CEO COMPENSATION | A little more scrutiny

CEO pay shifts from salaries and bonuses to incentives

Updated: 2012-05-08T06:35:57Z

By DIANE STAFFORD

The Kansas City Star

There’s a year-after-year pattern in what the regional public companies paid their chief executives. Again, for 2011:

• About half the CEOs had compensation packages worth seven figures — as in $1 million or more.

• About one-third of the CEOs had stock and option awards with values that dwarfed their base annual salaries.

The table on Page D23 doesn’t indicate, though, whether they exercised their options or sold shares to put more cash in hand.

• Significant parts of the total compensation for nearly half of the regional CEOs were in “non-equity incentives.” Those are cash alternatives to salaries that are aligned with meeting preset corporate goals.

For about one in four of the regional CEOs, their non-equity incentives were larger than their salaries.

• Despite heightened attention to “pay for performance,” it’s impossible to draw across-the-board correlations between changes in the size of Star 50* CEO pay packages and changes — up or down — in their companies’ revenues or income.

Among the regional companies, there were a nearly equal number of companies in which CEO pay rose while corporate income fell, of companies in which CEO pay fell while corporate earnings rose, and of companies in which CEO pay fell, but by a smaller percentage than the drop in corporate profits.

The Star 50* compensation leader for 2011, as in past years, was the Sprint Nextel CEO, a rank based largely on the company’s revenue size compared with others in the regional public company universe.

On paper, Dan Hesse got a 31 percent pay raise last year from 2010. The company lost money both years, but it did tally a 17 percent income growth in 2011 from 2010.

CEO pay is set up by each company’s board of directors. The ballooning size of big-company CEO compensation compared with average worker pay and its sometimes tenuous relationship to company performance have been drawing more intense legal and shareholder scrutiny in recent years.

In some companies, that scrutiny manifests itself in the latest round of shareholder meetings in “say on pay” resolutions.

Only about 2 percent of major U.S. corporations, such as Citigroup, saw stockholders vote against their CEO pay packages in the recent round of annual meetings.

Despite being fairly few in number and nonbinding, say-on-pay resolutions are showing public relations teeth. After stockholders gave thumbs down to the CEO pay package at Stanley Black & Decker, for example, that board imposed a pay cut last year along with requiring the CEO to hold on longer to options and stock before selling.

A recent Wall Street Journal study also noted that one-fourth of companies that lost say-on-pay resolutions changed their CEOs last year, although there’s no telling whether the resolution helped open the door as a no-confidence vote.

Kansas Citian Irvine O. Hockaday Jr., who has served or continues to serve on multiple public boards, including those of Sprint Nextel, Ford Motor, Estee Lauder and Dow Jones, said he believes directors around the country are more sensitive to stakeholder criticism of hefty CEO pay packages.

Directors, Hockaday said, are “more interested in having a total shareholder returns matrix” to guide their CEO pay decisions. Still, he acknowledged, “the disparity between CEO and average worker pay is huge, but I don’t see companies inclined to establish a ratio to set executive pay.”

What he does see happening at a slightly faster pace is implementation of company pay agreements that require officers to hold their stock and options for longer periods of time — say two, three or even five years — before selling or exercising, as in the Stanley Black & Decker case.

That arrangement gives an incentive for executives to work toward longer-term, instead of short-term, results.

Big incentives

One notable column in the Star 50* compensation chart has the heading “non-equity incentive.” For many CEOs, this kind of compensation, along with stock and option grants, has mushroomed since 2006.

The growth reflects Securities and Exchange Commission rules that required executive bonuses to be more closely aligned with corporate performance.

Those rules came on top of a 1993 Internal Revenue Code that disallowed corporate tax deductions for any executive pay over $1 million that wasn’t performance-based.

So instead of multimillion-dollar base salaries or big bonuses, many corporate compensation committees shifted cash from the “salary” and “bonus” columns to the incentive-tied cash equivalent.

Non-equity incentive pay also grew after the stock market tanked in 2008, which lessened the value of equity positions that executives could have been awarded instead.

At Sprint, Hesse’s non-equity incentive pay last year was four times his base salary. At Waddell & Reed, Hank Herrmann’s incentive line was three times his salary. For some CEOs, that kind of distribution is the norm. For others, it’s not a factor.

David Wise, senior principal and executive compensation specialist at Hay Group, said equity compensation — stock and options — usually continues to be the largest part of public-company CEO pay packages.

But there’s no question, Wise said, that non-equity pay is getting the main share of shareholder attention.

“Non-equity incentive pay is what’s being paid against pre-determined goals. It’s tied to performance, both corporate and individual,” Wise said. “It’s different from the bonus column, which is discretionary payment by the board based on a look back.”

A final note to the annual Star 50* compensation story: There was another sameness to the 2011 list. All of the CEOs were men.

To reach Diane Stafford, call 816-234-4359 or send email to stafford@kcstar.com.

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