NEW YORK, June 16, 2006
CEOs' Pay Climbs While U.S. Economy Sinks
Survey: Median Pay Package For CEOs Close To $8.4 Million; 3.5 Percent Higher Than 2006
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At Merrill Lynch, part of Chairman and Chief Executive Officer John Thain's $83.1 million pay package hinges on whether the stock rises. He got options on 1.8 million shares as part of his signing agreement, but two-thirds of them will only vest if the price of Merrill stock clears specific hurdles for 15 straight trading days. (AP)
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The AP review of compensation for the heads of companies in the Standard & Poor's 500 index finds the median pay package added up to nearly $8.4 million. That's a comfortable gain of about $280,000 from 2006.
The 3½ percent pay increase for CEOs came even as the landscape for both workers and shareholders darkened considerably and the economy was choked by a housing market in free fall, layoffs and soaring prices for fuel and food.
At the top of the AP list: John Thain, who took the reins of Merrill Lynch on Dec. 1, 2007. His $83 million pay package was supercharged by a signing bonus and other enticements that lured him from the New York Stock Exchange to lead the investment bank as it was suffering its worst-ever losses.
Collectively, the 10 best-paid CEOs made more than half a billion dollars last year. Yet half the members of this stratospheric club were leading companies whose profits shrank dramatically.
The AP examination of CEO pay in 2007 mined data from the 410 companies in the S&P 500 that filed compensation disclosures with federal regulators in the first six months of this year.
The AP's formula, based on data from the past two years, adds up salary, perks, bonuses, above-market interest on pay set aside for later, and company estimates for the value of stock options and stock awards on the day they were granted last year.
That provides a clearer picture than pay totals required by the Securities and Exchange Commission, compensation experts say, because the SEC totals include expenses companies book during the year for previously granted stock compensation and retirement benefits.
The value of stock and options given to CEOs may turn out to be significantly higher or lower if they are ultimately cashed out, but the numbers in the AP formula do reflect the board of directors' estimate of the likely eventual payout.
The median salary figure of about $8.4 million means half the CEOs in the AP analysis made more than that and half made less.
There were some signs companies were pulling back on pay at the top: Out of the 316 companies in the AP survey that had the same CEO two years running, about two-fifths lowered the total pay package for their CEOs. However, the primary culprit for some was falling stock prices that cut into the value of the shares included in pay packages.
In many more cases, overall pay ballooned.
Rick Wagoner, chief executive of General Motors Corp., announced earlier this month the company had to close four plants that make trucks and SUVs because of lagging demand as fuel prices soar. That followed the posting of a $39 billion loss in 2007, a year when its stock price fell by about 19 percent, without adjusting for dividends.
And Wagoner? His pay rose 64 percent, to $15.7 million.
Last year was rocky for the economy and the stock market, making it a useful test of a concept called pay for performance - a term companies use to sell shareholders on the idea CEOs are being paid based on how well the company does.
According to this concept, trotted out frequently by the compensation committees of corporate boards in their proxy statements, a big chunk of CEO pay is considered "at risk," meaning it could disappear if CEOs don't meet established metrics.
But the AP analysis found that CEO pay rose and fell regardless of the direction of a company's stock price or profits.
Take KB Home, battered by the subprime lending crisis and the weak housing market. According to the Los Angeles-based homebuilder's proxy statement, CEO Jeffrey Mezger is entitled to a cash bonus based on a percentage of KB's profit.
The problem was there was no profit. KB Home lost almost $930 million in 2007 and its stock lost 60 percent of its value. But Mezger still made $24.4 million, as valued by the AP, including a $6 million cash bonus.
He pocketed that bonus because he exceeded certain objectives the board had set out for him. Among them were improving performance on a customer satisfaction survey and developing senior leadership in his first year as CEO.
"Compensation has become a shell game," said Richard Ferlauto, director of pension and benefits policy for the American Federation of State, County and Municipal Employees, a Washington labor group representing government workers.
"So they take away the bonus," he said, "but then they still come up with ways to make sure the executive gets a big payout."
Pay packages were somewhat smaller in the financial industry last year - banks, investment firms, mortgage companies, insurers and other institutions, all were roiled by the subprime lending disaster.
