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CEO Pay Drops, but&Cash Is King


Bloomberg BusinessWeek's exclusive first look at the 2009 compensation of chief executives at 81 big companies

Here's a bit of good news for the Washington finger waggers who think executive compensation has gotten out of hand: A survey of 81 big companies shows that CEO pay dropped by 8.6% last year. Now for the worrisome twist: The cash portion of their compensation rose 8.3%.

That's a sign that companies are de-emphasizing long-term incentives for their top guys, a particular bugaboo of Kenneth Feinberg, President Barack Obama's executive pay cop. Feinberg and many shareholder activists argue that CEOs should have a stake in the success or failure of their companies. The value of stock-option grants, that much loved tool of incentive compensation, dropped 30% last year for the CEOs included in the analysis.

"To the extent there is more emphasis on cash than stock, that's unfortunate," says Feinberg in an interview about the survey. But, he adds, "every company is different. You can't across the board make any general evaluation."

For an early peek at how CEOs prospered—or didn't—Bloomberg BusinessWeek examined data from proxies filed by companies in the Standard & Poor's 500-stock index by Mar. 12. To get an accurate comparison to the previous year's numbers, we included only CEOs who sat in the big chair in both 2008 and 2009. The data was compiled by Graef Crystal, a long-time compensation analyst.

Assuming the trend holds for the rest of the S&P companies, it appears CEO compensation may have fallen for the third year in a row. Executive pay peaked in 2000, when average total compensation hit $14.6 million for CEOs of S&P 500 companies, according to research by Carola Frydman of Massachusetts Institute of Technology and Dirk Jenter of Stanford University. Their work shows that pay was roughly 40% off that high in 2008.

Some of last year's biggest losers sit atop the 20 financial firms included in the analysis. Overall, those companies cut CEO compensation by $28 million in 2009, accounting for almost 37% of the total drop among the 81 CEOs. Eleven were banks that received money from the Troubled Asset Relief Program and had to adhere to federal guidelines that restricted cash bonuses for top executives.

Citigroup's (C) Vikram S. Pandit in February 2009 voluntarily slashed his annual pay to $1. The previous year it topped $38 million. Citi's stock price remains down 93% from its high in 2006, and Pandit has vowed not to take a raise or incentive compensation until Citi returns to profitability. Former Bank of America (BAC) CEO Kenneth D. Lewis also received no salary, bonus, or equity compensation in 2009.

Taking a very different approach, the compensation committee at Wells Fargo (WFC) last August upped chairman and CEO John G. Stumpf's base salary to $5.6 million, more than five times his 2008 salary. All but $900,000 of that compensation was in company shares. They vested as they were paid out in regular paychecks, making his total 2009 compensation $21.3 million and giving him a 136% boost over the previous year. Melissa K. Murray, a Wells Fargo spokeswoman, said Stumpf received the salary increase because the company was unable to "reward him appropriately" in other pay categories due to TARP-related restrictions.

Many companies cut executive pay simply because of poor economic conditions. Compensation committees at Motorola (MOT) and printer maker Lexmark (LXK) reduced compensation in part because of challenges in their industries. David M. Cote, Honeywell (HON) International's CEO, requested that he not be awarded a bonus in 2009. Directors granted his wish, and as a result Cote took a 57% cut in total pay. At $44, Honeywell's stock remains 29% below its May 2008 high.

Aside from the cuts, the notable takeaway from the analysis is the tilt toward cash and away from compensation that is pegged to a company's long-term performance. Along with the 30% decrease in stock options, the CEOs of the 81 companies saw the value of their stock awards cut by 12%. The discrepancy in those two numbers is an early indication that compensation committees wanted to stick with safer bets when structuring pay packages. Stock awards pay off, albeit with diminished returns, even when a company's stock price stagnates. For options to pay off, prices must climb.

Of course cash is safer than either choice, especially when economic times are tough. In 2008 and the first part of 2009, as boards negotiated with CEOs and set executive compensation, stocks were tumbling and the market was volatile. The future value of options and stock awards was hard to predict. That may be one reason cash compensation increased at 43 of the 81 companies analyzed and that CEO salaries were up 8.9%. "In times of recession when the economy is reeling, the most stable form of pay isn't stocks, it's cash," says Sam Pizzigati, of the Institute for Policy Studies, who has written about compensation and shareholder activism. "In rough times the surest thing is cash, and that's what they went for."

