California executive pay report: CEOs took in 11% less in 2009, but riches are ahead
Thanks to the worst recession in decades, the titans of industry took a substantial pay cut in 2009. But it may just be a case of delayed gratification.
The chief executives of California’s 100 top companies collected an average of $8.4 million in total pay last year, down 11% from 2008, according to data compiled for The Times by research firm Equilar Inc. Nationwide, CEO pay dropped about 8%.
But appearances can be deceiving.
“This year, it looks like there’s a reduction, but you will see a few years from now that it has not been the case at all,” said Nell Minow, editor at Corporate Library, another compensation tracker.
The reason: Stock options issued last year at bargain-basement prices positioned executives for unusually large profits in the years ahead.
California’s 100 largest publicly owned companies, as ranked by revenue, last year paid more than 60% of their CEOs’ total compensation in the form of company shares or, more often, options.
A stock option is the right to buy stock during a specified period at a specified price. That “exercise” price is generally set to equal the stock’s market price on the day the options are granted. If the stock’s price subsequently rises, the option becomes more valuable.
The lower the exercise price, the greater the potential profit from eventually exercising the option.
And because the stock market tumbled to 12-year lows last year, exceptionally low market values translated into very attractive exercise prices for the options given to CEOs.
Not only that, for each dollar — OK, for each $1 million — of stock options they were granted, executives got many more options than they would have this year for the same amount of option pay.
Looked at another way, the bear market meant shareholders last year handed out to executives bigger-than-usual stakes in their companies.
“The numbers are tricky because the market was down in early 2009, which was when a lot of the equity awards were granted,” said Aaron Boyd, head of research at Equilar in Redwood Shores, Calif. “The irony … the value was a lot more than they had originally estimated.”
What especially troubles corporate-pay critics is that many executives will benefit from the rising tide of stock prices — regardless of how well their company performed compared with others in its industry.
In other words, said Minow at Corporate Library, CEOs will receive windfalls for just riding the market back up to normal. The idea of pay for performance, used in the past to justify extraordinary compensation, is not supposed to reward you for just keeping up, she added.
The largess with company shares and stock options was apparent in California, where the most highly compensated executives each received tens of millions of dollars in stock-based pay.
Larry Ellison, chief executive of Oracle Corp., was the state’s highest-paid CEO thanks largely to a grant of options to buy 7 million Oracle shares worth roughly $78 million.
Once his $4.7 million in cash compensation is counted, Ellison received $84.5 million in total pay, or $338,004 for each working day.
Ellison is also Oracle’s largest shareholder, with a stake of 23.4%, partly because he founded the company but also because of regular grants of stock options given to him by Oracle’s board.
Critics say the combination of very high pay and his big stake in the company makes Ellison a symbol of excess.
“Oracle shareholders have paid dearly for their board’s stock-option generosity through the dilution of their ownership,” said Brandon Rees, deputy director of the AFL-CIO office of investment. “It makes absolutely no sense to give the largest stockholder in your company these huge grants. They’re giving the company away.”
Oracle declined to comment on Ellison’s pay.
The software executive, however, didn’t benefit from the auspicious timing of option grants that other CEOs enjoyed. That’s because Oracle’s fiscal year ended in May 2009, so his options were granted in July 2008, before the worst of the bear market.
California’s No. 2 highest-paid CEO, Carol A. Bartz of Internet giant Yahoo Inc., got a $42-million “golden handshake” of stock-based pay after joining the Internet giant in early 2009. Her total pay, including $2.4 million in salary and bonus and a $2.5-million award to compensate her for leaving her previous job, was $47.2 million.
John H. Hammergren, CEO of pharmaceutical distributor McKesson Corp., rounded out the top three with a package worth $34million — $13.6 million in cash, $15.2 million in stock and a tidy $4.8million in “other” pay.
What’s “other”? In this case, it’s mainly $3.8 million in additions to Hammergren’s executive pension plan and preferential interest paid into his deferred compensation program. The company also paid $497,240 for “security services” — monitoring equipment in Hammergren’s home and personal use of the company jet, car and driver in the name of keeping the executive safe at home and on the job.
McKesson spokesman James Larkin said Hammergren deserved the money.
“The overwhelming majority of Hammergren’s compensation is long-term and directly aligned with shareholder interests,” Larkin said.
Corporate-pay critics focused more on $21.3 million paid to Wells Fargo & Co. CEO John Stumpf.
