More companies are listening to investors’ criticism that they overpay chief executives, but that doesn’t mean businesses have fixed the problem.
CEO pay continued to climb in 2005, although not nearly as rapidly as in recent years, new surveys show. The median pay to CEOs rose 11.3 percent, according to a survey of more than 550 companies by The Corporate Library, a governance firm.
For CEOs at the largest firms, however, pay rose 3.7 percent to a median of $5.2 million.
But the size of the typical CEO’s raise varied greatly by which companies were counted, and overall figures obscure wide variations in pay. A closer look at individual companies show that more than one in four granted their CEOs raises of at least 25 percent, according to a survey of nearly 200 large firms by compensation analyst Equilar Inc.
The newest raises for top executives mean the pay of the average CEO at a Standard & Poor’s 500 firm is now 430 times that of the average U.S. worker — more than ten times what it was in 1980, according to the AFL-CIO.
Once again, the largest payouts went to CEOs cashing in huge numbers of stock options.
Tops on that list was Richard D. Fairbank, the chairman and chief executive of Capital One Financial Corp., the credit card issuer. Fairbank, who earned no salary or bonus, was paid almost entirely in a grant of new options this year, valued at just over $18 million. That paled, however, with the $249.3 million Fairbank earned last year by exercising previously issued options.
The list of those who profited most handsomely from cashing in options also included Bruce Karatz, the CEO of builder KB Home Inc., who pocketed $118.4 million.
Options still huge
In many cases, such gains went to executives who have held on to options for years, waiting for their stock price to rebound. In the last few years, many companies have cut back on the number of options they issue, moving to restricted stock and long-term incentive payouts.
The days of huge options payouts are hardly over. More than 80 percent of large companies still include options in CEO compensation. But gauging the suitability of CEO pay packages increasingly requires investors and directors to focus on the size of future grants, rather than leftovers from the past, compensation experts say.
And even as more companies embrace changes designed to link CEO pay to executives’ proven ability to deliver results over time, serious disconnects remain, experts say.
“I think some of the companies are trying to improve the situation,” said Paul Hodgson, a compensation expert for The Corporate Library. “To be honest, if I can figure it out, I don’t see why people who are leading some of the largest companies in the country shouldn’t be able to figure it out as well.”
The slow pace of change means some companies continue to pay CEOs far out of proportion to the results they deliver to shareholders, experts say.
For example, AT&T Inc. — until recently known as SBC Communications Inc. — paid CEO Edward E. Whitacre $17.1 million last year, a 15 percent increase. That raise brought his total pay over the past five years to more than $85 million, despite the fact that shareholder return — the potential gain to investors who own its stock — is down 40 percent over that period, according to analysis by Hodgson’s firm.
Directors at software maker Ariba Inc. paid CEO Robert M. Calderoni $10.4 million in 2005 — a large part of that in restricted stock — representing a 75 percent increase over the previous year. The raise came despite the fact that return to shareholders fell 39 percent last year, according to proxy advisory firm Institutional Shareholder Services Inc.
Major companies that awarded their CEOs pay raises of between 25 percent and 50 percent averaged total shareholder return of 7.4 percent, according to Equilar Inc., a compensation analysis firm. Companies who gave their top executives raises of more than 50 percent averaged total shareholder return of 11.1 percent, according to the analysis of the pay packages at 197 large firms.
Increasingly, however, such disconnects are the anomaly, compensation experts say.
‘Gradual process’
Most firms have moved past the era of awarding huge raises to their top executives even as profits and stock price dropped, said Patrick McGurn, executive vice president of ISS. But companies are still in the infancy of efforts to reform pay, and have to yet to assure that CEO paychecks directly — and not just directionally — reflect how they perform compared to the top executives at rival firms, he said.
“Boards, frankly, are just getting up to speed in many instances on what they’ve done in the past and are really just starting to exhibit some control over the pay practices,” McGurn said. “It’s going to be a gradual process.”
However, investor irritation over excessive pay is not dissipating despite the rebound in the stock market and the ebbing of corporate scandals. Nine of 10 institutional investors surveyed recently by consulting firm Watson Wyatt Worldwide said U.S. companies rely on methods that dramatically overpay executives. Nearly as many say those practices have damaged corporate America’s image.
U.S. investors singled out executive compensation as their top concern over the next three years, according to another survey by ISS, to be released this week.
“We’ve had three years of shareholder gains and yet this (CEO pay) is still a headline,” said Tim Ranzetta, president and chief operating officer of Equilar. “Shareholders are still focusing on the issue.”
Given those concerns, investors will continue to find much in this year’s CEO pay packages to raise eyebrows.
The most generous paychecks
Some of the largest paychecks went to the top executives at energy and home building firms, even though their companies’ surging profits arguably had more to do with conditions in the economy and marketplace than with CEO strategizing or leadership, compensation experts say.
“The question is, have you simply allowed your ship to rise along with a rising tide and it’s not the value actually provided,” McGurn said. “Certainly the builders and the energy companies would seem to fit that.”
For example, Occidental Petroleum Corp. awarded Ray R. Irani, its chairman, president and CEO, with restricted stock valued at $30.9 million and long-term incentive payouts valued at $10.6 million. Builder Lennar Corp. awarded President and CEO Stuart A. Miller with a package that included a $21.5 million bonus and restricted stock award of $6.3 million.
CEOs at Wall Street firms also enjoyed among the most generous paydays. One of the largest was the package Lehman Brothers Inc. paid to Richard S. Fuld Jr., its chairman and CEO, valued by the company at $34.5 million.
While companies have been slow to rein in pay, some are being more up front about the way they compensate their CEOs. Such detail will be required beginning next year, when new rules proposed by the Securities & Exchange Commission are to take effect, requiring more disclosure of executive pay packages.
For example, nanomanufacturing technology firm Applied Materials Inc. included a table in its proxy statement with a column showing total compensation paid to its top executives. Last year, the tally shows, the company paid Michael R. Splinter, its president and CEO, a total of $6.4 million, down from the $17.6 million it paid the previous year, reflecting a much smaller bonus and options award.
It might seem obvious for a company to provide such a total. But companies have routinely avoided providing such a figure, leaving it to investors to determine the full value of pay packages split between salary, bonuses, stock awards, options and myriad perks and benefits.
Compensation experts say mandated disclosure could act as a disinfectant in corporate board rooms, forcing directors to more closely examine the way they pay CEOs and eliminating the worst abuses. But the value of the increased information will only be realized if activist investors speak up, they say.
“If we’re going to see better performance in the future,” said McGurn of ISS, “I think it’s always going to be because shareholders took the new information they were provided with and actually did something with it.”