U.S. News

Bargain Rates for Chief Executive Officers?

Devin Leonard|The New York Times

Last year may have been unnerving for chief executives accustomed to all of the familiar ornaments of corporate life: eight-figure pay packages, corporate jets, memberships in select clubs, and on and on.

As the country settled into the worst recession in decades, the government became unusually involved in corporate pay practices. The Obama administration appointed Kenneth Feinberg — aka the pay czar — to scrutinize compensation at corporate behemoths like Citigroup, the American International Group, Bank of America, General Motors and Chrysler, all of which taxpayers propped up with billions upon billions of dollars in bailouts.

Mr. Feinberg came up with his own blueprint for compensation boundaries — and noted that its strictures could be applied not only to corporate wards of the state under the Troubled Asset Relief Program but also in myriad other boardrooms.

So if you were the typical American C.E.O., you may have found some of the pay czar’s prescriptions startling. For instance, he thinks you should pay golf club dues out of your own pocket. He also would like you to take less of your pay in cash and more of it in stock. In fact, the White House set a limit on how much cash top executives of the biggest TARP companies could get as part of their annual compensation: $500,000 a year. That sum that may seem princely to the average American worker but, alas, doesn’t buy much for a crowd used to Fifth Avenue triplexes, third and fourth homes, top-drawer health care and lavish private schools for their children.

Mr. Feinberg’s proposed remedies weren’t the only compensation-related issues that might have disturbed an executive’s sleep. The Securities and Exchange Commission ordered companies to disclose more information about compensation, which invariably stirs up shareholders. And the Federal Reserve also announced its own sweeping review of banker pay.

On Capitol Hill, meanwhile, Democratic allies of the White House are mulling reforms that would require public companies to give shareholders an annual “say on pay” vote. While the measure, if enacted, would be nonbinding, it would still force C.E.O.’s to publicly debate at annual meetings all aspects of sumptuous pay packages.

In short, the long-running feud between shareholder advocates and corporations over executive pay will offer an emotional flashpoint as President Obama turns his attention from health care to financial reform.

CEO Pay Down 15%

Business representatives in Washington are pushing back. “We are not taking issue with the pay master’s approach to those companies that are still receiving TARP funds,” says John J. Castellani, president of the Business Roundtable, an association of chief executives whose board includes highly paid C.E.O.’s. “But to apply that to every public company, we think, is not advisable and out of bounds.”

Even so, shareholder advocates say they see some companies recrafting pay policies to please the government and to get in front of any coming changes.

“Boardrooms correctly read the pay czar’s action as a real signal to corporate America of public dismay over excessive pay,” says Stephen M. Davis, a senior fellow at the Millstein Center for Corporate Governance and Performance at Yale. “It was a warning that if they didn’t get their act together that further intervention by the government was perhaps inevitable.”

But it’s probably more accurate to say that companies are sending a mixed message about compensation: we will follow some of Washington’s pay recommendations, but not all of them. At least, that’s the trend in the data in this season’s raft of corporate proxy filings.

Equilar, a compensation research firm in Redwood Shores, Calif., recently prepared a report for The New York Times analyzing the pay of 200 chief executives at 199 public companies with revenue of at least $5.78 billion that filed their proxies by March 26. (Only 199 companies are on the list because Motorola has two co-C.E.O.’s.)

Equilar says the median pay package — the midpoint where half of the compensation packages on that list are lower and half are higher — declined by 13 percent last year, to $7.7 million. The average total pay tumbled by 15 percent, to $9.5 million.

It was the second consecutive year that C.E.O. pay slipped, sending the median compensation package back to about where it was in 2004 and shaving off much of the increase that occurred when the economy went into overdrive and executive pay soared along with it.

Two years ago, C.E.O. compensation dropped because cash bonuses were decimated by the financial crisis. The decline last year can be largely attributed to the hammering of stock and option awards granted early in 2009, when stock prices were at their nadir. As a result, Equilar says, the median values of C.E.O. stock and option awards were down by 19 percent and 28 percent.

Of course, some chief executives have seen the value of their equity grants soar along with the stock market. This angers some shareholder advocates who say that these C.E.O.’s did little to earn their paper wealth. Still, it may be years before executives are able to actually reap the proceeds of those grants, because of vesting requirements.

Poll: Is Executive Pay Too High?

Mr. Feinberg has made it more than clear that he finds perks like private jets and private clubs to be particularly noxious — and companies have apparently read that memo. According to Equilar, companies collectively cut the median annual perk award by 19 percent, to $170,487. The average fell by 14 percent, to $261,801.

At the same time, companies in the Equilar survey were reluctant to increase the cash component of their compensation packages. Equilar says the median cash payout rose slightly, by 1 percent, to $3.1 million. The average fell by 5 percent, to $3.8 million. “We’ve seen some companies that switched over to cash because equity was too volatile,” says Aaron Boyd, the research manager of Equilar.

