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 About 300 CEOs who served throughout the 2009-2013 period at S&P 500
companies together realized about $22 billion in compensation in the
form of pay, bonuses and share and option grants, or an average of
$73 million each, figures provided by executive compensation data
firm Equilar show.
That compares to about $16 billion initially reported in annual
company summary compensation tables, which include estimates for the
value of stock grants based on the price of shares at the time of
awards.
The comparison does not include pensions and perks such as country
club memberships and use of corporate jets for private use. The
study also excludes rewards reaped by other top executives, such as
chief financial officers and chief operating officers, and
compensation for CEOs who did not serve the full five years.
Further gains in share prices in 2014 and so far this year will only
have increased the gap between the annual disclosures and the amount
actually derived from the awards, with the full picture for last
year only becoming clear over the next couple of months. The S&P
500’s total return, including dividends, was 166 percent from the
end of 2008 through Monday of this week, according to S&P Dow Jones
Indices.
The impact of the stock market gains on executive pay illustrated in
the study will strengthen concerns about how much of an impact the
U.S. Federal Reserve’s easy money policies have had on income
inequality. Critics say that by raising the value of assets, such as
stocks, the Fed's stimulus has helped those who are already wealthy
even as median household income declined 4 percent between
2009-2013.
The bull market also has some investors re-evaluating how they judge
compensation plans. In some cases, they say CEOs may be benefiting
greatly from a rising tide even when their performance might be
weak.
”You’re seeing overpayment, or outsized payments, for what is market
performance or mediocre performance,” said Aeisha Mastagni, an
investment officer for the $191 billion California State Teachers’
Retirement System, who helps oversee its votes on executive pay
proposals at company annual meetings. “Directors can’t ignore the
issue of pay inequality or rising executive pay.”
However, more companies are disclosing their realized pay figures
and some are eager to defend the supercharged rewards if
shareholders have also benefited. Some of the highest paid
executives also often appear in top CEO lists compiled by investors
and others because they have run companies so successfully that
their share prices have gone through the roof.
A $600 MLN QUESTION
An example is John Martin, the CEO of drug maker Gilead Sciences
Inc, who has become the best compensated executive of a major U.S.
company since the crisis, when factoring in stock and options.
He realized $400.6 million in total compensation from 2009 to 2013,
according to the Reuters analysis of the nearly 300 CEOs tracked by
Equilar. That is poised to top $600 million by this summer, mostly
because of additional exercises of stock options. Their value has
surged well beyond the estimates in annual disclosures.
Gilead had estimated Martin's compensation totaled only $75 million
over the five years from 2009 to 2013. But Gilead's shares have
climbed nearly 300 percent since the end of 2008 while net income
almost quadrupled to $12.1 billion in 2014, fueled by sales of its
hepatitis C drug Sovaldi. The company declined to comment for this
story.
The second highest-paid CEO over the period was Starbucks Corp's
Howard Schultz who realized $366 million, or more than three times
the $97 million reported in summary compensation tables. That upside
is largely the result of the cafe chain’s shares climbing 931
percent since the end of 2008 as earnings surged.
“When the company performs well and the stock price increases, our
executives, partners (employees) and shareholders are all rewarded,”
a Starbucks spokeswoman said.
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The equity-oriented pay structure is good for CEOs of high-growth
companies, but also bites those who don’t show big growth.
Larry Ellison, CEO of Oracle Corp, realized $282 million during the
five-year period analyzed by Reuters. That was $100 million below
the value reported in Oracle's summary compensation tables.
The software giant's total stock return since 2008 has been several
percentage points better than the S&P 500 Index, according to
FactSet. But off a large base, profit growth has been relatively
slow. Operating income has increased by 8 percent to $14.8 billion
over its past three fiscal years. Oracle declined comment.
GE CEO LAGS
Another CEO who realized less pay than originally estimated was Jeff
Immelt of General Electric Co. His $52 million in realized pay was
less than the $69.2 million reported in summary compensation tables
for 2009-2013. With a total return of about 96 percent since the end
of 2008, GE shares badly lag the S&P 500 index. GE declined to
comment.
Companies began introducing bigger stock and options awards in
executive pay packages in the 1990s as a means of reducing tax
liability on cash bonuses and as part of a push to encourage CEOs to
act in the interests of shareholders. But with stock markets
breaking records, some worry the awards will only underscore the
widening gulf between the compensation of top executives and average
workers.
"The numbers can be obscene, particularly when you look at the
general challenges we face as an economy and society," said Matthew
Benkendorf, a portfolio manager at Vontobel Asset Management, which
oversees about $50 billion.
In 2013, CEOs made 331 times the average worker's income, the
largest such gulf in American history and a gap that is set to rise
further, according to a study by the AFL-CIO, the largest U.S.
federation of unions. "The executive has received a windfall based
on the bull market, which isn’t always attributable to their own
performance, and that’s wrong," said Brandon Rees, deputy director
of the AFL-CIO’s Office of Investment, which advises union-sponsored
pension plans managing $560 billion.
Big investors can influence the size of company pay plans but have
mostly backed management, largely because the value of their shares
has also been climbing. In each year since 2011 when most Russell
3000 companies began holding advisory votes on executive
compensation, more than 90 percent of companies have gotten more
than 70 percent approval for their executive compensation plans,
according to pay consultant firm Semler Brossy.
For example, Michael Cuggino, president and portfolio manager of the
$5.3 billion Permanent Portfolio Family of Funds in San Francisco,
supported the pay of Gilead CEO Martin. His funds own Gilead shares
and Cuggino said Martin deserves credit for managing the company in
a risky industry, where failed drug trials are common and can wreck
a company’s share price.
"As long as we're happy with the company, and it's making investors
money, we don't begrudge the executives getting their money," he
said.
(Editing by Richard Valdmanis and Martin Howell)
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