Big Bonuses for CEOs? Not So Fast

After shareholders' dismal 2008, corporate boards are being watched closely while they decide whether to dole out traditionally huge bonuses

By Ben Steverman

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Chief executives of U.S. companies, used to receiving million-dollar bonus checks at the end of the year, should prepare to get by with a lot less this time around.

As corporate boards begin discussing 2008 bonus awards, it is a near certainty that U.S. CEOs will get smaller checks—and many will not get bonuses at all. To blame are the plunge in the stock market, the financial crisis, the downturn in the economy, and also an environment that makes hefty bonuses toxic in the arena of public opinion.

Still, many wonder how much boards will really cut back on one of their favorite ways of rewarding senior executives. A steep drop in bonus awards would be a marked contrast with previous years.

According to executive compensation research firm Equilar, as recently as 2006, 96.6% of CEOs in the S&P 500 received a median $1.9 million in cash bonus compensation at the end of the year. As the financial crisis began in 2007, those figures fell somewhat, with 88.4% of CEOs receiving median bonuses of $1.84 million.

No one knows how low bonuses could go in 2008, or how rare they might be.

The Pressure's On

Nell Minow, co-founder of the Corporate Library, which focuses on corporate governance issues, says institutional investors are watching boards, and their compensation committees, carefully. "There will be very powerful calls for the ouster of comp committee members who do not cut back on bonuses this year," she says.

Board members know they're being watched, say many consultants who specialize in executive compensation. In 2007, bonuses fell mostly on a company-by-company basis, says Steven Hall, managing director of Steven Hall & Partners. "You're going to see everything down this year," Hall says, with "big time" declines in financial services and housing industries.

Many boards have no choice but to slash bonuses. At the start of each year, most boards set and disclose specific criteria for yearend bonuses. If those benchmarks—which might include particular revenue or profit targets—aren't met, no bonus is supposed to be paid.

Even if most benchmarks are met, boards in this environment might use their discretion to limit or cancel a bonus, says Lance Froelich, a compensation consultant and senior director at BDO Seidman. Numbers might still look O.K., he says, "but you can't ignore the cash position of the company [or] the fact that shareholders have been hurt."

"No, Thank You"

It's not just boards that are showing resistance to bonus payouts in 2008. CEOs also may want to limit their own compensation—at least temporarily—for appearance's sake.

Goldman Sachs (GS) Chief Executive Lloyd Blankfein and six other senior executives said last month that they would forego all bonuses in 2008, including both cash payouts and equity awards or options. A spokesman for the investment bank said it was the "right thing to do."

At the end of 2007, it appeared that Goldman was one of the best-run Wall Street firms and might withstand the credit crisis better than many rivals. Blankfein was the ninth highest-paid U.S. CEO in 2007, according to the Corporate Library. His cash bonus was $30 million of his total $76.7 million pay. But Goldman's stock is down 68% in 2008, and, after the collapse of Lehman Brothers, Goldman was forced to turn itself into a bank holding company and apply for federal bailout funds.