ELLISON of Oracle Highest-paid C.E.O.: $96.2 million
of Yahoo Highest-paid woman: $36.6 million
CBS. Highest total cash compensation: $32 million.
News Corporation. Largest base salary: $8.1 million.
Well, what a difference a
few months and a larger pool of C.E.O.’s make. According to an updated
analysis, the top 200 chief executives at public companies with at
least $1 billion in revenue actually got a big raise last year, over
The research, conducted for Sunday Business by Equilar Inc., the
executive compensation analysis firm, found that the median 2012 pay
package came in at $15.1 million — a leap of 16 percent from 2011.
So much for the idea that
shareholders were finally getting through to corporate boards on the
topic of reining in pay.
At least the stock market
returns generated by these companies last year exceeded the pay
increases awarded to their chiefs. Still, at 19 percent in 2012, that
median return was only three percentage points higher than the pay
In other words, it’s
still good to be king.
Because the data shows
only chief executives’ pay, it does not reveal how good it still is to
be a prince. Brian Foley, an independent compensation consultant in
White Plains, pointed out that the 2012 compensation of the No. 2
executives at some of these companies would have vaulted them to the
top ranks on the C.E.O. roster.
“The interesting thing is
that there are people at these companies that make as much or more
than other C.E.O.’s,” Mr. Foley said. “I’m sure it’s a case of ‘Look
at what the C.E.O. has; I want more of that.’ “
Lawrence J. Ellison, founder and C.E.O. of
Oracle, the software company, is a familiar face on the pay
charts, and is ranked No. 1 this year. And had his two top lieutenants
been included, they, too, would have landed among the top five on the
list. Safra A. Catz, Oracle’s chief financial officer and
co-president, and Mark V. Hurd, also a co-president, each received
packages worth $52 million in 2012. (Mr. Hurd, you might remember,
received severance of more than $12.2 million when he left
Hewlett-Packard in 2010.)
As usual, cash pay for
many of the managers pales next to the value of the stock and option
grants they received. Median cash compensation was $5.3 million last
year, while stock and option grants came in at $9 million.
Stock grants are clearly
where the action is, and their value can really add up. Equilar’s
analysis calculates the median value of stock holdings of these top
C.E.O.’s at $51 million.
The trouble is, stock
grants, which are supposed to create an incentive to improve a
company’s performance, are also where pay excesses and disconnects
arise, compensation consultants say. How these boards measure
corporate performance can create pay problems by failing to align
long-term incentives with shareholders’ interests.
This is a significant
lapse, given how hefty the incentive awards of stock or options can
be. Performance shares generally comprise at least 50 percent of a
typical chief executive’s long-term incentive award, consultants say.
The median of combined
stock and option awards last year for the 200 C.E.O.’s on the list was
60 percent of pay. But individual cases can be far larger. Mr. Ellison
received $90.7 million in options in 2012, or 94 percent of his nearly
$96.2 million in total pay. Over all, Mr. Ellison’s compensation was
up 24 percent from last year; his shareholders’ returns, meanwhile,
were negative 22 percent in the company’s fiscal year, which ended in
Mr. Ellison was hardly
alone in receiving boatloads of stock in 2012. Among the five top
C.E.O.’s receiving compensation packages that were at least double
those of last year, stock and option awards — which can vest over
several years — provided the major kick.
Those executives included
Robert A. Kotick of
Activision Blizzard, the software publishing company; James Q.
Crowe of Level 3 Communications, the communications network company;
and Mark G. Parker of Nike. Mr. Kotick received stock awards worth
almost $56 million, or 86 percent of his total. Of Mr. Crowe’s $40.7
million in pay, stock and option grants amounted to $37 million, or 91
percent of the total. At Nike, Mr. Parker’s stock and option awards
were 77 percent of his $35.2 million in compensation.
At least shareholders of
Level 3 and Nike made money on their stocks in fiscal 2012 — a gain of
36 percent at Level 3 and 30 percent at Nike. Activision’s holders
weren’t so fortunate: their company’s shares lost 12 percent.
Cassandra Bujarski, an
Activision spokeswoman, said Mr. Kotick’s equity award of $56 million
was part of a new five-year employment contract he signed in March
2012, after two decades as chief executive. The award vests over five
years, and half is performance-based, she said.
BOARDS typically assess
an enterprise’s performance not only internally against what occurred
in previous years, but also externally, against a peer group of
Far too often, though,
measures used by company boards to evaluate performance are focused on
short-term results. They often miss a crucial element that determines
long-term success: the ability to innovate.
“We need compensation
that is aligned to long-term value drivers, like innovation,” said
Mark Van Clieaf, a managing director at MVC Associates
International, an organization consulting firm. “Yet at probably 70 to
80 percent of companies, there are no metrics for measuring the impact
of new products or services that were launched.”
Companies that don’t
weigh innovation in deciding pay, he added, are essentially rewarding
the status quo and failing to reward moves to keep a company strong in
the long term, including farsighted efforts to invest in research.
There are several ways to
gauge a company’s commitment to innovation. One is to look at research
and development expenses as a share of revenue. Another is to look at
return on invested capital, indicating how well a company uses its
money to generate profits. This figure should always exceed the
company’s percentage cost of capital.
