Typical CEO made $9.6M last year, AP study finds

Kroger CEO Dave Dil­lon is seen in an undated photo pro­vided by Kroger. The Kroger Co. says it gave CEO David Dil­lon a 66 per­cent pay hike last year largely as a reward for the super­mar­ket chain’s improved per­for­mance. The nation’s largest tra­di­tional super­mar­ket chain gave its top exec­u­tive a pay pack­age worth $8.9 mil­lion, up from $5.4 mil­lion in 2010, accord­ing to an Asso­ci­ated Press analy­sis of a reg­u­la­tory fil­ing made May 11. (AP Photo/Kroger)

BERNARD CONDON, CHRISTINA REXRODE

AP Busi­ness Writers

NEW YORK — Prof­its at big U.S. com­pa­nies broke records last year, and so did pay for CEOs.

The head of a typ­i­cal pub­lic com­pany made $9.6 mil­lion in 2011, accord­ing to an analy­sis by The Asso­ci­ated Press using data from Equi­lar, an exec­u­tive pay research firm.

That was up more than 6 per­cent from the pre­vi­ous year, and is the sec­ond year in a row of increases. The fig­ure is also the high­est since the AP began track­ing exec­u­tive com­pen­sa­tion in 2006.

Com­pa­nies trimmed cash bonuses but handed out more in stock awards. For share­holder activists who have long decried CEO pay as exor­bi­tant, that was a vic­tory of sorts.

That’s because the stock awards are being tied more often to com­pany per­for­mance. In those instances, CEOs can’t cash in the shares right away: They have to meet goals first, like boost­ing profit to a cer­tain level.

The idea is to moti­vate CEOs to make sure a com­pany does well and to tie their for­tunes to the company’s for the long term. For too long, activists say, CEOs have been richly rewarded no mat­ter how a com­pany has fared — “pay for pulse,” as some crit­ics call it.

To be sure, the com­pa­nies’ motives are prag­matic. The cor­po­rate world is under a brighter, more uncom­fort­able spot­light than it was a few years ago, before the finan­cial cri­sis struck in the fall of 2008.

Last year, a law gave share­hold­ers the right to vote on whether they approve of the CEO’s pay. The vote is non­bind­ing, but com­pa­nies are keen to avoid an embar­rass­ing “no.”

“I think the boards were more eas­ily shamed than we thought they were,” says Stephen Davis, a share­holder expert at Yale Uni­ver­sity, refer­ring to boards of direc­tors, which set exec­u­tive pay.

In the past year, he says, “Share­hold­ers found their voice.”

The typ­i­cal CEO got stock awards worth $3.6 mil­lion in 2011, up 11 per­cent from the year before. Cash bonuses fell about 7 per­cent, to $2 million.

The value of stock options, as deter­mined by the com­pany, climbed 6 per­cent to a median $1.7 mil­lion. Options usu­ally give the CEO the right to buy shares in the future at the price they’re trad­ing at when the options are granted, so they’re worth some­thing only if the shares go up.

Profit at com­pa­nies in the Stan­dard & Poor’s 500 stock index rose 16 per­cent last year, remark­able in an econ­omy that grew more slowly than expected.

CEOs man­aged to sell more, and squeeze more profit from each sale, despite prob­lems rang­ing from a down­grade of the U.S. credit rat­ing to an eco­nomic slow­down in China and Europe’s nev­erend­ing debt crisis.

Still, there wasn’t much imme­di­ate ben­e­fit for the share­hold­ers. The S&P 500 ended the year unchanged from where it started. Includ­ing div­i­dends, the index returned a slen­der 2 percent.

Share­holder activists, while glad that com­pa­nies are mov­ing a big­ger por­tion of CEO pay into stock awards, cau­tion that the rear­rang­ing isn’t a cure-all.

For one thing, com­pa­nies don’t have to tie stock awards to per­for­mance. Instead, they can make the awards auto­mat­i­cally payable on a cer­tain date — mean­ing all the CEO has to do is stick around.

Other com­pa­nies do tie stock awards to per­for­mance but set easy goals. Some­times, “they set the bar so low, it would be dif­fi­cult for an exec­u­tive not to trip over it,” says Patrick McGurn, spe­cial coun­sel at Insti­tu­tional Share­holder Ser­vices, which advises pen­sion funds and other big investors on how to vote.

