle. The company says in its proxy that it adjusted 2007 equity grants for executives to reflect "previous wealth accumulation," but Mr. Theobald declines to discuss specifics.

Most companies approach the topic gingerly. Many -- like General Motors Corp. -- say they look at past and potential pay when setting compensation, but that it isn't a big factor in their decisions. Others, such as Petroleum Development Corp., say they won't "punish" a well-paid executive by reducing current awards. Auto insurer Progressive Corp. says it awards equity based on performance, so capping awards could make pay uncompetitive.

Many companies take a nuanced view of how much is enough. Directors at Waddell & Reed generally don't believe in reducing awards just because executives have earned a lot in the past, says compensation-committee chairman Ronald Reimer. But he says the committee has reduced Mr. Herrmann's equity grants and boosted cash since 2006, because the CEO will soon retire and owns plenty of stock already.

Many CEOs aren't happy with the idea of capping pay. Aflac Inc. Chief Executive Daniel P. Amos, who holds 9.9 million shares valued at about $650 million, says he views equity awards as a way to keep score of his performance and that he would be less motivated if his pay was cut below that of other CEOs.

But Richard Brooks, chief executive of apparel maker Zumiez Inc., says his 3.7 million shares -- valued at about $72 million -- are adequate incentive. Mr. Brooks hasn't received stock options or equity since 1993, and when other executives accumulate sufficient equity they won't either, he says.

"At some point [getting more stock] doesn't change behavior," says Mr. Brooks. "So how is it going to change performance?"

Write to Phred Dvorak at phred.dvorak@wsj.com