Archive for Sunday, June 10, 2007

AP research: CEO compensation explodes to movie-star level

June 10, 2007


— 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 of such A-list movie stars as Brad Pitt or Leonardo DiCaprio - $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.

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.

More disclosure

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.

Bulk comes from stock

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.

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.

The SEC's new disclosure 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.


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