And for many share­hold­ers, their main con­cern — that pay is just too much, no mat­ter what the form — has yet to be addressed.

“It’s just that total (com­pen­sa­tion) is going up, and that’s where the prob­lem lies,” says Charles Elson, direc­tor of the Wein­berg Cen­ter for Cor­po­rate Gov­er­nance at the Uni­ver­sity of Delaware.

The typ­i­cal Amer­i­can worker would have to labor for 244 years to make what the typ­i­cal boss of a big pub­lic com­pany makes in one. The median pay for U.S. work­ers was about $39,300 last year. That was up 1 per­cent from the year before, not enough to keep pace with inflation.

Tita Free­man, a senior vice pres­i­dent at the Busi­ness Round­table, a group of chief exec­u­tives of large U.S. com­pa­nies, says that CEO com­pen­sa­tion is dri­ven by mar­ket forces.

“I can’t tell you pre­cisely what a spe­cific CEO should make, any more than I can tell you what a top-performing Major League Base­ball short­stop should make,” Free­man said in an emailed statement.

Since the AP began track­ing CEO pay five years ago, the num­bers have see­sawed. Pay climbed in 2007, fell dur­ing the reces­sion in 2008 and 2009 and then jumped again in 2010.

To deter­mine 2011 pay pack­ages, the AP used Equi­lar data to look at the 322 com­pa­nies in the S&P 500 that had filed state­ments with fed­eral reg­u­la­tors through April 30. To make com­par­isons fair, the sam­ple includes only CEOs in place for at least two years.

Among the AP’s other findings:

— David Simon, CEO of Simon Prop­erty, which oper­ates malls around the coun­try, is on track to be the highest-paid in the AP sur­vey, at $137 mil­lion. That was almost entirely in stock awards that could even­tu­ally be worth $132 mil­lion, some of which won’t be redeemable until 2019. The com­pany said it wanted to make sure Simon wasn’t lured to another com­pany. He has been CEO since 1995; his father and uncle are Simon Property’s co-founders.

This month, Simon Property’s share­hold­ers rejected Simon’s pay pack­age by a large mar­gin: 73 per­cent of the votes cast for or against were against.

But the com­pany doesn’t appear likely to change the 2011 pack­age. After the share­holder vote, it released a state­ment say­ing that “we value our stock­hold­ers’ input” and would “take their views into con­sid­er­a­tion as (the board) reviews com­pen­sa­tion plans for our man­age­ment team.” But it also said that Simon’s per­for­mance had been stel­lar and it needed to pay him enough to keep him in the job.

Simon’s pay­check looks pal­try com­pared with that of Apple CEO Tim Cook, whose pay pack­age was val­ued at $378 mil­lion when he became CEO in August. That was almost entirely in stock awards, some of which won’t be redeemable until 2021, so the value could change dra­mat­i­cally. Cook wasn’t included in the AP study because he is new to the job.

— Of the five highest-paid CEOs, three were also in the top five the year before. All three are in the TV busi­ness: Leslie Moonves of CBS ($68 mil­lion); David Zaslav of Dis­cov­ery Com­mu­ni­ca­tions, par­ent of Ani­mal Planet, TLC and other chan­nels ($52 mil­lion); and Philippe Dau­man of Via­com, which owns MTV and other chan­nels ($43 million).

— About two in three CEOs got raises. For 16 CEOs in the sam­ple, pay more than dou­bled from a year ear­lier, includ­ing Bank of America’s Brian Moyni­han (from $1.3 mil­lion to $7.5 mil­lion), Marathon Oil’s Clarence Caza­lot Jr. (from $8.8 mil­lion to $29.9 mil­lion) and Motorola Mobility’s San­jay Jha (from $13 mil­lion to $47.2 million).

— CEOs run­ning health-care com­pa­nies made the most ($10.8 mil­lion). Those run­ning util­i­ties made the least ($7 million).

— Perks and other per­sonal ben­e­fits, such as hired dri­vers or per­sonal use of com­pany air­planes, rose only slightly, and some com­pa­nies cut back, say­ing they wanted to align their pay struc­ture with “best practices.”

