The Associated Press
May 10, 2010, 6:45AM ET
AP IMPACT: Market gains set up
CEO pay bonanza
America's top CEOs are set
for a once-in-a-lifetime pay bonanza.
Most of them got their
annual stock compensation early last year when the stock market was at a
12-year low. And companies doled out more stock and options than usual
because grants from the previous year had fallen so much in value that
many people thought they'd never be worth anything.
But stock prices have
generally surged ever since. Even with last week's sharp declines, CEOs
still have enormous gains on paper.
"The dirty secret of 2009 is
that CEOs were sitting on more wealth by the end of the year than they had
accumulated in a long time," says David Wise, who advises boards on
executive compensation for the Hay Group, a management consulting firm.
An Associated Press analysis
of companies in the Standard & Poor's 500 index shows that 85 percent of
the stock options given to CEOs last year are now worth more than they
were on the day they were granted. For some the value jumped by a factor
of 10 or more. A year ago, after the stock market had collapsed, 90
percent of the options granted in 2008 were worth less than the original
estimate, or were considered "underwater," according to the AP's analysis.
Ford Motor Co. CEO Alan
Mulally's pay package illustrates this point. In March 2009, Ford granted
5 million stock options to Mulally. Using a complex formula, Ford assigned
the options an estimated value of $5 million. At the time, Ford's shares
were trading at $1.96. Since then, the stock has jumped nearly sixfold,
and Mulally's options have a value on paper of about $48 million.
Mulally is also ahead on his
2008 options, which were valued at $9 million when they were granted two
years ago. Now, they're worth close to $21 million.
Mulally's gains still exist
only on paper, of course. The ultimate size of his payday will fall if
Ford's stock falters. But his gains could just as easily march even higher
if Ford's stock continues to rise. And they take the sting out of a 30
percent salary cut and the lack of a bonus. A Ford spokesman said the
structure of Mulally's compensation means most of it is aligned with the
interests of shareholders.
Overall, the AP analysis
found that the median 2009 pay package for chief executives at companies
in the Standard & Poor's 500 index fell by about 11 percent to $7.2
million. That followed a 7 percent decline in 2008 in median pay. The
median value is the midpoint in the AP sample, meaning half of the CEOs
made more and half made less.
The total doesn't take into
account the increase in value on paper of the stock and the options
executives received. The median pay only reflects the value that companies
must assign to stock compensation when it is initially granted.
Stock compensation in 2009
accounted for 58 percent of total pay for CEOs. Cash bonuses that CEOs
received from meeting performance goals amounted to 20 percent and
salaries represented 14 percent, with the rest from guaranteed cash
bonuses and perks.
Other findings in the AP
-- The highest-paid CEO in
2009 was Yahoo Inc.'s Carol Bartz, who received a $47.2 million
compensation package during her first year on the job. Ninety percent of
her pay came from stock awards and options that were all granted around
the time she was hired in the winter of 2009.
-- No financial companies
were in the AP's top 10. Three were on the 2008 list. Citigroup Inc.'s
Vikram Pandit went from No. 10 in 2008 to the third-lowest paid CEO in the
AP analysis in 2009.
-- The median value of
performance-based cash bonuses rose 19 percent, making it the
fastest-growing component of executive pay in the AP sample. CEOs
generally had to meet goals for profits and stock returns in 2009 to
receive the bonuses. Some companies made that easy. In early 2009, as the
stock market was still falling and the economy was in a deep recession,
many companies lowered the bar on the benchmarks for profit and stock
returns. As profits began to improve with the economy and the market
rebounded, many executives easily beat the stripped-down goals.
The AP's analysis found
evidence that boards took some action amid a public outcry over executive
pay following the financial meltdown and the onset of the Great Recession.
The median amount CEOs received in perks fell by 15 percent in 2009, as
companies cut back on benefits such as the use of corporate jets for
personal travel. And fewer CEOs got a guaranteed cash bonus.
"There were deliberate
efforts by companies to take away things that could get them noticed,"
says J. Robert Brown, a professor of business law and corporate governance
at the University of Denver and an expert on compensation issues. "No one
likes being an outlier."
Pandit's pay for 2009
consisted of $125,001 in salary and $3,750 in 401(k) benefits. Citigroup's
board said he earned a bonus for his work in 2009, but Pandit said he
won't take one until the company returns to profitability.
