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CEO Compensation Skyrockets
NewsMax.com Wires Sunday, June 10, 2007
NEW YORK -- A new Associated Press calculation shows that compensation for
America's top CEOs has skyrocketed into the stratospheric heights of pro
athletes and movie stars: Half make more than $8.3 million a year, and some
make much, much more.
CEOs of companies in the Standard & Poor's 500 that filed proxy information
in the first half of this year received a combined $4.16 billion in 2006,
according to AP's formula.
The high cost of chief executive pay has drawn criticism in recent years as
salaries rose, stock options paid off like lottery jackpots, and perks like
chauffeured cars and private jets spread. Still, there are few signs of any
investor backlash.
Yahoo Inc.'s Terry Semel, whose Internet company has lagged behind Google
Inc. in profit growth and stock performance, led the pack with total
compensation last year of $71.7 million, according to the AP formula used to
analyze those filings.
That's more than 2 1/2 times the $27 million in total compensation this year
for the New York Yankees' Alex Rodriguez, baseball's highest-paid player,
and higher than the typical pay A-list stars like Brad Pitt or Leonardo
DiCaprio earn for a movie - $20 million, plus 20 percent of the gross box
office take.
Semel was followed on the AP list by two energy industry CEOs, Bob Simpson
of XTO Energy Inc. at $59.5 million and Occidental Petroleum Corp.'s Ray R.
Irani at $52.8 million. Investment banks and energy companies were the
sectors with the highest-paid leaders.
The top 10 earners were in disparate industries, but they all had one thing
in common: They were paid at least $30 million each in 2006.
The Securities and Exchange Commission required companies starting this year
to more completely disclose what they're paying their top executives. But
the SEC's approach has been criticized for failing to provide useful figures
for investors; the AP, in consultation with leading experts, came up with
its own formula designed specifically to isolate the value of all
compensation awarded to CEOs in the previous year.
Of the 386 companies in the AP list - those whose fiscal years ended after
Dec. 15, and who reported by June 1 under the new SEC rules - only six
reported their CEOs made less than $1 million last year.
The lowest paid was Costco Wholesale Corp. CEO James Sinegal, who made
$411,688. But no need to shed tears for him: Sinegal also owns 2.4 million
Costco shares, worth about $1.3 billion, and has options to buy 1.2 million
more shares.
This year's expanded disclosure requirements also offer a much more detailed
look at perks given to top executives. They range from multimillion dollar
tax payments on behalf of executives to much smaller amounts for household
bills, including home alarm monitoring.
A handful of companies, including Washington Mutual Inc., have stopped
offering perks, and pay consultants say many more are likely to do so as
boards think twice about the repercussions of seeing their largess disclosed
in proxies.
The AP formula, developed with advice from pay consultants Pearl Meyer &
Partners and Mercer Human Resource Consulting, adds up salaries, bonuses,
perks, above-market interest on pay that is set aside for later and what
companies estimated the present value to be of restricted stock and options
awards on the day they were granted last year.
This differs from the summary compensation formula that the SEC requires
companies to use in proxy statements. Some executive pay consultants say the
SEC formula is of less value to investors because it includes expenses that
companies recognize during the year for current and previously awarded stock
grants.
That tends to overstate in some cases, and understate in others, the
specific pay decisions boards of directors took during the year, they said.
SEC Chairman Chris Cox told the AP that the SEC is looking at the statements
it receives this year and could change the rules going forward.
No matter which formula you use, Yahoo CEO Semel's total illustrates one of
the most pronounced recent trends in executive pay: Salary and cash bonuses
account for only a small portion of total compensation. Almost all of his
pay - $71.4 million - came as stock grants and stock options, according to
AP calculations. His salary totaled only $250,001.
Plus, the eventual payouts from stock options handed to CEOs could be
substantially higher in future years if the overall market keeps floating
most stock boats higher.
