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Bloomberg, March 25, 2010 article



CEOS Defy Obama With More Cash Instead of Pay for Performance

By Alexis Leondis, Jessica Silver-Greenberg and Tara Kalwarski


March 25 (Bloomberg) -- Total compensation for U.S. chief executive officers shrank by 8.6 percent last year, according to data compiled by Bloomberg BusinessWeek.

Boards offset some cuts in stock awards and options by boosting CEO salaries and bonuses, the data show.

With pay packages under pressure from President Barack Obama and shareholder activists, average compensation fell by 8.6 percent to $9.81 million for the 81 CEOs whose companies’ proxy statements were examined. While option awards were slashed by 30 percent, cash earnings, including non-equity incentive rewards, rose 8.3 percent.

Cash became king in corner offices because boards acquiesced to CEOs’ desire for dependable income, according to interviews with 15 compensation experts. Executives, whose pay packages were typically negotiated in 2008 and early last year, weren’t willing to give up salaries for long-term, stock-based awards that could decline in value.

“When the economy is reeling, the most stable form of pay isn’t stocks, it’s cash,” said Sam Pizzigati, an associate fellow at the Institute for Policy Studies in Washington who has written about executive compensation and shareholder activism. “In rough times, the surest thing is cash, and that’s what they went for.”

That isn’t the direction preferred by the White House.

“To the extent there is more emphasis on cash than stock, that’s unfortunate,” said Kenneth Feinberg, the U.S. special master on executive compensation, who was appointed by Obama in June 2009. “We’re pushing the other way.”

New Disclosure Rules

Assuming the trend holds for other Standard & Poor’s 500 companies, CEO compensation may have fallen for the third year in a row. The average pay package declined in 2007 and 2008, when it was off roughly 40 percent from its 2000 high of $14.6 million, according to research by assistant finance professors Carola Frydman of the Massachusetts Institute of Technology and Dirk Jenter of Stanford University.

The proxies that Bloomberg reviewed include the most complete pay summaries that companies have ever been required to provide. For the first time, the Securities and Exchange Commission has mandated that the full value of stock and option awards appear in proxy statements covering the year in which they were given. The awards’ value was divided among several years in the past.

For a look at how S&P 500 CEOs fared under the new disclosure rules, Bloomberg compiled data from proxies for companies whose fiscal years ended on Dec. 31, 2009, and that had been filed as of March 12. For comparison purposes, only CEOs serving in that capacity in 2008 and 2009 were included.

‘Hot Spotlight’

Printer maker Lexmark International Inc., based in Lexington, Kentucky, cited challenging economic conditions in its proxy as the reason for freezing salaries. The CEO of Morris Township, New Jersey-based Honeywell International Inc., David Cote, 57, requested that he not be awarded a bonus because of the recession. Directors agreed -- and his total pay was reduced by 57 percent.

Compensation committees also exercised caution to avoid criticism, said Tim Smith, a senior vice president at Walden Asset Management, a money manager in Boston.

“The hot spotlight of public attention is on companies more than ever,” Smith said.

The 20 financial institutions among the 81 companies cut CEO compensation in 2009 by almost $28.1 million to $176.1 million -- accounting for 37 percent of the overall pay lost. Eleven were banks that received money from the Troubled Asset Relief Program and had to adhere to federal guidelines that restricted cash bonuses for top executives.

Nothing for Lewis

Vikram Pandit, CEO of New York-based Citigroup Inc., voluntarily slashed his annual salary to $1 in February 2009. His package exceeded $38 million in 2008, when the bank’s stock price fell 77 percent. Pandit, 53, vowed not to take a raise or receive incentive compensation until Citi -- 27 percent owned by the U.S. -- returns to profitability.

At Charlotte, North Carolina-based Bank of America Corp., Kenneth D. Lewis received no cash, bonus or equity compensation in 2009. Lewis, 62, retired on December 31.

Not all TARP recipients showed restraint. Last August, San Francisco-based Wells Fargo & Co.’s compensation committee approved upping CEO John Stumpf’s base salary more than fivefold to $5.6 million, all but $900,000 of which was awarded in shares that vested over the rest of the year.

Stumpf, 56, received a total pay package of $21.3 million, 136 percent more than in 2008. It was boosted because TARP rules made the bank unable to “reward him appropriately” in other pay categories, said Melissa Murray, a spokeswoman for the bank.

‘No Teeth’

Another possible explanation for the decline in overall compensation was pressure from shareholders, according to John Keenan, a strategic analyst at the American Federation of State, County and Municipal Employees union in Washington.

More than 100 resolutions seeking advisory roles on executive compensation were submitted last year, up from 7 in 2006, Keenan said, and 64 companies have agreed to give shareholders a say on pay.

The resolutions that have passed are typically nonbinding.

“It’s policing executive pay with something that has no teeth,” said Frank Glassner, CEO of San Francisco-based Veritas Executive Compensation Consultants LLC.

The gain in cash forms of pay and the decrease in stock and option awards moved the companies further away from compensation aligned with long-term performance, according to the data compiled by Bloomberg.

Greener Pastures

“This is exactly the opposite message that was meant to be imparted by President Obama, Feinberg and the other preachers from D.C.,” said Graef Crystal, a pay analyst who examined the data for Bloomberg.

At 43 of the 81 companies, salaries and bonuses increased. Salaries alone rose an average 8.9 percent.

“That is a large increase in any year, but few Americans received any raises at all and many lost their entire income,” Crystal said. “The increase for CEOs seems a gross insult.”

Salaries might have gone up been because boards saw stock- based awards as too volatile and wanted to offer more stable cash income as a retention tool, said Paul Sorbera, president of the executive recruiting firm Alliance Consulting in New York.

