CEO pay keeps rising
Bigger chunk comes in stock
Thu., May 23, 2013
CEO pay has been going in one direction for the past three years: up.
The head of a typical large public company made $9.7 million in 2012, a 6.5 percent increase from a year earlier that was aided by a rising stock market, according to an analysis by the Associated Press using data from Equilar, an executive pay research firm.
CEO pay, which fell two years straight during the Great Recession but rose 24 percent in 2010 and 6 percent in 2011, has never been higher.
Companies say they need to pay CEOs well so they can attract the best talent, and that this is ultimately in the interest of shareholders. But shareholder activists and some corporate governance experts say many CEOs are being paid far above what is reasonable or what their performance merits.
After years of pressure from corporate governance activists unhappy about big payouts, many companies have revamped their compensation formulas. They have awarded a bigger chunk of compensation in stock to align pay more closely to performance, become more transparent about how compensation decisions are made and in some cases promised to claw back pay from fired executives.
Shareholder activists say the changes are a step in the right direction, yet they argue that CEO pay remains too high and that there is still too much incentive to focus on short-term results.
With the economy on steadier footing and the stock market surging, the debate on CEO pay is settling into more of a simmer than a boil. Companies cut CEO pay in 2008 and 2009 amid investors’ white-hot anger for the losses they suffered during the financial crisis. Since 2011, they have been required by law to hold “say on pay” votes, which give shareholders the right to express whether they approve of the CEO’s pay. The vote is nonbinding, but companies don’t want to deal with the public embarrassment of a “no.”
Companies say they are listening to their shareholders’ concerns. They point to changes in how CEOs are rewarded that are meant to tie pay more closely to company performance. For example, they’re more often linking stock awards to revenue, earnings and share price targets, rather than just handing them out automatically.
“I’ve never seen an environment where boards take more time trying to get this right,” says Charlie Tharp, CEO of the Center on Executive Compensation, an advocacy group that supports corporations.
Pay is up partly because a bigger proportion is coming from stock, and stock markets are hitting all-time highs. But it’s a two-way street: If stock markets decline, pay could decline or at least grow more slowly in future years.
But changing the pay structure has hardly silenced the critics. They say formulas for stock awards, for example, can drive CEOs to focus on short-term results. And they’re anxious for the Securities and Exchange Commission to implement a rule required under the Dodd-Frank financial reform law that would force big public companies to disclose the ratio of their CEOs’ pay compared with the median pay for their entire workforce.
“If you’re making $10 million a year, you get into a situation where life isn’t real anymore,” says Eleanor Bloxham, CEO of the Corporate Governance Alliance, which advises boards.
Charles Elson, a well-known shareholder rights expert who is director at the Weinberg Center for Corporate Governance at the University of Delaware, has been crusading for companies to stop compensating their CEOs based on what their peers at similar companies are making.
The trouble with peer groups, Elson says, is that a CEO could have a terrible year, “but if my peer’s pay goes up, my pay will too.”
To calculate pay, Equilar looked at salary, bonus, perks, the potential future value of stock awards and option awards, and other pay that companies have to report for their top executives in regulatory filings each year. This year’s study examined pay for 323 CEOs at S&P 500 companies that had filed their shareholder proxies by April 30. The sample includes only CEOs in place for at least two years.
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