Consider the case of Occidental Petroleum's Irani, who topped a separate Top
10 list of executives who exercised previously awarded stock options,
compiled for the AP by Capital IQ, a division of Standard & Poor's. His net
gain, before taxes, on shares he exercised in 2006 was $270.2 million - an
amount not included in AP's pay total.
But it's worth noting that three hedge fund managers - James Simons of
Renaissance Technologies Corp., Kenneth Griffin of Citadel Investment Group
and Sears Holding Corp. Chairman Edward Lampert, who also runs ESL
Investments - together earned more than the 386 CEOs the AP studied
combined. They collectively earned $4.4 billion last year, according to
Alpha magazine, published by Institutional Investor.
Hedge fund managers say there is nothing wrong with such outsized returns
because their pay is strictly related to performance and could fall to zero
in any year when they stumble.
The likelihood of a similar flatlining of pay totals for CEOs of public
companies is almost nil, however, even for companies with huge losses and
dire prospects. And consultants expect CEOs to cite the fat paychecks of
hedge fund managers and the kings of Wall Street to argue for even more
lucrative packages.
It wasn't supposed to turn out this way.
This was expected to be the year that investor anger over pay boiled over.
After Home Depot Inc.'s Robert Nardelli and Pfizer Inc.'s Henry A. McKinnell
left their battered companies with golden parachutes worth $210 million and
nearly $200 million, respectively, shareholder activists entered proxy
season this spring primed for a showdown on pay and outsized retirement
packages. It didn't happen.
Most annual meetings were quiet affairs. Shareholders did win votes giving
them a say in executive compensation at Verizon Communications Inc.,
Blockbuster Inc. and Motorola Inc.
But mutual funds largely backed companies in voting against the initiatives,
a poor portent for their future success at slowing the growth of executive
compensation.
A recent report by the Congressional Research Service helps to put the
executive pay issue into a real-world context. CEOs make, on average, 179
times as much as rank and file workers, double the 90-to-1 ratio in 1994,
according to the agency's calculations.
Options grants and stock awards helped boost CEO pay as much as six-fold
during the 1990s economic expansion, according to compensation consultant
Donald Delves. Then the stock market bubble burst in 2000 - but CEO pay
hasn't come down since.
By contrast, median household income edged up only 8.6 percent from 1990 to
2005, according to U.S. Census data.
If the minimum wage had risen at the same pace as CEO pay since 1990, it
would be worth $22.61 today, according to the Institute for Policy Studies.
Instead, the federal minimum wage will increase to $5.85 an hour on July 24,
the first increase in a decade.
CEOs are also much richer than lower-level executives at their own
companies. The Hay Group, a compensation consulting company, estimates that
the average CEO makes 2.5 times more than the average executive in base pay.
That doesn't bother S. Randy Lampert, a managing director for investment
banking at Morgan Joseph & Co., who advises corporations through the bank's
Activist Defense Group. "Compensation is only excessive when it exceeds
industry norms and the stock performance has been underwhelming," he said.
That's not how the board - and executives - at Costco see it.
CEO Sinegal and company Chairman Jeffrey Brotman haven't received a salary
increase in six years, a period when shares of the nation's largest
wholesale club operator rose 28.3 percent.
"The philosophy of the board, in terms of compensating executives, is that
we are fairly paid, if not slightly underpaid, relative to other corporate
peers," Richard Galanti, the company's chief financial officer and a
director, said in an interview. "But that's OK. It's a fair wage, but not
absurd."
"I think it sends a message to our employees that they don't see their CEO's
name on the Top Five highest-paid people in the world," he said. "It's a
positive message."
Not every board thinks the same way as Costco's, which angers J. Richard
Finlay, founder of The Centre for Corporate & Public Governance in Toronto,
which bills itself as North America's first independent think tank for
corporate ethics.
CEO pay isn't set by markets, Finlay said in an e-mail interview. Instead,
it is "determined by a small clique of like-minded directors, most of whom
are themselves past and current CEOs with a vested interest in perpetuating
a failed, but to them, remarkably generous, system."