Stock options don’t have as much “holding power on executives” as they once did and some companies felt they had to offer CEOs more cash so competitors wouldn’t “steal their talent away,” said Steven Hall, managing director of New York- based Steven Hall & Partners, an executive compensation consulting company. “Some of these executives need to be paid $20 million” or they might leave for greener pastures.

‘Far Too Greedy’

Option awards declined by 30 percent, the biggest drop in any form of compensation, according to the data. Some boards didn’t want to give out large option awards because of the potential for gains that would later make the awards look excessive, according to Kenneth Raskin, a lawyer in the New York office of White & Case who represents CEOs in pay negotiations.

“CEOs didn’t want the stock price to rise dramatically and in a year seem far too greedy,” said Ira T. Kay, an independent compensation consultant in New York.

Boards cut stock awards by 11.7 percent, putting less emphasis on options and more on stock awards, which compensate a CEO even when a share price stagnates. For options to pay off, stock prices have to climb.

The greater relative reliance on share awards “misaligned” CEO and shareholder interests, according to a February report by the Corporate Library, a shareholder governance research firm in Portland, Maine.

Shortfalls and Windfalls

Meanwhile, bonuses -- including what the proxies call “non-equity incentive plan compensation” -- rose 7.9 percent in 2009 to an average $2.07 million.

Nine of the 81 CEOs took home a bonus in one category or the other, after receiving none in 2008. They included Columbus, Georgia-based Aflac Inc.’s Daniel Amos, 58, who was awarded $4.1 million, and Midland, Michigan-based Dow Chemical Co.’s Andrew Liveris, 55, who received $4.5 million.

Some performance goals for long-term awards are being reduced in the still-uncertain economy, Veritas’s Glassner said.

“Companies haven’t raised the bridge,” said Glassner. “They’ve just lowered the river.”

Glassmaker Corning Inc., based in Corning, New York, altered its performance measurements “given the great uncertainty in accurately forecasting the impact of the global recession” in order to “alleviate any unintended shortfalls or windfalls in actual bonus payouts,” the company said in its filing. CEO Wendell Weeks, 50, received $4.8 million in an annual incentive bonus, up from $301,584 in 2008.

Bigger Payday

Ray Irani, CEO of Los Angeles-based Occidental Petroleum Corp., ranked first among the 81 executives with a $31.4 million pay package in 2009. Irani, 75, stands to get a bigger payday this year -- a $58.5 million cash award from an incentive plan tied to the company’s return on equity, or earnings divided by book value, a common measure of performance.

Irani will get the payout if Occidental attains a 54 percent cumulative return over three years, according to the company’s proxy. The company achieved a 94 percent cumulative rate in 2004 to 2006, in the three calendar years before the target was set.

Occidental’s compensation committee rewarded Irani in 2009 for continuing “to place Occidental among the best performers in the oil and gas industry,” according to the company’s 2010 proxy statement. The board’s focus on return on equity is meant to encourage “the effective use of capital” in profitable, long-term investments, the proxy said.

‘An Actuarial Value’

Pension plans gained an average of 15.4 percent or $1.27 million. One reason: the 8.3 percent rise in salary and bonus drove up the current value of what companies promised to pay CEOs in retirement, typically calculated as a percentage of their annual income.

While pension values in proxies are mostly book entries, not cash outlays, they reflect changes in the real amount a CEO would get if he took his pension in a lump sum.

Dallas-based AT&T Inc. put $8.99 million into CEO Randall Stephenson’s pension plan, the biggest such contribution. Under the retirement plan, Stephenson, 49, will get a pension equal to 60 percent of his highest average salary and bonus in three of his last 10 years at the company. Although he’s not currently eligible for retirement, his pension is valued at an estimated $31 million today.

McCall Butler, a spokesman for AT&T, said Stephenson’s pension gain was “an actuarial value, not part of his actual taxable income.”

Fewer Private Planes

In a letter to shareholders last April supporting a say-on- pay resolution, Carole Lovell, president of an AT&T retiree association, said that the company’s “executive compensation policies continue to exhibit all the worst excesses and abuses.” The resolution did not win a majority.

In the 81 filings, “all other compensation” -- including perquisites like private planes, security details and country club memberships -- declined by 23.2 percent.

One casualty: Lincoln National Corp. CEO Dennis Glass, 60, whose “other” pay dropped to $308,463 from $2.26 million. Glass’s 2008 perks included $82,901 for personal use of aircraft, according to the proxy. His perks in 2009 cost $16,600 for matching charitable contributions and financial planning, said Laurel O’Brien, a spokeswoman for the Philadelphia-based insurer.

180 Shareholder Resolutions

Companies are backing off on criticism triggers like private planes because “these kinds of perks just aren’t worth it,” said David Gordon, an executive compensation consultant at Frederic W. Cook & Co. Inc. in Los Angeles. “They are a small fraction of overall compensation, but have the ability to get 50 percent of the attention.”

Scrutiny of pay isn’t likely to go away. RiskMetrics, an investor consultant, counts 180 resolutions concerning executive compensation around the country.

Legislation in Congress that would mandate say-on-pay votes may have led some activists to “feel the battle has been won,” said Doug Friske, head of the global executive compensation practice at New York-based Towers Watson & Co.

The House passed the measure, which is part of the financial regulation overhaul bill in the Senate.

Tim White, a partner with Dallas-based Kaye/Bassman International, an executive recruiter, ties shareholder pressure to the U.S. recession that began in 2007 and may now be abating.

“In difficult times, there is always a clamoring for the fat cats to make less money,” White said. He predicted executive compensation will rise as the economy strengthens.

To contact the reporters on this story: Alexis Leondis in New York at; Jessica Silver-Greenberg in New York or; Tara Kalwarski in New York at or

Last Updated: March 25, 2010 00:01 EDT





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