Image: Howard Schultz
Ted S. Warren  /  AP
Starbucks CEO Howard Schultz may have cut his salary to $10,000. But then there are those benefits.
updated 2/8/2009 5:13:52 PM ET 2009-02-08T22:13:52

Chief executives who agree to have their salaries slashed to nearly nothing look like they’re taking one for the team. After all, if the company’s struggling, the top brass should feel the pain, too.

Don’t believe it. They’re hardly the heroes of corporate pay suggested by the headlines and news releases.

Knocking down a salary may be symbolic, but it doesn’t equate a full-fledged retrenchment in pay. Investors need to watch what’s getting cut, and how that affects executives’ total compensation.

Fact is, most of the CEOs will still make plenty. Though cash may be cut, huge stock grants could make them even richer over the long run. And they still can get perks that are part of the compensation package.

That’s usually left out of the PR campaign.

“If I made a million dollars last year, I am going to let everybody in corporate America and the public know I am only taking $1 in pay,” said Richard V. Smith, senior vice president at Sibson Consulting. “Their compensation consultant didn’t come up with that. Their public relations department came up with that.”

Through the middle of January, 28 publicly traded companies announced that would reduce their executives’ salaries, on top of 20 that did the same in December. That’s up from two companies seen last June and four last July, according to Equilar Inc., an information services firm specializing in executive compensation.

More could be on the way under the new plan announced by President Barack Obama on Wednesday that imposed a $500,000 salary cap on senior executive pay for the most distressed financial institutions receiving taxpayer bailout money in the future.

But even in the White House plan, the cap is only for salary. Companies that want to pay their executives more have to use stock. The only hitch is that those shares can’t be sold until the bank has repaid the bailout money.

That’s not to say that companies and their boards aren’t hard at work rethinking executive compensation. They have to be, given how the weak economy is ravaging corporate earnings. At the same time, battered shareholders and disgruntled workers are lashing out against the idea of CEOs still making out big while they’re taking it on the chin.

Gourmet coffee chain Starbucks recently announced that it would reduce CEO Howard Schultz’ salary from about $1.2 million in 2008 to below $10,000 a year in 2009. That was the minimum salary he could receive to be entitled to the company’s health benefits, said spokeswoman Deb Trevino.

But Seattle-based Starbucks — which is in the process of closing as many as 900 stores resulting in about 6,700 lost jobs — hasn’t said it would strip him of his perks. Last year, company paid out $764,364 for such things as security, insurance premiums and his annual physical.

On top of that, Schultz will still receive a grant of stock options in 2009, the size of which hasn’t been disclosed, according to the company’s proxy report. Those stock options aren’t tied to his individual performance in particular, but their ultimate worth does hinge on the move in Starbucks’ stock price.

In 2008, Schultz received stock options valued at $7.78 million on the date they were granted. All of those shares are currently “under water” because their exercise price of $22.87 a share is above the current stock price of about $10 each.

New to the $1-a-year salary club is General Motors’ CEO Rick Wagoner. He got there because the automaker was running out of cash and needed the government to loan it money. Before that happened and due to intense political pressure, he agreed to drop his salary to a buck from $1.6 million in 2007.

Under the government’s agreement to loan GM as much as $13.4 billion, Wagoner also can’t get any bonuses, in cash or stock. But he, too, still will be eligible for perks, which totaled nearly $700,000 in 2007.

He also could get stock options that aren’t based directly on performance, though the company has not yet disclosed whether stock options will be granted. In 2007, that part of his equity compensation was valued at more than $4 million on the day the options were granted. Those are currently underwater because their exercise price is $29.11 a share, 90 percent higher than current value of GM stock at nearly $3 a share.

While such a heavy reliance on stock-based compensation means executives can’t take the money and run so fast, there is still the potential for a huge windfall. That could amount to even more than in the past, since share prices across the marketplace have gotten so depressed over the last year. As a result, the new batch of stock options will have a low exercise price.

“It’s a good thing to have them thinking like owners,” said Bruce Ellig, who advises corporate boards on pay issues and is the author of “The Complete Guide to Executive Compensation.” “The risk is they could make nothing, but it could also be a fortune.”

Everyone seems to be hoping for a Lee Iacocca moment. Back in the late 1970s, the former Chrysler CEO took $1 in salary to secure $1.5 billion in government loan guarantees to save the ailing automaker.

That action made him world famous — he was sacrificing it all for his company, or so the spin went.

But Iacocca didn’t just get $1 in compensation. While he didn’t get a cash salary or any bonus, the company converted his $359,999 in salary into restricted stock and also granted him stock options, according to compensation expert Graef Crystal.

That deal paid off once Chrysler turned itself around. Iacocca exercised stock options with pre-tax gains of $43 million between the time he was hired in 1978 and the end of 1987, Crystal’s analysis found.

He walked away with big money, for sure. Many of today’s CEOs could likely, too.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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