Billionaire investor Warren Buffett, the world's second richest man after
Microsoft Corp. founder Bill Gates, doesn't go quite that far. But he did
write in his annual letter to Berkshire Hathaway shareholders last year that
"too often, executive compensation in the U.S. is ridiculously out of line
with performance."
Some boards, apparently, are starting to agree. Harvard law professor Lucian
Bebchuk, co-author of the book "Pay Without Performance," said board members
have been calling him to talk about proposals he made this year at a handful
of companies to give shareholders a louder voice on pay.
As a shareholder activist, he engaged three of them - American International
Group Inc., Bristol-Myers Squibb Co. and Home Depot. All agreed that CEO
compensation should be ratified by the entire board, not just the
compensation committee.
"I did not expect boards to be so willing to make changes," he said.
The SEC's new disclosure rules also required companies to explain the
thinking behind their CEO pay packages, describing, in detail, the goals
they've set for executives in a section called compensation discussion and
analysis.
John Wilcox, head of corporate governance at retirement system TIAA-CREF,
which manages more than $410 billion, said his sense is that "some companies
are backing into this process."
"Some have admitted, as they have gone through this process, that they have
not had a compensation philosophy," he said.
The rules also mandate narratives, in plain English, explaining how pay
decisions are reached. But a study of the disclosures by Clarity
Communications found that most failed to meet readability standards many
states require for insurance forms.
"It's a complex subject and that's really the question - Why is it so
complex?" said Dominic Jones, Clarity's president.
"Why is it that a CEO gets compensated in such a discombobulating fashion
when the average worker gets a paycheck and can tell immediately what it's
about? ... If you're an investor and you get your (proxy) statement and it
just goes on for pages and pages of the different methods used to pay the
CEO, at some point you have to ask yourself why. 'Why don't I get all
this?'"
Still, if the process around pay is inching its way toward something that
looks more democratic, executive pay may be one area where gravity doesn't
apply.
Said TIAA-CREF Wilcox: "Once it's up there, it's very hard to pull it down
again."
CEO Compensation Skyrockets
NewsMax.com Wires Sunday, June 10, 2007
NEW YORK -- A new Associated Press calculation shows that compensation for
America's top CEOs has skyrocketed into the stratospheric heights of pro
athletes and movie stars: Half make more than $8.3 million a year, and some
make much, much more.
CEOs of companies in the Standard & Poor's 500 that filed proxy information
in the first half of this year received a combined $4.16 billion in 2006,
according to AP's formula.
The high cost of chief executive pay has drawn criticism in recent years as
salaries rose, stock options paid off like lottery jackpots, and perks like
chauffeured cars and private jets spread. Still, there are few signs of any
investor backlash.
Yahoo Inc.'s Terry Semel, whose Internet company has lagged behind Google
Inc. in profit growth and stock performance, led the pack with total
compensation last year of $71.7 million, according to the AP formula used to
analyze those filings.
That's more than 2 1/2 times the $27 million in total compensation this year
for the New York Yankees' Alex Rodriguez, baseball's highest-paid player,
and higher than the typical pay A-list stars like Brad Pitt or Leonardo
DiCaprio earn for a movie - $20 million, plus 20 percent of the gross box
office take.
Semel was followed on the AP list by two energy industry CEOs, Bob Simpson
of XTO Energy Inc. at $59.5 million and Occidental Petroleum Corp.'s Ray R.
Irani at $52.8 million. Investment banks and energy companies were the
sectors with the highest-paid leaders.
The top 10 earners were in disparate industries, but they all had one thing
in common: They were paid at least $30 million each in 2006.
The Securities and Exchange Commission required companies starting this year
to more completely disclose what they're paying their top executives. But
the SEC's approach has been criticized for failing to provide useful figures
for investors; the AP, in consultation with leading experts, came up with
its own formula designed specifically to isolate the value of all
compensation awarded to CEOs in the previous year.
Of the 386 companies in the AP list - those whose fiscal years ended after
Dec. 15, and who reported by June 1 under the new SEC rules - only six
reported their CEOs made less than $1 million last year.