His compensation in 2008 was
an estimated $38 million, mainly because of a large grant of stock awards
and options in January 2008 shortly after he became CEO. That stock
compensation was granted when Citigroup's stock traded around $23 a share.
Today, it trades around $4 a share. Pandit still has time for Citigroup's
stock to rebound. His options don't expire until 2018.
A few other CEOs, including
General Electric Co.'s Jeffrey Immelt, turned down bonuses. United States
Steel Corp. CEO John Surma took a salary cut and refused any stock
compensation because of the difficult business climate.
But experts say those
examples weren't typical. "There have been gains chipping away at the
sides, but the real fundamental changes still need to be made," says Jesse
Brill, chair of the website CompensationStandards.com and an expert on CEO
Chief among those changes:
Limiting how much wealth CEOs can accumulate through big grants of stock
"The purpose of stock
options was to create a nest egg that a CEO would receive after a
successful career," Brill says. "Once that number is big, there is no
reason to keep adding to it. Additional grants do not provide additional
The AP's analysis looked at
320 companies in the S&P 500 that filed proxy statements with federal
regulators between Jan. 1 and April 30 and had the same CEO for the past
two years. CEOs new to the job in 2009 were included on the AP's
highest-paid list but were not used in the year-over-year analysis.
Stock market data were
provided to the AP by Capital IQ, a unit of Standard & Poor's. The prices
used in the analysis were as of the end of trading on May 7.
The AP formula captures how
corporate boards value their executives' pay packages. It adds up salary,
bonuses, perks and the company's estimate of the value of stock options
and awards of restricted stock on the day they were granted. That value is
intended to represent how much the executive could receive from exercising
options in the future.
Consider this hypothetical
example: An executive is granted options in 2009 to buy 300,000 shares at
$40 each. The company puts a value on the options of $5 million. The
options vest over three years, meaning in 2010 he can exercise 100,000
shares at $40 each and the same in 2011 and 2012. As at most companies,
the CEO has 10 years to exercise the options.
The CEO would only exercise
his right to buy those options if the stock was trading above the exercise
price. In 2013, the stock has risen to $75 a share. The CEO decides to
exercise all of the 300,000 options at $40 a share for $12 million. He
then immediately sells at $75 a share for $22.5 million. His profit on
those options: $10.5 million.
The example shows that the
initial value a company puts on an executive's stock options, which is
disclosed in company proxy statements and used in AP's calculation of
annual compensation, probably won't be what the executive ultimately
receives. In this hypothetical case, the initial value was $5 million and
the executive made $10.5 million.
The AP analysis found that
two-thirds of the stock compensation granted to CEOs was awarded in the
first three months of 2009. That is the time of year when most boards
typically make their annual compensation decisions, but in 2009 it
happened as the market crumbled to a 12-year low. The Dow Jones industrial
average bottomed out at 6,547 on March 9, 2009, the same day the S&P 500
index dropped to 676. Both were down more than 50 percent from records set
in October 2007.
"When the Dow hit 6,600, we
didn't know if it was going to 9,000 or 3,000 in the next three months.
Boards and management were terrified," says Ira Kay, one of the nation's
leading compensation consultants.
The fact that stock options
awarded in early 2008 were so far underwater had a big effect on stock
compensation that boards granted in early 2009. Some boards increased the
amount of stock awards and options they gave CEOs, or granted special
"Everything was underwater,"
Kay says. "Executive teams had not been paid. The boards were trying to
keep executives as whole as possible."
What no one knew was that
the market would soon start a powerful rally. The Dow and S&P 500 have
climbed about 60 percent since March 2009. The gains have left executives
poised to win big unless the stock market nosedives.
So how big will the bonanza
Here's a clue: Last year,
CEOs in the AP sample exercised options and had previous stock awards vest
worth $1.72 billion, according to data provided to the AP by compensation
research firm Equilar. If the market doesn't crater, as it did during the
financial meltdown, the payouts will dwarf that total in the coming years.
"This shows you how
executives are always taken care of," says Lisa Lindsley, director of
capital strategies at the American Federation of State, County and
Municipal Employees, a labor group that is also an institutional
shareholder with $850 million in assets.
Associated Press Business
Writers Matthew Fordahl, Nicoletta Ratti, Erin Conroy, Tali Arbel, Emily
Fredrix and Ashley Heher contributed to this report.