FOR all of these signs that a real reordering of executive compensation may be under way, some analysts wonder whether the Obama administration will abandon its pay crusade.

“We have a long history of episodes like this in depressions and recessions where everybody talks about reform,” says Kevin J. Murphy, a business professor at the University of Southern California. A few years go by, he says, and then you wonder, “What were those reforms again?”

Mr. Murphy says he’s not only skeptical that reforms will be enacted, he is also skeptical that they do any good at all.

But Mr. Feinberg cautions that companies banking on the public’s short attention span do so at their own peril. “There is a tremendous amount of populist outrage and frustration in this,” he warns.

Indeed, there have been fierce exchanges between activist investors and business supporters over a provision in both the House and Senate financial reform bills that could make it easier for shareholders to vote their own directors onto boards.

In February, conservative groups including the Christian Coalition warned Congress that the proposed measures would enable union operatives and animal-rights activists to win board seats.

Shareholder advocates, however, are hopeful that they will prevail. “It looks like the Democrats are holding firm on that,” says Mr. Davis of Yale. “If that’s traded away, there will be enormous disappointment in the investment community.”

IF ever a C.E.O. would have seemed impervious to the administration’s calls for pay reform, it is Lawrence J. Ellison of Oracle, the highest-paid chief executive in the Equilar survey. He made $85 million last year — more than the combined pay of the second- and third-ranked C.E.O.’s, J. Raymond Elliott of Boston Scientific, with $33 million, and Ray R. Irani of Occidental Petroleum, with $31 million. Mr. Ellison took all but $6 million of his pay in stock options.

A billionaire many times over, Mr. Ellison has never been afraid to flaunt his wealth. Yet he made a sacrificial gesture last year that is a sign of the times: this year he plans to decline his $1 million base salary and take just $1 instead. (Oracle declined to comment on Mr. Ellison’s pay.)

Few of the other top-10 C.E.O.’s on the Equilar list are apparently willing to make such concessions. Many of them saw the cash portion of their pay decrease as their bonuses shrank, thanks to the recession.

Mark V. Hurd of Hewlett-Packard, the fourth-highest-paid C.E.O. on the Equilar chart, made $24 million in 2009 — $18 million of which came in cash. William C. Weldon of Johnson & Johnson made $23 million — $15 million of it in cash. Robert A. Iger of Walt Disney made $22 million — $12 million in cash.

As usual, some C.E.O.’s in the Equilar survey seemed to have done more to earn their pay than others. For instance, Samuel J. Palmisano of I.B.M. made $21 million after he delivered a 9 percent net profit increase and helped oversee total shareholder returns of 58 percent. Jeffrey L. Bewkes of Time Warner made $19 million last year as he undid the disastrous AOL-Time Warner merger by spinning AOL off as a separate public company. Mr. Bewkes got $14 million of his pay in cash. He might wish he had received more Time Warner shares, though. The total return on his company’s stock was 21 percent in 2009.

There also was a crop of C.E.O.’s who relinquished their cash bonuses or took voluntary pay cuts because of a recession that devastated many customers, employees and shareholders.

Some of those who gave up their pay, however, didn’t seem to have any qualms about taking it later in the year after their boards had a change of heart.

Howard Schultz of Starbucks requested last year that his base salary be reduced from $1.19 million to $6,900 as “a personal contribution to cost-control efforts,” according to a company statement. However, the company later gave him a $1 million “discretionary bonus” that nearly made up for his sacrifice.

“Mr. Schultz’s performance greatly exceeded the board of directors’ expectations,” the company said in a statement.

At Hewlett-Packard, Mr. Hurd took a 20 percent salary cut early last year. But H.P. ended up giving him a $1.18 million discretionary bonus that restored the pay cut, a sum that also included extra cash the board approved to enhance Mr. Hurd’s regular bonus plan.

That left some analysts wondering whether H.P. had weakened the link between bonuses and performance.

“If they didn’t feel the incentive plans they had in place were rewarding this executive well enough, isn’t it about time they redesigned the bonus plan?” asked Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm. “This is the third year in a row that H.P. gave its C.E.O. a discretionary bonus. Maybe it’s time for a new compensation committee.”

Gina Giamanco Tyler, an H.P. spokeswoman, said the company had “an effective pay-for-performance compensation model.”

U.S. Bancorp’s C.E.O., Richard K. Davis, who made $7 million last year, was also the beneficiary of corporate largess. He initially declined his $1 million cash bonus because of his company’s poor results in 2008, the “depressed level” of its stock price and “the general economic performance,” according to a U.S. Bancorp filing.

However, Mr. Davis would not go without the money for long. The bank’s board ended up reversing itself and paying him the bonus after all. Jennifer Wendt, a U.S. Bancorp spokeswoman, said that the directors thought he deserved the money because the bank had a good year and paid back its TARP aid.

