U.S. manufacturing CEO pay up, but grows more slowly

NEW YORK (Reuters) - Executive pay packages at the largest U.S. manufacturing companies rose in 2007, but at a slower rate than the year before, according to a study showing how the ripples from a slowing economy and a housing slump may be slowly undercutting salaries.

Some of the largest companies in the sector, including diversified conglomerate General Electric Co and manufacturer Honeywell International Inc, cut the pay packages of their top executives, Equilar Inc, an executive compensation research firm, said on Monday.

"Pay is up, but by a small amount and it grew at a slower rate than the year before," said Equilar analyst Alexander Cwirko-Godycki. "Pay packages reflect the turbulent situation right now, in that the bonuses are down across the board."

Manufacturing and industrial companies gave packages to their top executives worth a median $7.7 million, up 1.6 percent from the year before, according to Equilar's survey of 37 companies that have reported 2007 compensation figures so far. Inflation, measured by the Consumer Price Index, rose 4.1 percent last year.

But executive bonuses tied to stock or company performance declined 5.5 percent, according to the Redwood Shores, California-based research firm.

Overall, the chief executive compensation of large U.S. companies rose 1.3 percent last year, to a median of $8.8 million, according to Equilar's study of 223 companies in the broad market Standard & Poor's 500 index

Equilar data comes from companies that have so far reported pay information for 2007. Total compensation includes base salary, discretionary bonuses, non-equity incentive plan payouts, the grant date value of stock awards, the grant date value of option awards and other compensation.

Equilar said that, while not directly comparable, a prior study it carried out last year found median CEO compensation for 194 Standard & Poor's 500 company chiefs with tenure longer than two years rose 6 percent in 2006 from 2005. That means that, while pay rose in 2007 versus 2006, the growth rate was weaker. The trend was also true for manufacturing companies, Equilar said.

SCRUTINY

Investors scrutinize salaries and other financial benchmarks at industrial companies since the sales of their materials, tools and services are so closely tied to economic strength that they can suggest the direction of U.S. growth.

And as the stock market sags, pay packages at these economically sensitive companies may influence an investor's willingness to buy shares.

Clover Capital Management fund manager Matthew Kaufler will vote against adding a stock to his team's portfolio if he believes the company's stock performance or growth potential does not justify high executive pay.

"If I see a pay package that is designed in a way that the incentives aren't aligned with shareholders, it will sway my vote," he said.

Kaufler declined to give a specific example, but said he wants to see compensation tied to a company's free cash generation, improving margins and other metrics that show sustainable growth.

Russell Croft, who manages the $54 million Croft Value Fund, also examines pay packages at industrial companies he holds, including United Technologies Corp and Honeywell International Inc.

"When we meet with a management team, we always ask how they're compensated," Croft said. "It's a check in their favor if we feel their pay is aligned with an investor like us."

Croft said bonuses and salaries should reflect if business is slowing, although he added that "as long as the company's three-year or five-year or 10-year plans are coming to fruition, management should be paid accordingly."

The U.S. political season will only heighten scrutiny.

"We're in the thick of the political season so if you have the combination of downsizing or layoffs, executive compensation will be brought even more the fore," said Matthew Warren, an analyst for Morningstar.

Morningstar grades companies on their corporate governance, giving high marks to those that link executive pay to sustainable company growth. Nuts and bolts distributor Fastenal Co, for one, received a high grade since its chiefs' pay depends on company performance, Warren said.

Fastenal CEO Willard Oberton's compensation package was worth $1.7 million, according to Equilar.

According to Equilar. Honeywell CEO David Cote received a package worth $19.6 million, down 2 percent from the year before, while GE's Jeffrey Immelt's package was worth $14.2 million, down 6 percent.

(Editing by Andre Grenon)