Investors, lawmakers and the public have been peeking inside CEO pay envelopes for nearly a quarter century and still aren’t happy with what they see.
They want new disclosures, clearer comparisons and more meaningful measures of what chief executives of publicly traded companies make.
Pending changes would look at executives’ “actual pay,” compare it with what a typical employee at the company earns and weigh it against the investment gains — or losses — of shareholders.
Consider it a search for a magic yardstick that would prove what many consider to be the real issue with executive pay.
“The problem is everybody believes that people are making too much money,” Paul Dorf of Compensation Resources said. “So they’re looking at different ways to capture to see if they can, in fact, find something that says, hey, these guys are making too much money.”
CEO pay has climbed since The Kansas City Star first reported the 1992 compensation totals for chief executives of publicly traded companies in the region. The Star collected the latest information from reports that companies provided to shareholders for their annual meetings this spring.
Top pay on that first list went to Fred Lyons, who earned nearly $1.68 million at what was then Marion Merrell Dow. The latest batch of pay disclosures shows that 19 out of 43 area CEOs earned more in 2014 than Lyons did in 1992 when calculated on similar terms.
These totals cover salary and bonuses the executives received last year, cash incentives tied to how well they did their jobs, increases to their pensions and earnings they have deferred, plus an “other” category that varies from contributions to their 401(k) accounts and matching charitable contributions they make to country club fees and personal use of the company’s plane.
Those comparisons, however, leave out the equity compensation part of executives’ pay packages doled out in stock grants and stock options. And for the current group of CEOs, it’s half of what they collectively made last year.
Back in 1992, Lyons had received options to buy 40,285 shares of Marion Merrell Dow’s stock. Those first pay reports, however, did not put a dollar value on the equity awards that companies gave executives.
Current pay reports set dollar amounts for equity compensation, and in some cases the reported haul is hefty.
Stock awards pushed James Welch at YRC Worldwide to the top of this year’s ranking among 43 CEOs in Kansas and Missouri outside the St. Louis area. Welch’s compensation totaled $10,795,025, with $9,855,537 of it coming from restricted shares of YRC stock.
Another reason Welch topped the chart was that Sprint CEO Marcelo Claure, who took the helm last August, is missing from this year’s list. Sprint’s executive pay report isn’t due until around midyear because the Overland Park-based wireless company changed its fiscal year to end in March rather than December.
Claure’s pay, as laid out in his employment agreement, includes an annual salary of $1.5 million, a $500,000 signing bonus, stock and option awards equal to $24 million, incentive bonuses and other compensation. How much of that counted toward his 2014 total is unknown, and Sprint declined to comment ahead of its official report to shareholders.
Former Sprint CEO Dan Hesse made this list but at No. 42. Sprint issued an interim compensation report that covered Hesse’s pay for the first three months of 2014. Sprint’s next report will cover April 2014 through March 2015.
Otherwise, The Star’s records show that Sprint’s CEO has topped the regional compensation chart in exactly half the years that data has been available. That includes counting Welch as the top paid CEO this year.
Welch declined to talk about his compensation, but YRC chief financial officer Jamie Pierson offered an explanation. He said a change in both men’s employment deals with the trucking company inflated how much stock was reported as compensation in the most recent report.
The new deal did away with their employment contracts and established new factors for setting the executives’ compensation. In canceling the old agreements, the company gave the executives restricted shares of stock they were due to receive over the next two or three years, Pierson said.
YRC did not change how quickly those shares become the executives’ property free and clear — for example, when they would be able to sell the stock. Pierson said that schedule remains in place over the two or three years.
“What they did was accelerate the grants that were already contractually, legally due to us. That’s why you see these big numbers for me and James” Welch, Pierson said.
Such distinctions would show up in changes to executive pay reports that Congress ordered after the financial crisis but have yet to take effect. Lawmakers weighed in through the Dodd-Frank Act over concerns that compensation incentives contributed to decisions that worsened the crisis.
“All CEO pay disclosure has a broader audience,” said Brandon Rees, deputy director of the AFL-CIO Office of Investment. “Certainly runaway CEO pay is a troubling public concern as well and is paid attention to by people who aren’t investors.”
One rule set in Dodd-Frank calls for companies to report their executives’ “actual pay.” To do this, companies would count the value of stock and options at the time executives gain control over them, rather than when they’re awarded to them.
Another would weigh CEO pay against the investment returns that stockholders have earned. A third would compare a CEO’s pay to what a typical employee at the company makes.
None of these disclosures were in this year’s batch of reports because the federal rules on calculating them remain in the works. Reasons for the delay include the complexity of making the measures work for every company.
Executive pay deals already face a vote each year from company shareholders. The owners rarely vote down pay, and their say on pay is not binding on what the company does.
But it has made a difference, said Rees at the AFL-CIO Office of Investment.
Companies have abandoned “gross up” arrangements that essentially paid the extra taxes triggered by CEO compensation deals. And, Rees added, companies are better at tying the collection of stock rewards to how well the company performs.
“One thing that hasn’t changed is overall levels of pay,” Rees said.
Kansas City attorney Jack Bowling agrees that companies tie pay more closely to performance. Bowling, the deputy director of the corporate finance practice at Stinson Leonard Street, works with publicly traded companies on various issues, including executive pay.
Bowling said executive compensation isn’t arrived at arbitrarily. Boards of directors set pay for executives and are under scrutiny from large investors such as mutual funds and pensions.
Pressure also comes from proxy advisory services, such as Institutional Shareholder Services and Glass Lewis & Co., that make recommendations to investors on how to vote on compensation, who serves on boards of directors and other issues.
Bowling is not convinced executive pay is too high.
“It’s a perception that they make too much money. I don’t know that they do,” he said.
Congress’ post-crisis rules are aimed at making the pay process more transparent for investors, Bowling said. Lawmakers did not set limits on pay.
Whether investors will see these new comparisons from companies next year depends on the rule-writing process. Dorf, the compensation expert, said he is doubtful new disclosures will be able to simplify the complex deals executives get and the broad differences among companies.
“The reality is there are so many ifs, ands and buts that it doesn’t fit into a nice smooth formula,” Dorf said.
TOP EXECUTIVE PAY
These CEOs of publicly traded companies in the region posted the highest total compensation in 2014. The totals include all cash, equity and other compensation. For a complete breakdown of 43 executives’ pay, go to KansasCity.com.
YRC Worldwide Inc.
James L. Welch
Spirit AeroSystems Holdings Inc.
Larry A. Lawson
Aratana Therapeutics Inc.
Steven St. Peter
Waddell & Reed Financial Inc.
Henry J. Herrmann
H&R Block Inc.
William C. Cobb
Leggett & Platt Inc.
David S. Haffner
DST Systems Inc.
Stephen C. Hooley
Neal L. Patterson
Steven J. Bresky
Kansas City Southern
David L. Starling
Source: Company proxy statements