AMONG the C.E.O.’s of TARP recipients last year, 12 are on the Equilar list, including Kenneth D. Lewis of Bank of America, Vikram S. Pandit of Citigroup, John G. Stumpf of Wells Fargo, Lloyd C. Blankfein of Goldman Sachs, Jamie L. Dimon of JPMorgan Chase and Kenneth I. Chenault of American Express.

According to Equilar, the median pay for this group was $6 million in 2009, a 34 percent decrease from 2008. The median stock and options portion of their pay plummeted 94 percent and 92 percent, respectively. But the median cash payout for the group rose 20 percent.

Mr. Lewis, who has stepped down, was the second-lowest-paid C.E.O. on the Equilar list, with $32,171 in cash. The only chief executive who made less was Steven P. Jobs of Apple, who collects a $1 salary and nothing more. (Mr. Jobs, of course, also owns more than a $1 billion worth of Apple stock.)

Mr. Pandit of Citigroup was the third-lowest-paid of the Equilar 200, at $128,751. He announced partway through the year that he would take just a $1 salary for the remainder of the year and no bonus until his bank returned to profitability, which it did not do in 2009. His pay last year was entirely in cash.

Mr. Blankfein, meanwhile, was the survey’s seventh-lowest-paid chief executive. He made $862,657 in cash, which includes $262,657 in perks for things like car expenses and financial counseling.

The highest-paid banker on the list, Mr. Stumpf of Wells Fargo, was paid nearly $19 million. He vaulted past his better-known peers last year by closely following the Obama administration’s compensation blueprint.

Last June, the Treasury Department appointed Mr. Feinberg and issued interim rules for compensation at TARP companies. It mandated a $500,000 salary cap for executives at the largest TARP recipients, saying any additional pay be awarded as long-term restricted stock.

Wells Fargo, which received TARP aid, layered $4.7 million worth of stock on top of Mr. Stumpf’s $900,000 cash base salary, bringing his total salary up to $5.6 million.

“If you want an almost perfect example of unintended consequences, this is it,” says Mr. Hodgson of the Corporate Library.

Wells awarded Mr. Stumpf an additional $13 million in stock, making his total compensation $19 million.

A Wells spokeswoman said Mr. Stumpf deserved his raise, in part because he now presided over a bank that was twice as big as it was the previous year after acquiring Wachovia. Wells repaid its TARP aid in December.

Goldman Sachs, which returned its TARP aid last summer, said late last year that it would pay a “vast majority” of its senior managers’ pay in stock that cannot be sold for five years. The bank can force employees to return pay if they engage in “materially improper risk analysis or failed sufficiently to raise concerns about risks” — a policy known as a clawback. Goldman also said it would have a nonbinding say-on-pay vote at its 2010 annual meeting.

Analysts say that other companies are making similar moves, though some more tepidly than others. Equilar says that the percentage of Fortune 100 firms that disclosed clawbacks last year rose to 73 percent from 64 percent. Some of the largest companies in the nation have also adopted similar say-on-pay provisions.

Few of these initiatives, however, go as far as those at Goldman. Equilar says that most clawbacks occur only if top executives engage in unethical conduct or misdeeds that result in financial misstatements. Some of these recently unveiled say-on-pay initiatives are also weaker than one would expect. Prudential, for example, allows say-on-pay votes only every other year. “We talked to a lot of our institutional investors and pension funds,” said a Prudential spokesman. “They said every year would be a lot of work for them. They said every other year would be adequate.”

Microsoft’s say-on-pay ballots are cast only once every three years. “Our compensation program is designed to induce and reward performance over a multiyear period,” Microsoft wrote online last year. “Say-on-pay votes should occur over similar timeframe.”

CHARLES M. ELSON, a corporate governance professor at the University of Delaware, says such limited measures are just window dressing corporations deploy to keep regulators from imposing tougher reforms. “I’ve always supported clawbacks, but they are almost impossible to enforce,” he says. “Unfortunately, I think say-on-pay is pointless.”

Both the House and the Senate financial reform bills could require public companies to have annual say-on-pay votes. The bills include a “proxy access” rule to make it easier for shareholders to get their own candidates elected to boards.

“We are looking at the first time across the American marketplace at an environment where shareholders will have real authority to hire and fire directors,” says Mr. Davis of Yale. “If companies ignore a vote on say-on-pay, a shareholder majority would have the right to remove the directors who failed to listen.”

Corporate America is dead set against this. The United States Chamber of Commerce says that proxy access would give extreme groups the ability to meddle in broad corporate decisions.

“This is something that isn’t about better corporate governance,” says Thomas Quaadman, the executive director of the chamber’s Center for Capital Markets Competitiveness. “This is about activists being put at the head of the line.”

Even if enhanced proxy access is eliminated from the bills, the Senate version also includes an amendment sponsored by Robert Menendez, Democrat of New Jersey, that would offer a revealing compensation barometer: a requirement that public companies disclose median wage for their workers along with their chief executive’s compensation.

Asked why he thought this was important, Mr. Menendez quoted the Supreme Court justice Louis D. Brandeis: “Sunlight is the best disinfectant.”