Mil­i­tary con­trac­tor Gen­eral Dynam­ics stopped pay­ing for coun­try club mem­ber­ships for top exec­u­tives, though it gave them pay­ments equiv­a­lent to three years of club fees to ease “tran­si­tion issues” caused by the change.

The typ­i­cal pay of $9.6 mil­lion that Equi­lar cal­cu­lated is the median value, or the mid­point, of the com­pa­nies used in the AP analy­sis. In other words, half the CEOs made more and half less.

To value stock awards and stock options, the AP used num­bers sup­plied by the com­pa­nies. Those fig­ures are based on for­mu­las the com­pa­nies use to esti­mate what the stock and options will even­tu­ally be worth when a CEO receives the stock or cashes in the options.

Stock awards are gen­er­ally val­ued based on the stock’s cur­rent price. Stock options are val­ued using com­pany esti­mates that take into account the stock’s cur­rent price, how long until the CEO can cash the options in, how the stock price is expected to move before then, and expected div­i­dends. Esti­mates don’t gen­er­ally take infla­tion into account.

The shift to stock awards is at least partly rooted in what is known as the Dodd-Frank law, passed in the wake of the finan­cial cri­sis, which over­hauled how banks and other pub­lic com­pa­nies are regulated.

Begin­ning last year, Dodd-Frank required pub­lic com­pa­nies to let share­hold­ers vote on whether they approve of the top exec­u­tives’ pay pack­ages. The votes are advi­sory, so com­pa­nies don’t have to take back even a penny if share­hold­ers give them the thumbs-down. But shame has proved a pow­er­ful motivator.

It got Hewlett-Packard to change its ways. After an embar­rass­ing “no” vote last year on the 2010 pay pack­ages, includ­ing nearly $24 mil­lion for ousted CEO Mark Hurd, the com­pany hud­dled with more than 200 invest­ment firms and major share­hold­ers, then threw out its old pay for­mula. New CEO Meg Whit­man is get­ting $1 a year in salary and no guar­an­teed bonus for 2011. Nearly all her pay is in stock options that could be worth $16 mil­lion, but only if the share price goes up.

Other com­pa­nies took notice, too. Last year, share­hold­ers rejected the CEO pay pack­ages at Janus Cap­i­tal, home­builder Beazer Homes and con­struc­tion com­pany Jacobs Engi­neer­ing Group. All won approval this year after the com­pa­nies made the pack­ages more palat­able to shareholders.

To be sure, share­hold­ers aren’t vot­ing en masse against exec­u­tive pay. Instead, they seem to be sav­ing “no” votes for the exec­u­tives they deem most egregious.

Of more than 3,000 U.S. com­pa­nies that held votes in 2011, only 43 got rejec­tions, accord­ing to ISS. But the mere pres­ence of the “say on pay” vote is trig­ger­ing change, share­holder activists say.

“Com­pa­nies that have gone through that trial by fire don’t want to go through it again,” says McGurn, the ISS spe­cial counsel.

Even Chesa­peake Energy, a com­pany peren­ni­ally in the cross-hairs of corporate-governance activists, is bow­ing to pres­sure. The com­pany has drawn fire for show­er­ing CEO Aubrey McClen­don with assorted good­ies. In addi­tion to hand­ing him big pay pack­ages — $17.9 mil­lion for 2011 — Chesa­peake in recent years has spent mil­lions spon­sor­ing the NBA’s Okla­homa City Thun­der, which he par­tially owns, pay­ing him for his col­lec­tion of antique maps and let­ting him buy stakes in com­pany wells.

Last year, share­hold­ers of the nat­ural gas pro­ducer passed the pro­posed 2010 pay pack­age but by a low mar­gin, 58 per­cent. This year, with share­holder pres­sure mount­ing, the board has ended some of McClendon’s perks and stripped him of his title as chair­man. A law­suit set­tle­ment is forc­ing him to buy back his $12 mil­lion worth of maps.

After los­ing the chair­man job, McClen­don issued a state­ment say­ing the demo­tion “reflects our deter­mi­na­tion to uphold strong cor­po­rate gov­er­nance stan­dards.” Chesa­peake will seek share­holder approval for McClendon’s 2011 pay at its annual meet­ing in June.