For companies in the financial sector that had the same CEO two years in a row, median pay dropped 4¼ percent to $8.7 million in 2007. But that was still a smaller decline than the 6 percent drop in earnings and 15 percent slump in stock prices before dividend adjustments, according to Standard & Poor's Capital IQ data service.
In some cases, companies appeared at first glance to have kept their promise to base pay on performance - only to have a different picture emerge on closer inspection.
For example, Washington Mutual Inc.'s stock took a nosedive last year - almost 70 percent - because of fallout from the housing and mortgage crises. The Seattle-base banking and mortgage lender lost $1.87 billion in the fourth quarter alone, and $67 million for the year.
WaMu's board decided not to give CEO Kerry Killinger a bonus for 2007. But board members also eliminated real-estate foreclosures and mortgage defaults as factors in whether to award him a bonus this year. After a shareholder revolt, the board decided to revise the formula, though it has not yet announced what metrics will be used.
Profit at insurer XL Capital fell more than 80 percent last year, and its stock price slumped about 30 percent. But Chief Executive Brian O'Hara made $7.5 million, a raise of 23 percent.
In its proxy statement, the company called its profits "unsatisfactory" but said operating earnings, which exclude certain factors, were better than planned.
O'Hara, who plans to retire later this year, was also given 62,500 shares of restricted stock and 250,000 stock options, which were not included in the calculation of his total compensation. The company said that was to "reflect the importance of Mr. O'Hara's role in the CEO succession process."
"The cracks in the idea of pay for performance really start to show when performance falters but pay still rises," said Paul Hodgson, senior research associate at The Corporate Library, an independent corporate governance research firm. "It's always a win-win scenario for executives."
Even companies with huge profits and soaring stock prices can be faulted for not following the principle of pay for performance, according to some experts on corporate pay.
As an example, these experts cite the energy industry, where CEOs in the AP survey chalked up a median 32 percent gain in 2007.
It's no secret that profits at oil and gas companies have raced higher in recent years, and stock prices have followed. But that's not necessarily because CEOs are more skillful at operating their businesses. The boon has more to do with the surge in the price of oil, which this year topped $130 a barrel for the first time on the New York Mercantile Exchange.
"The issue of an escalated price of oil shouldn't flow back in to executives' wallets, but to shareholders in the form of higher dividends," said activist investor Gerald R. Armstrong of Denver, who owns shares in XTO Energy Inc.
XTO's CEO Bob Simpson, with annual compensation of more than $50 million, has ranked in the AP's list of the 10 highest-paid chief executives for the past two years.
Pay consultants say that illustrates a weakness in executive pay programs. When outside factors help the bottom line, CEOs tend to benefit personally as well. But the opposite is not generally true, said Bill Coleman, chief compensation officer for Salary.com, which provides corporate pay information.
"How convenient," he said. "I take credit for everything good and I blame external factors for anything bad, but say that shouldn't affect my pay."
There were examples of companies that really did cut back on pay during a bad year.
Department store operator Dillard's Inc., plagued by falling sales, profits and stock value, cut CEO William Dillard's pay package by two-thirds, to $1.1 million, according to the AP calculation.
Of course, compensation is not always designed to reflect how the company does in the year it's handed out. Sometimes boards give out bonuses to the CEO for a strong performance a year earlier, and sometimes they are pegged to future performance goals.
At investment bank Morgan Stanley, CEO John Mack was paid a total of $41.7 million for 2007, a rough year for the bank. That made him No. 8 on the AP list of CEOs.
But Mack's pay was largely tied to his performance in 2006. The investment bank said in February that Mack would not be taking home a bonus for 2007 because of the company's heavy losses in the subprime lending crisis.
At Merrill Lynch, part of Thain's $83.1 million pay package hinges on whether the stock rises. He got options on 1.8 million shares as part of his signing agreement, but two-thirds of them will only vest if the price of Merrill stock clears specific hurdles for 15 straight trading days.
Right now Merrill shares trade at about $35, far from the $80 a share level that has to be reached for the first bundle of Thain's options to be in the money.
Shareholders aren't in the boardroom when pay decisions are made, but at some companies they are gaining clout and holding directors more accountable.
In May, insurer Aflac Inc. became the first major U.S. company to give investors a vote on how senior management is paid, and shareholder proposals requesting an annual nonbinding vote on pay received slightly more support at U.S. companies this year.
