Big rises at top fail to reflect returns to shareholders

Huge stock grants to bosses reveal it's still good to be the king at US firms, a survey suggests

PUBLISHED : Tuesday, 02 July, 2013, 12:00am
UPDATED : Tuesday, 02 July, 2013, 3:10am


When we made our annual foray into the executive pay gold mine in April, chief executives' earnings for last year showed what appeared to be muted growth on the year. The US$14 million in median overall compensation received by the top 100 chief executives in the United States was just a 2.8 per cent increase over 2011, the figures showed.

What a difference a few months and a larger pool of chief executives make. An updated analysis shows the top 200 chief executives at companies with at least US$1 billion in revenue got a big raise last year, overall.

The research, conducted for The New York Times business section by Equilar, an executive compensation analyst, found that the median pay package came in at US$15.1 million, a leap of 16 per cent 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 per cent, that median return was only 3 percentage points higher than the pay rise.

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, pointed out that the compensation of the No2 executives at some companies would have vaulted them to the top ranks on the chief executive roster.

"The interesting thing is that there are people at these companies that make as much or more than other CEOs," Foley said.

Larry Ellison, founder and chief executive of Oracle, the software firm, is a familiar face on the pay charts, and he is ranked No1 this year. Had his two top lieutenants been included, they, too, would have landed among the top five on the list. Safra Catz, Oracle's chief financial officer and Mark Hurd, a co-president, each received packages worth US$52 million.

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 US$5.3 million last year, while stock and option grants were US$9 million a head.

Stock grants are clearly where the action is. Equilar's analysis calculates the median value of stock holdings of these top chief executives at US$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.

The median of combined stock and option awards last year for the 200 chief executives on the list was 60 per cent of pay. But in individual cases, that can be far larger. Ellison received US$90.7 million in options, or 94 per cent of his nearly US$96.2 million in total pay. Overall, his compensation was up 24 per cent from 2011; his shareholders' returns, meanwhile, were minus 22 per cent in the firm's financial year, which ended last month.

Far too often, measures used by boards to evaluate performance are focused on short-term results and 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 organisation consulting firm. "Yet at probably 70 to 80 per cent of companies, there are no metrics for measuring the impact of new products or services that were launched."

The New York Times