The $6.4 million that Jacobs Engineering Group Inc. paid Chief Executive Craig Martin last year normally wouldn't have raised many eyebrows.
Sure, the amount was a lot more than most of us could ever hope to make for a mere 12 months' work. But it also was well below the average CEO compensation at California's 100 biggest public companies — and less than one-tenth the remuneration of the executives at the top of that ladder.
Still, Martin's pay gained uncomfortable attention when a majority of the Pasadena company's shareholders voted not to approve it at the firm's annual meeting in January — marking the first "no" vote in the country in newly required "say-on-pay" ballots.
Since then, shareholders of more than 20 other companies nationwide have rejected their top managers' pay packages, and more such rebuffs are expected in the months ahead.
Although the "no" votes account for a small fraction of the hundreds of say-on-pay ballots held so far — and they aren't binding — investor advocates say this new exercise in corporate democracy, mandated by last summer's financial reform legislation, is already having an effect.
Opponents of fat executive paychecks say they're getting more attention from boards of directors. Some firms took small steps to change their ways before their shareholders voted. Along with other investor-friendly rules in the regulatory pipeline, the referendums are giving corporate watchdogs some hope that the most egregious pay practices can be reined in.
"I think boards have actually gotten the message," said Patrick McGurn, executive director of Institutional Shareholder Services in Rockville, Md., which advises big investors on say-on-pay ballots and other issues.
For now, however, executive pay once again is zooming skyward after pausing for a couple of years for the recession.
At California's 100 biggest public companies as measured by revenue, the total pay bestowed on CEOs surged 23% last year to an average of $10.4 million, according to data compiled for The Times by compensation research firm Equilar Inc. The sharp increase was consistent with the national trend in executive pay, surveys show.
The jump followed declines the previous two years in response to the deepest economic downturn in decades. But many of the pay packages in those lean years had an unusually large proportion of equity, or company shares and stock options. As the stock market has recovered — the Standard & Poor's 500 index has almost doubled since March 2009 — the equity awards have shot up in value. And those increases aren't counted as part of total pay.
The Golden State's highest-paid CEO was Ray Irani of Occidental Petroleum Corp., who earned $76 million in 2010, more than double his 2009 pay. But even Irani, whose pay has been a longtime target of critics, is an example of progress.
A year ago, under pressure from angry shareholders, Occidental held an early say-on-pay vote, which management lost. That triggered a series of conversations with Oxy's biggest investors, after which the Westwood company said Irani would give up the CEO post, which he did this month (though he remains executive chairman). Oxy also promised significant executive pay cuts to be phased in over three years. Shareholders overwhelmingly approved the revamped compensation program this month.
No. 2 on the state's CEO pay chart was Larry Ellison of Oracle Corp., whose fiscal 2010 compensation totaled $70.1 million, which was down 17% from the year before. The biggest chunk of that treasure: stock options valued at $61.9 million. For years Oracle has been widely criticized for giving Ellison generous option grants. That sentiment could make for an interesting say-on-pay vote at the software giant's annual meeting in the fall. By then the Redwood City firm will have reported Ellison's pay for fiscal 2011, which ends Tuesday.
There also could be fireworks at McKesson Corp.'s annual meeting this summer. John Hammergren, the pharmaceutical distributor's chief executive and chairman, was the third-highest-paid CEO in California, collecting $54.6 million for the year that ended March 31, 2010. (The San Francisco company hasn't yet reported its fiscal 2011 compensation.) The main complaint heard about Hammergren's pay focuses on its biggest component: a $21-million contribution by McKesson to his supplemental retirement plan — a form of pay that's completely divorced from measures of company performance.
"These pensions are one of the elements of 'stealth compensation' that grew in an environment when these things didn't have to be disclosed," McGurn said, predicting that such massive supplemental pensions would draw increasing attention from shareholder activists.
The battle against extreme pay could gain more momentum next year, when another provision of the Dodd-Frank financial regulatory overhaul is scheduled to kick in. That rule, still being written by regulators, would require every public company to disclose the disparity between how much the firm pays its CEO and how much the average worker makes.
Those numbers, which won't look pretty by any stretch of the imagination, could shame companies into pulling back on executive pay, said Brandon Rees, deputy director of the AFL-CIO's office of investment.
Business groups are lobbying Congress to block the rule, though that isn't considered likely.
"When you look at how hard companies are fighting" the disclosure requirement, Rees said, "it tells me that this might be enough to burst the CEO pay bubble."
Shareholders could get additional leverage on compensation under a rule adopted by the Securities and Exchange Commission that would make it easier for big investors to put up their own candidates in board elections. The rule, however, is on hold pending a court challenge.
But some warn that any downward pressure on pay as a result of these changes may be limited largely to the companies now granting truly eye-popping packages. In other words, don't expect a typical CEO's compensation to drop into the mere six figures.
One possible reason is that many shareholders, especially institutional investors, aren't averse to high pay per se. But they get ticked off when compensation is inflated so much that it's divorced from the company's financial performance, said Paul Hodgson, senior research associate at GovernanceMetrics International, a research firm in New York.
That's because a disconnect between results and rewards, he said, can be a sign of a weak corporate board that provides ineffective oversight of management for shareholders.
"Most of our clients are convinced that pay is the window to the board's soul," Hodgson said. "It gives a good picture as to how the board functions and whether it's independent."
Concern that compensation was out of sync with performance was an issue in the failed say-on-pay vote at Jacobs Engineering. The CEO's pay jumped 38% from the year before although the firm's profit slumped 28% and its revenue tumbled 14%. The company didn't return phone calls seeking comment.
Generally, however, more companies are responding to concerns about inappropriate levels of pay.
"Compensation committees are more focused than ever on this link between pay and performance," said attorney Claudia Allen, head of the corporate governance practice at Neal, Gerber & Eisenberg in Chicago.
Still, the generous level of executive pay in general may be hard to change. In setting compensation, it's not unusual for company directors to survey how much CEOs make at other firms in the same industry. Because directors tend to view their CEO as an above-average leader, they often opt for above-average pay. That self-reinforcing process is what has shot executive pay into the stratosphere.
"The problem is that pay levels are just so high, and it's very hard to ratchet them back," said Amy Borrus, deputy director of the Council of Institutional Investors. "Progress is being made, but the battle is not over."