Mr. Van Clieaf argues
that boards should assess these factors when designing
pay-for-performance packages. Otherwise, executives could be rewarded
for destroying shareholder value.
Among the few companies
to include an executive pay performance measure based on innovation is
3M, Mr. Van Clieaf said. Its “New Product Vitality Index” measures the
percentage of the company’s total sales from products introduced in
the last five years. “They recognize that to have sustainable growth
and value, they must continue to be an innovation company,” he said.
In an analysis for Sunday
Business, MVC Associates International compared financial statements
and executive pay at three tech companies: Google, Qualcomm and Xerox.
Using data from
Morningstar, Mr. Van Clieaf’s firm analyzed each company’s research
and development costs, return on invested capital and stock
performance over the last five years. He and his colleagues also
calculated each company’s economic profit, which is after-tax income
excluding acquisitions or divestitures that year, minus a charge for
the capital used to generate that income. Then they compared these
figures with the pay dispensed to the five executives at each company
who were the highest paid over the period.
The differences were
striking. Not surprisingly, spending on research and development over
the last five years was high at both Google (averaging 13 percent of
revenue) and Qualcomm (22 percent). Sizable returns on invested
capital were a result at both companies: Google averaged 18 percent a
year while Qualcomm averaged 16 percent.
At Xerox, it was another
story. Research and development costs averaged 4 percent, while return
on invested capital was 2.5 percent. Given that the typical cost of
capital for a tech company is at least 8 percent, these figures would
suggest that Xerox is earning less than its capital costs.
The economic profits at
the three companies were also disparate. While all three generated net
income over the last five years, a different picture emerged when MVC
adjusted those earnings for the amount of all capital necessary to run
While economic profits at
Qualcomm and Google were around 70 percent of reported earnings over
the period, economic profits at Xerox were negative.
Finally, MVC tallied the
executive pay at these companies. Compensation for top executives was
certainly larger at Google ($462 million) and Qualcomm ($280 million).
But when judged as a percentage of the company’s economic profit over
the five years, the pay amounted to 1.6 percent at Google and 2.3
percent at Qualcomm.
In Mr. Van Clieaf’s view,
those two companies’ executives earned their pay. In Xerox’s case, the
company paid its top managers $165.7 million over five years, even
though its economic profits amounted to a negative $1.65 billion.
“Corporate boards, pay
advisers and proxy governance firms need to rethink how they assess
what executives are doing,” he added. “And it’s time for long-horizon
investors to demand performance metrics and long-term inventive pay
Karen Arena, a Xerox
spokeswoman, declined to comment on Mr. Van Clieaf’s findings. But she
said 96.4 percent of investor shares voted at the latest annual
meeting were in favor of its executive compensation program.
Another problem with
performance stock grants, pay consultants say, is that an award’s size
is typically decided at the start of a year, well before shareholder
returns for that or future years can be measured. Because most stock
or option grants are expressed as a multiple of an executive’s salary,
a falling share price during the year means that a larger amount of
stock will be handed over when the award is made. In other words, the
loss of value is compensated for with a gain in the amount of stock
granted. For many shareholders, stuck with the reality of a declining
share price, that may seem unfair.
To eliminate this
problem, James F. Reda, an independent compensation consultant in New
whose firm is a unit of
Gallagher Benefit Services, suggests that company boards allocate
awards at or near to the end of the year so that total shareholder
returns can be assessed more easily.
“Why just give stock away
to senior executives and hope for future performance?” Mr. Reda asked
in an interview. “It’s better to adjust the pay based on performance
the C.E.O.’s are actually delivering to shareholders. This is also a
good way to put the brakes on C.E.O. pay.”
He has pitched this idea
to various boards. “A lot of directors say, ‘That makes perfect sense;
why don’t we take a look at it,’ “ he said.
In an article this year
in the Journal of Compensation and Benefits, Mr. Reda and two
colleagues studied pay at 334 large companies and found that more than
two-thirds made stock grants in the first two months of their fiscal
year. That leaves 10 months before shareholder returns can be
Looking at shareholder
return rankings of 173 companies in 2011, Mr. Reda found that the
median change in a company’s ranking from February to December was 25
percentage points. By contrast, the median change in ranking from
November to December at these companies was 7 percentage points.
In other words, companies
making grants in the last month of a fiscal year can be much more
confident about their shareholder return position than companies
granting early in that year.
Some companies have
already started shifting their stock award timing to the end of the
year. Mr. Reda identified energy companies, such as Anadarko
Petroleum, Exxon Mobil and Valero Energy, among those making late-year
grant decisions. Others include Coca-Cola Enterprises, Federated
Investors and Stanley Black & Decker, as well as St. Jude Medical, a
medical devices company, and Ecolab, a maker of cleaning and
Obviously, the pace of
change in corporate pay practices has been glacial, even as the growth
in pay has exploded. Dysfunctional performance metrics are a root
cause, experts say.
“How much of the pay is
driven by right time, right place, and how much is driven by truly
sustained, multiyear performance that’s still in place ‘X’ years out?”
Mr. Foley said. “What I would like to see is not just performance
criteria that are robust and meaningful but also awards that are at
risk for a meaningful period of time.”
Not in our lifetimes, but
in our children’s, perhaps?