So far, Cit­i­group is the highest-profile com­pany to have its pay pack­age rejected this year. The bank planned to pay CEO Vikram Pan­dit about $15 mil­lion for his work last year, not­ing that he had returned the com­pany to prof­itabil­ity in 2010 and worked for $1 that year. Share­hold­ers, who watched the stock price plunge 44 per­cent in 2011 (after adjust­ing for a reverse stock split) weren’t so forgiving.

It’s usu­ally around Jan­u­ary that boards decide how much to pay a CEO for the pre­vi­ous year. Then they inform share­hold­ers and ask for their vote in the spring — usu­ally after the cash por­tion has already been handed out. For Pan­dit, that meant he had already received $7 mil­lion in salary and cash bonus by the time share­hold­ers voted against his pay.

In a state­ment, Citi said it took the vote seri­ously and planned to “care­fully con­sider” the input of major share­hold­ers. It hasn’t given more specifics. Richard Par­sons, who retired as Citi’s chair­man after the April annual meet­ing, as pre­vi­ously planned, said after the vote that the board should have done a bet­ter job explain­ing to share­hold­ers how it deter­mined CEO pay.

Another big change is that more com­pa­nies are giv­ing them­selves the right to take back a top executive’s pay from pre­vi­ous years if they deter­mine that the exec­u­tive acted inap­pro­pri­ately to inflate the company’s finan­cial results.

The Dodd-Frank over­haul will even­tu­ally require pub­lic com­pa­nies to include such broad “claw back” pro­vi­sions, which will expand on nar­rowly writ­ten rules from a decade ago. But com­pa­nies aren’t wait­ing. In a sep­a­rate study, Equi­lar found that 84 per­cent of For­tune 100 com­pa­nies now include claw backs in their exec­u­tive pay pack­ages, up from 18 per­cent in 2006.

Last year, the for­mer CEO of Beazer Homes agreed with reg­u­la­tors, who cited the older claw back rules, to turn over $6.5 mil­lion he had earned when prof­its were inflated. In Feb­ru­ary, UBS took back half of the pre­vi­ous year’s bonuses awarded to many invest­ment bankers because of sub­se­quent losses in the unit.

Pick­ing the right mix of incen­tives is partly just guess­work, and some­times the results are sim­ply a force of serendip­ity. Stocks can get swept up in ris­ing or falling mar­kets, so the for­tunes of CEOs with well-designed pay pack­ages can reflect luck — good or bad — not just man­age­r­ial skills.

In Feb­ru­ary 2009, James Rohr, the head of PNC Finan­cial Ser­vices, was granted options that allowed him to buy shares in the future at the then-current price, which had fallen 62 per­cent in five months on its way to a 17-year low the next month.

The stock has since dou­bled, and the options, mostly based on hit­ting cer­tain profit and cost-cutting goals, are worth more than $20 mil­lion in paper profit, accord­ing to research by GMI Rat­ing, a cor­po­rate gov­er­nance watch­dog. If investors had bought PNC stock just before the finan­cial cri­sis in 2008, they would still be down more than a fifth.

Luck, of course, can cut both ways. Rohr is still wait­ing to cash in options granted in 2007, val­ued then at $2.5 mil­lion, when the stock was 18 per­cent higher than it is today.

Some share­holder groups doubt that ever-higher CEO pay, ingrained as it is in the cor­po­rate psy­che, will ever be refash­ioned dra­mat­i­cally enough to sat­isfy share­hold­ers and con­sumer groups who see the pay­checks as too big, too dis­con­nected from per­for­mance, and set by wealthy direc­tors who are obliv­i­ous to the way that most of their share­hold­ers live.

“I hope we have seen the last of this,” says Rosanna Weaver of the CtW Invest­ment Group, which works on share­holder issues with union-sponsored pen­sion funds and has lob­bied against CEO pay pack­ages at a num­ber of com­pa­nies. “But I would be very sur­prised, just given what I know of human nature, let alone what I know of the finan­cial markets.”

Still, she’s encour­aged by the change that has already been stirred.

“It’s a very big task,” Weaver says. “I still believe it is worth trying.”

Posted by AP News on May 25 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.