The lowest paid was Costco Wholesale Corp. CEO James Sinegal, who made
$411,688. But no need to shed tears for him: Sinegal also owns 2.4 million
Costco shares, worth about $1.3 billion, and has options to buy 1.2 million
more shares.
This year's expanded disclosure requirements also offer a much more detailed
look at perks given to top executives. They range from multimillion dollar
tax payments on behalf of executives to much smaller amounts for household
bills, including home alarm monitoring.
A handful of companies, including Washington Mutual Inc., have stopped
offering perks, and pay consultants say many more are likely to do so as
boards think twice about the repercussions of seeing their largess disclosed
in proxies.
The AP formula, developed with advice from pay consultants Pearl Meyer &
Partners and Mercer Human Resource Consulting, adds up salaries, bonuses,
perks, above-market interest on pay that is set aside for later and what
companies estimated the present value to be of restricted stock and options
awards on the day they were granted last year.
This differs from the summary compensation formula that the SEC requires
companies to use in proxy statements. Some executive pay consultants say the
SEC formula is of less value to investors because it includes expenses that
companies recognize during the year for current and previously awarded stock
grants.
That tends to overstate in some cases, and understate in others, the
specific pay decisions boards of directors took during the year, they said.
SEC Chairman Chris Cox told the AP that the SEC is looking at the statements
it receives this year and could change the rules going forward.
No matter which formula you use, Yahoo CEO Semel's total illustrates one of
the most pronounced recent trends in executive pay: Salary and cash bonuses
account for only a small portion of total compensation. Almost all of his
pay - $71.4 million - came as stock grants and stock options, according to
AP calculations. His salary totaled only $250,001.
Plus, the eventual payouts from stock options handed to CEOs could be
substantially higher in future years if the overall market keeps floating
most stock boats higher.
Consider the case of Occidental Petroleum's Irani, who topped a separate Top
10 list of executives who exercised previously awarded stock options,
compiled for the AP by Capital IQ, a division of Standard & Poor's. His net
gain, before taxes, on shares he exercised in 2006 was $270.2 million - an
amount not included in AP's pay total.
But it's worth noting that three hedge fund managers - James Simons of
Renaissance Technologies Corp., Kenneth Griffin of Citadel Investment Group
and Sears Holding Corp. Chairman Edward Lampert, who also runs ESL
Investments - together earned more than the 386 CEOs the AP studied
combined. They collectively earned $4.4 billion last year, according to
Alpha magazine, published by Institutional Investor.
Hedge fund managers say there is nothing wrong with such outsized returns
because their pay is strictly related to performance and could fall to zero
in any year when they stumble.
The likelihood of a similar flatlining of pay totals for CEOs of public
companies is almost nil, however, even for companies with huge losses and
dire prospects. And consultants expect CEOs to cite the fat paychecks of
hedge fund managers and the kings of Wall Street to argue for even more
lucrative packages.
It wasn't supposed to turn out this way.
This was expected to be the year that investor anger over pay boiled over.
After Home Depot Inc.'s Robert Nardelli and Pfizer Inc.'s Henry A. McKinnell
left their battered companies with golden parachutes worth $210 million and
nearly $200 million, respectively, shareholder activists entered proxy
season this spring primed for a showdown on pay and outsized retirement
packages. It didn't happen.
Most annual meetings were quiet affairs. Shareholders did win votes giving
them a say in executive compensation at Verizon Communications Inc.,
Blockbuster Inc. and Motorola Inc.
But mutual funds largely backed companies in voting against the initiatives,
a poor portent for their future success at slowing the growth of executive
compensation.
A recent report by the Congressional Research Service helps to put the
executive pay issue into a real-world context. CEOs make, on average, 179
times as much as rank and file workers, double the 90-to-1 ratio in 1994,
according to the agency's calculations.