The package stood out because Wells Fargo received a federal infusion of capital under the Troubled Asset Relief Program, a taxpayer bailout of financial services firms. When TARP was launched, government leaders sought to limit executive pay at the banks that benefited from it to quell taxpayer animosity. But Wells Fargo found a loophole.
“They were very clear. They had a consultant pore over the law to find a way around the rules,” said Paul Hodgson, senior research associate at Corporate Library. “This is one of the most obscene actions I have seen a board take in a long time.”
The board eliminated Stumpf’s bonus, which would have been limited under TARP, and increased his base salary, which was not limited. The directors also granted Stumpf $2.8 million in stock options, contingent on the bank’s repaying the TARP money to the government. Then in late December, when the company repaid the taxpayer funds and was no longer subject to federal pay restrictions, the board quickly granted Stumpf $10 million more in “retention performance share awards.”
In a year when financial executives were supposed to be taking it on the chin, Stumpf went home with a 136% raise.
A spokeswoman for Wells Fargo defended Stumpf’s pay, saying that because the company purchased Wachovia Corp. last year, Stumpf was running a much larger bank that was still highly profitable. Most of his pay was long-term in nature, added spokeswoman Melissa Murray. Besides, shareholders voted on Wells Fargo’s pay and approved the package, she said.
“One of the biggest problems with executive compensation is that these plans that are excessive get approved,” said Tracy Stewart, executive director of Shareowners.org, a new group aimed at representing the interests of individual stockholders.
Stewart says part of the reason that shareholders approve packages that some compensation experts consider excessive is that the plans are too complex to understand. In some cases, she said, companies disclose that their stock-based pay-for-performance grants will hinge on dozens of different measures. But they never say how much weight any one factor might hold.
“It’s shameful that we are voting on these plans when we don’t have any idea of how they are going to use the shares,” Stewart said. “We complain afterward, but if you want to put your foot down, vote no.”
That’s just what happened at Occidental Petroleum Corp., where the majority of shareholders voted against the company’s pay plan in its inaugural “say on pay” ballot this month. Although the vote was not binding, Occidental spokesman Richard Kline said the company was taking it to heart and had authorized a committee to seek input from shareholders to determine how compensation packages should be structured in the future.
Occidental CEO Ray Irani was the fourth-highest-paid executive in California in 2009, earning $31.4million, up 39%.
Overall, the vast majority of CEOs — excluding people new to the job — reported that they got no raise or took a pay cut in 2009. But there were exceptions. Nine of the 100 executives on The Times’ list saw their pay rise by more than 100%.
Top among the pay hikes was the 251% raise provided to Michael A. Balmuth, CEO of Ross Stores, who earned $10.6 million in 2009.
A Ross spokeswoman said 2009 “was a phenomenal year” for the off-price retailer. The company’s earnings jumped 52% after climbing 23% the year before, she said. Moreover, she said, the size of the boost was more timing than reality. Balmuth receives equity awards every other year, making his pay appear to swing considerably from year to year.
Symantec Corp., whose chief executive, John W. Thompson, got a 243% hike, cited the same anomaly. However, the company’s performance was not as sweet. Symantec posted a $6.7-billion loss for 2009, largely because the company was compelled to write down assets acquired in recent years. Without the write-downs, the company would have been profitable, said spokeswoman Genevieve Haldeman. Thompson was paid $7.6million.
The problem with pay that critics view as excessive, some of those critics say, is that it’s often a signal of a company run amok, where the board of directors is incapable of effective oversight of management.
“The theory is that the board is in charge of the CEO,” Hodgson said. “But where that isn’t the case, the problems manifest themselves in compensation.”
That can be a harbinger of trouble. Some past top dogs in the Times rankings may underscore the point.
A few years ago, Bruce Karatz, former chairman of KB Home, and Angelo Mozilo, former chairman of Countrywide Financial Corp., jockeyed for position at the top of The Times’ annual pay rankings, earning hundreds of millions of dollars each during their tenure at their Los Angeles-based employers.
Karatz, ousted from KB two years ago in a stock scandal, was recently convicted of felony charges related to backdating of stock options.
Mozilo left Countrywide after the company, beset by losses in the mortgage meltdown, was swallowed up by Bank of America Corp. The Securities and Exchange Commission subsequently accused him of insider trading. He has denied the allegation.
“The question isn’t whether pay is down or up. It’s whether this service is priced appropriately,” Stewart said. “We have a long way to go before pay is priced appropriately.”
