Tuesday, May 10, 2011

CEO Compensation - How the Other Half Lives

The Wall Street Journal and Hay Group released its annual study of Chief Executive Officer compensation in early May.  The Hay Group is a "global management consulting firm", headquartered in Philadelphia, with 85 offices in 49 countries developing managers and executives.

In their 2010 CEO Compensation Study, the Hay Group examined the various elements that comprise the compensation packages of CEOs working for the 350 largest United States corporations.  The data used in the study is sourced from the proxy statements filed with American securities regulatory bodies between May 1, 2010 and April 30, 2011.

American corporations are now facing the impact of "say on pay", the rule adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  "Say on Pay" allows shareholders to vote on executive compensation packages for all public companies.  This is a step in the right direction as the original laws meant that "say on pay" was either non-binding or for companies that received funding from the Troubled Assets Relief Program.  Apparently, a very small percentage of shareholders are appear to be concerned about CEO compensation, especially in years where stock prices are in positive territory.  While that may be true among institutional shareholders that generally hold the lion's share of any publicly traded company, my suspicion is that the same cannot be said for many of the smaller volume "mom and pop" shareholders who hold a few hundred shares out of hundreds of millions floating out there in the ether.  Their voices against excessive CEO compensation are simply not heard and appear as a minor statistical blip on the proxy voting radar screens.

Despite statistics that show that the massive increases in CEO compensation is wearing thin amongst shareholders, boards of directors still approved pay levels that were substantially higher in 2010 - 2011 than they were in 2009 - 2010.  This could be due, at least in part, to improving profitability among the 350 companies in the study; on average, corporate net income was up 17 percent on a year-over-year basis and shareholder return averaged 18 percent.  Hey, it's a lot easier for shareholders to digest a big pay raise for a CEO when the stock value is climbing than when it's falling!  The major change in compensation was in the emphasis on performance related long-term incentives rather than just stock options.  As well, a smattering of companies eliminated some of the perquisites that seem to accompany compensation for those who dwell at the top of the ivory tower.  After all, without the "toys", how are we going to attract the "boys"?

Here is a summary of what 2010 looked like on average for the "big guys" living in the plush corner offices:

Average Base Salaries: $1.1 million
Average Annual Incentive Payments: $2.2 million (up 19.7 percent)
Average Long Term Incentives: $6.2 million (up 7.3 percent)

The biggest gains were found in the Basic Materials sector which saw a pay increase of 27.7 percent with Health Care bringing up the rear (sad pun) with a tiny pay increase of only 0.2 percent.  By the way, if you take the measly $1.1 million that an average CEO is receiving as their base pay and divide that into a 40 hour work week, it works out to only $528.85 per hour.

A further breakdown of the compensation package shows that 41 percent of the long term incentive value was comprised of performance awards.  Stock options declined from 39 percent in 2009 to 34 percent in 2010.  Many corporations are now using a number of financial vehicles when assessing long term incentives.  Rather than strictly using stock options, many are now using long-term performance plans and time-vested restricted stock.  Restricted stock has its advantages; once the stock is vested, it belongs to the CEO and is worth something whether or not the price has fallen.  On the downside, restricted stock is taxed in the year that the stock is vested and tax is paid as income rather than capital gains.  Ah, the poor CEO.  They just cannot win.

Let me rephrase that last sentence.  Sometimes they just cannot win...but that excludes last year.  With the rising stock market, many CEOs have seen the value of their long term incentive awards climb rapidly; in combination with the equity granted as part of their compensation during the market lows in 2009, most CEOs are sitting on a very tidy sum of "in the money" stock.

Lastly, let's take a quick look at CEO perquisites.  Of the 350 companies in the study, a whole 55 disclosed that they had eliminated at least one of their perks.  Tax gross-ups on perquisites were eliminated by 28 companies followed by 10 companies that eliminated country club memberships.  On the upside, if you happen to be a CEO in the study group, there are still 219 of your pals out there who are still using the corporate aircraft for personal use.  Hey, why fly in cattle class when you can take the company bus!  I just love this quote from the press release for the study:

"By the end of the year, many companies decided that these items werent worth the attention they were getting, forcing executives to bite the bullet and pay their own way on many of these items."