Options grants and stock awards helped boost CEO pay as much as six-fold
during the 1990s economic expansion, according to compensation consultant
Donald Delves. Then the stock market bubble burst in 2000 - but CEO pay
hasn't come down since.
By contrast, median household income edged up only 8.6 percent from 1990 to
2005, according to U.S. Census data.
If the minimum wage had risen at the same pace as CEO pay since 1990, it
would be worth $22.61 today, according to the Institute for Policy Studies.
Instead, the federal minimum wage will increase to $5.85 an hour on July 24,
the first increase in a decade.
CEOs are also much richer than lower-level executives at their own
companies. The Hay Group, a compensation consulting company, estimates that
the average CEO makes 2.5 times more than the average executive in base pay.
That doesn't bother S. Randy Lampert, a managing director for investment
banking at Morgan Joseph & Co., who advises corporations through the bank's
Activist Defense Group. "Compensation is only excessive when it exceeds
industry norms and the stock performance has been underwhelming," he said.
That's not how the board - and executives - at Costco see it.
CEO Sinegal and company Chairman Jeffrey Brotman haven't received a salary
increase in six years, a period when shares of the nation's largest
wholesale club operator rose 28.3 percent.
"The philosophy of the board, in terms of compensating executives, is that
we are fairly paid, if not slightly underpaid, relative to other corporate
peers," Richard Galanti, the company's chief financial officer and a
director, said in an interview. "But that's OK. It's a fair wage, but not
absurd."
"I think it sends a message to our employees that they don't see their CEO's
name on the Top Five highest-paid people in the world," he said. "It's a
positive message."
Not every board thinks the same way as Costco's, which angers J. Richard
Finlay, founder of The Centre for Corporate & Public Governance in Toronto,
which bills itself as North America's first independent think tank for
corporate ethics.
CEO pay isn't set by markets, Finlay said in an e-mail interview. Instead,
it is "determined by a small clique of like-minded directors, most of whom
are themselves past and current CEOs with a vested interest in perpetuating
a failed, but to them, remarkably generous, system."
Billionaire investor Warren Buffett, the world's second richest man after
Microsoft Corp. founder Bill Gates, doesn't go quite that far. But he did
write in his annual letter to Berkshire Hathaway shareholders last year that
"too often, executive compensation in the U.S. is ridiculously out of line
with performance."
Some boards, apparently, are starting to agree. Harvard law professor Lucian
Bebchuk, co-author of the book "Pay Without Performance," said board members
have been calling him to talk about proposals he made this year at a handful
of companies to give shareholders a louder voice on pay.
As a shareholder activist, he engaged three of them - American International
Group Inc., Bristol-Myers Squibb Co. and Home Depot. All agreed that CEO
compensation should be ratified by the entire board, not just the
compensation committee.
"I did not expect boards to be so willing to make changes," he said.
The SEC's new disclosure rules also required companies to explain the
thinking behind their CEO pay packages, describing, in detail, the goals
they've set for executives in a section called compensation discussion and
analysis.
John Wilcox, head of corporate governance at retirement system TIAA-CREF,
which manages more than $410 billion, said his sense is that "some companies
are backing into this process."
"Some have admitted, as they have gone through this process, that they have
not had a compensation philosophy," he said.
The rules also mandate narratives, in plain English, explaining how pay
decisions are reached. But a study of the disclosures by Clarity
Communications found that most failed to meet readability standards many
states require for insurance forms.
"It's a complex subject and that's really the question - Why is it so
complex?" said Dominic Jones, Clarity's president.
"Why is it that a CEO gets compensated in such a discombobulating fashion
when the average worker gets a paycheck and can tell immediately what it's
about? ... If you're an investor and you get your (proxy) statement and it
just goes on for pages and pages of the different methods used to pay the
CEO, at some point you have to ask yourself why. 'Why don't I get all
this?'"
Still, if the process around pay is inching its way toward something that
looks more democratic, executive pay may be one area where gravity doesn't
apply.
Said TIAA-CREF Wilcox: "Once it's up there, it's very hard to pull it down
again."
