WHEN does big become excessive? If the question involves
, the answer is “often.”
But despite the reams of figures about pay in any given year,
shareholders often have to struggle to put those numbers into perspective.
Companies typically hold up pay from previous years as a benchmark, but
just how this paycheck stacks up against, say, a company’s
earnings or stock market performance is rarely laid out.
Investors can run the numbers themselves, of course, but it’s a pretty
laborious process. As a result, pay for most public companies’ top
executives exists in a sort of vacuum, as far as investors are concerned.
Shareholders know they pay a lot for the hired help, but a lot compared
Answers to that question come fast and furious in a recent,
immensely detailed report in
The Analyst’s Accounting Observer, a publication of R. G. Associates,
an independent research firm in Baltimore. Jack Ciesielski, the firm’s
president, and his colleague Melissa Herboldsheimer have examined proxy
statements and financial filings for the companies in the Standard &
Poor’s 500-stock index. In a report titled “S.& P. 500 Executive Pay:
Bigger Than ...Whatever You Think It Is,” they compare senior executives’
pay with other corporate costs and measures.
It’s an enlightening, if enraging, exercise. And it provides the
perspective that shareholders desperately need, particularly now that they
are being asked to vote on corporate pay practices.
Let’s begin with the view from 30,000 feet. Total executive pay
increased by 13.9 percent in 2010 among the 483 companies where data was
available for the analysis. The total pay for those companies’ 2,591 named
executives, before taxes, was $14.3 billion.
That’s some pile of pay, right? But Mr. Ciesielski puts it into
perspective by noting that the total is almost equal to the gross domestic
product of Tajikistan, which has a population of more than 7 million.
Warming to his subject, Mr. Ciesielski also determined that 158
companies paid more in cash compensation to their top guys and gals last
year than they paid in audit fees to their accounting firms. Thirty-two
companies paid their top executives more in 2010 than they paid in cash
The report also blows a hole in the argument that stock grants to
executives align the interests of managers with those of shareholders. The
report calculated that at 179 companies in the study, the average value of
stockholders’ stakes fell between 2008 and 2010 while the top executives
at those companies received raises. The report really gets meaty when it
compares executive pay with items like research and development costs, and
earnings per share.
The report, for instance, compared earnings per share with cash pay —
just salary and bonus, if there is one. It identified 24 companies where
cash compensation last year amounted to 2 percent or more of the company’s
net income from continuing operations.
Topping this list is
Allergan Inc., the health care concern whose top executives received,
after taxes, an estimated $2.6 million in salaries last year. That
amounted to 50 percent of what the company earned from continuing
operations, the report said.
Caroline Van Hove, an Allergan spokeswoman, said that the salaries were
large when compared with net income in 2010 because one-time charges
reduced earnings significantly that year; in previous years, she noted,
earnings were far higher than executives’ pay. She also said the company’s
C.E.O. had not received an increase in salary over the past three years.
Moving on to R.& D. costs, the report examined the 62 technology
companies in its sampling that reported such an expense, excluding certain
costs associated with acquisitions.
Mr. Ciesielski found that the median level of executive pay was equal
to 5.3 percent of these companies’ R.& D. expenditures.
Topping the pack was
Jabil Circuit, a manufacturer of electronic circuits and boards for
computer, communications and automotive markets. In 2010, its $27.7
million in total executive pay almost matched the $28.1 million it spent
on R.& D. While last year may have been an outlier, over the past four
years, Jabil’s pay equaled 57.2 percent of the amount it spent on research
Jabil did not respond to a request for comment.
Finally, there’s the comparison of executive pay with market
capitalization. As Mr. Ciesielski noted, this calculation provides the
biggest shock value.
Eleven companies analyzed in the report gave top executives a combined
pay package amounting to 1 percent or more of the companies’ average
market value over the course of the year. The
Janus Capital Group, the
mutual fund concern, topped the list, with pay totaling almost $41
million for five executives. This accounted for 1.95 percent of the
company’s average market value over 2010.
“To earn their keep,” the report said, “managers would have to create
stock market value in the full amount of their pay.” The executives at
Janus failed to increase value in 2010, when the stock closed out the year
roughly where it had begun it. This year, the company’s shares are down
almost 30 percent.
Janus declined to comment.
Mr. Ciesielski says he believes that shareholders need more context
when it comes to pay practices — and that rule makers should improve pay
reports. “The disclosures really are not sufficient to get people fired
up,” he said in an interview last week, “unless they add up the
compensation and find out how it relates to other things.”
“We need a different model,” he added. “There is a real lack of
information here about how shareholders’ funds are being managed.”
THIS may explain why shareholders at annual general meetings so rarely
vote against pay practices. Broc Romanek, who is editor of
CompensationStandards.com, said that a majority of shareholders at
only 34 companies, or 2 percent of those that have held votes so far this
year, have rejected executive pay packages.
If shareholders could size up the impact of pay on a company’s
operations, they’d be more informed, Mr. Ciesielski said. For example, why
not show a company’s total executive pay against its overall labor costs?
Or disclose top pay as a percentage of marketing expenditures, if that is
what propels a company’s results?
“How does executive pay relate to the basic drivers of what makes the
company work?” Mr. Ciesielski asked. “We should be exploring that kind of