Steven Hall, a compensation consultant, pointed out that stock options have lost value and don't necessarily have as much "holding power on executives." He says some companies felt they had to offer CEOs more cash so that competitors didn't "steal their talent away."

Among the compensation packages analyzed, the average CEO cash bonus, including nonequity incentives, was $2.1 million, up 7.9% over the previous year. One reason the percentage went up was that some companies didn't give cash bonuses at all in 2008, a dismal year for most. Nine CEOs took home cash bonuses in 2009 after not getting them the year before. Among the big rebounders were Dow Chemical's (DOW) Andrew N. Liveris, who was awarded $4.5 million, and Aflac's (AFL) Daniel P. Amos, who received $4.1 million.

Some of the increase in cash bonuses also may be due to lowered performance targets set by boards. Frank Glassner, CEO of Veritas Executive Compensation Consultants, says performance goals for long-term awards have been reduced, giving CEOs a better chance to hit their marks. "Companies haven't raised the bridge, they've just lowered the river," he says. Glassmaker Corning, in its proxy, said it had altered performance metrics "in order to alleviate any unintended shortfalls or windfalls in actual bonus payouts." The company cited the "great uncertainty in accurately forecasting the impact of the global recession in early 2009." Earnings per share for 2009 fell 12% last year. CEO Wendell P. Weeks was granted an annual incentive bonus of $4.8 million, up from $301,584 in 2008.

Finally, some companies were worried about what would happen if the market made a dramatic rebound from its 2009 lows. Kenneth Raskin, an attorney at the law firm White & Case, who represents CEOs in pay negotiations, says that when 2009 pay packages were being negotiated, the stock market was depressed, and some boards didn't want to give out large options awards because of the potential for large gains that would later make the awards look excessive. Ira T. Kay, an executive pay consultant, adds that some CEOs had similar worries. "CEOs didn't want the stock price to rise dramatically and in a year [for them to] seem far too greedy," he says.

A fast-growing compensation category in 2009 was pensions. Company contributions to CEO pension plans gained an average of 15.4%, with the executives on our list receiving about $1.3 million on average. One reason: The 8.3% rise in salary and bonuses drove up the current value of what companies promise to pay CEOs in retirement, typically calculated as a percentage of their annual income. AT&T (T) CEO Randall Stephenson received a $9 million contribution to his pension plan, the biggest of those surveyed. Under this plan, Stephenson will get 60% of the salary and bonus that he has earned, calculated by averaging the value of the highest 3 years within the last 10 years of his tenure. An outside spokesman for AT&T, McCall Butler, said Stephenson's pension gain was "an actuarial value, not part of his actual taxable income" in 2009.

Carole Lovell, president of an AT&T retiree association, said in a letter to shareholders last April that "AT&T's executive compensation policies continue to exhibit all the worst excesses and abuses." She was writing in support of a shareholders' say-on-pay resolution, which didn't win majority approval at the company's annual meeting that month.

The category that took the second-biggest hit after options was the "all other compensation" column of the company proxies, which dropped 23%. That category includes the fun stuff—perks such as private planes, security details, and country club memberships—that sometimes gets CEOs into public relations hot water. Lincoln National CEO Dennis R. Glass saw this pay category drop to $308,463 last year from $2.26 million in 2008. His perks were limited to a $16,600 matching charitable contribution and included nothing for personal use of aircraft, which was reported as $82,901 the year before. "These kind of perks just aren't worth it," says David E. Gordon of Frederic W. Cook & Co., a compensation consultancy. "They are a small fraction of overall compensation but have the ability to get 50% of the attention."

Certainly public pressure played a role in forcing executive pay cuts. Last year shareholder activists on boards such as AT&T, Apple, and Pfizer campaigned for say-on-pay resolutions. (Shareholders succeeded at Apple and Pfizer, and didn't at AT&T.) While typically nonbinding, they allow shareholders a say on whether or not pay packages are too fat. RiskMetrics, a governance consulting firm, has counted 180 pending resolutions concerning executive compensation. That's down from 230 as of the same time last year, says Carol Bowie of RiskMetrics, but well ahead of the level five years ago.

Tim White, a partner with executive recruiter Kaye/Bassman, ties shareholder dismay on pay to the economic downturn. "In difficult times, there is always a clamoring for the fat cats to make less money," he says. Some of that uproar soon may be tempered. His prediction as the economy improves? Executive compensation will go right back up.


Cash Is for Losers
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