Poor, poor babies.  Apparently even a whiff of the lifestyle of the sweaty masses is distasteful to their sensibilities.

In closing, I'd like to make one brief comment on CEO compensation in comparison to the wages earned by those who sweat for a living (and by that, I don't mean sweating on the country club tennis courts).  Back in September 2011, the Institute for Policy Studies released their "Executive Excess 2010: CEO Pay and the Great Recession" study.  In that study, they show that in 2009, the average American CEO made 263 times the compensation received by their workers.  This is up from less than 30 times in the 1970s.  In 2009, the compensation for an average CEO was $8.5 million, up from $1.8 million in the years from 1980 to 1989 (adjusted to 2000 dollars).  In February 2011, the Congressional Budget Office released their report entitled "Changes in the Distribution of Worker's Hourly Wages between 1979 and 2009".  Between the years 1979 and 2009, the median wage for men rose a massive 8 percent after inflation to $18.50 per hour.

I wonder if personal use of the corporate jet is included?


  1. APJ:
    Is there any way you could provide another link for the CBO paper "Changes in the Distribution of Worker's Hourly Wages Between 1979 and 2009?"
    Your link did not get me to the paper.
    Neither was I able to access it through googling the paper.
    I could not even access the CBO web site!
    Thanks for any help you can provide.
    Don Levit

  2. Try this one Don:


  3. APJ:
    That's a winner!
    Don Levit

  4. Can you say "feudalism"? It's what's comming to your neighborhood.

  5. What's needed to be publicized is how many CEO's have contracts stating they be in the top 50 percentile (or 20, 0r 10...) So the rising tide lifts all boats.

    So, if one CEO does his job for handsome reward...even the slackers get a raise.

    Remember, bad parasites eventually kill the host...so it's important to have that spot in the Caymans, Isle of Man..etc.

  6. There's no point in comparing CEO pay with the average pay. Unfortunately, good CEOs are much rarer than excellent workers. And by 'good CEOs', I mean people like Andy Grove, Lee Iacocca, Ricardo Anton Semmler, or Richard Branson. For that matter, even Thomas Edison and Henry Ford (the first) would fall in the same category.
    When something is rare, it becomes more expensive. When skills are rare, they become more valuable. There are reasons doctors, airline pilots, footballers and quantum physicists are also paid a huge multiple of what the average worker is paid.
    And frankly, anyone who thinks a CEO works only 40 hours a week is dreaming. I've seen CEOs who go home feeling 'the work is not done' after a 14-hour day - on Saturday - and come to work on Sunday to 'catch up'. The typical CEO in this study would be working at least 60 hours per week.
    Just to clarify - I'm not a CEO myself and will likely never be. But I've worked for one. And the advice he gave me made me a much more effective worker - and later got me a much better job.

  7. To the other Anonymous, there is a point in comparing CEO pay with the average worker pay; The comparison is on the basis of how much the gap has increased and to whom value was generated.
    It is just absurd that pay for CEOs has increased disproportionally to the average worker in this scale.
    It's all about maximising return on investment, but during the pas decades this maximisation has been to the expense of the average worker.
    We are living through the bubble culture; The daring result is that there is no liquidity for the disproportionate valuation and the exit strategies are predating on the working class wealth.
    I wonder where we are heading... Somebody mentioned feudalism... This has come close in some societies around the world and I am not talking 3rd world countries.
    We must not forget that corporations are made of people and if one would argue everything can be automated to the point no human is needed, who will consume whatever corporations produce?
    Also above a mention was made about bad parasites...
    I have no problem with CEOs making a lot of money, as long as it's not at the expense of the ones producing wealth.
    Last time I checked, only the BEP could make money out of plain paper.