This issue has also spilled onto the presidential campaign trail. Democrat Barack Obama and Republican John McCain support giving shareholders some say on executive pay. Obama wants to legislate it, while McCain says companies should make the move themselves.
The votes would be nonbinding, but they would still shine more light on executive pay.
© MMVIII The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.
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See all 53 CommentsI would specifically include all the Democrats in Republican''s clothing who passed the 50 cal ban in Jersey. That stupid *** Jennitailia Beck was probably the stinking ring leader behind this Republican betrayal. Politicians like that need brought to justice and removed from office in one way or another.
That is "B.S." of the worst sort. Unless you are the owner of the company, nobody deservers that type of pay. Their job is no more difficult than the Janitors that clean the toilet. One may have more responsibility than the other, but does not more work nor does the one have more "personal" risk in their decisions. Those huge salaries should be returned to the stock holders. Pay an honest wage for the folks at the top to compensate for education and experience (up to 1 million) anything more than that is just ripping of the real owners of the company (the stock holders).
Posted by smitty448 at 12:24 PM : Jun 16, 2008
And a few years later we''ll find ourselves living in an economic powerhouse like Cuba. Nyet comrade, that isn''t the solution.
Naturally, all this is in keeping with the "Ferengi Economics" of the neocon Fascist Nazi right which states that the rich will and should become richer while the poor (there is no middle class!) will become poorer and be the slaves of the mega-rich. The reasoning here is that the wealthy DESERVE to become rich and stay that way since they are the elite and the REAL POWER in the government, even though none of them have done an honest day''s work in their lives.
The old phrase "power to the people" is, as that blubber-head Rush Limbaugh would say, dead and buried just like FDR, Truman, and JFK are!
George Orwell''s "1984" has almost become a reality, and as the great neocon Fascist Nazi motor-mouth of the Supreme Court, justice Scalia put it, "Get Used To IT!".
SIG HEIL, BUSH!!!!!!
sig heil, DEFINITELY MORE OF THE SAME, McCain!!!!!
And a few years later we''''ll find ourselves living in an economic powerhouse like Cuba. Nyet comrade, that isn''''t the solution.
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Posted by rational_1 at 01:25 PM : Jun 16, 2008
No! And living in a FASCIST Nation isn''t either!! When American Workers are FORCED to compete with workers earning 30 CENTS a DAY and those who benefit from that see their pay Rise as the plants shut down, that IS NOT the America I grew up in that''s for sure. Our standard of Living has fallen until we are DEAD LAST amoung the G-7 Nations because of the policies of the Fascist! Time for a change!! Sieg Heil McSame!!
Posted by MCVet at 01:47 PM : Jun 16, 2008
..............
Nor is it the America that you served... in uniform... in the jungles of Vietnam almost 40 years ago!
So what are our soldiers fighting for now? An 8-digit salary for those who are profiting from their bloodshed?!
We are 180 degrees apart on this. Sorry about the disparaging remark. Your post hit me wrong. Many CEOs are scum suckers, but the majority do their jobs well. There are many bottom feeders lurking in the malodorous muck of the same pond. Have a nice day.
Posted by brianp55
Thanks, someone who expresses some objectivity. There has been a long standing right wing capitalistic bent in this country that is every bit as extremist as raw marxism. There is no room for a wise mind in this nation where both extremes could otherwise be wed to form a healthy sensibility. We suffer from capitalistic extremism and it has rapidly reduced us to a 3rd world nation run by private shareholders.
Are employees "disposable" resources? Is that your educated solution to improving the value of share prices and increasing revenue? My my, you have just proven my point that very few individuals are up to the job of CEO. It seems clear you wouldn''t last long. While layoffs might be a part of a strategy to restore profitability, only the CEO, his confidants and the board can evaluate the full impact of their move. It''s not that simple. Again, they deserve every penny and I feel you''re wrong about it being an easy job. Is also take certain types of individuals with certain talents and connections.
That''s funny. I needed a laugh!
Posted by rational_1 at 01:25 PM : Jun 16, 2008
Capitalistic extremism will lead us to a land owning king and we''ll reside in his private kingdom tilling the land to make his bread. FeFiFoFum
I''m absolutely sick of the right wing extremism. It is every bit as destructive to the posterity of humanity as marxism. Right wingers deserve to burn in he*ll and they will.
Posted by ubrew12
Huh? management would be less competitive? Uh no, they''d become more so on the backs of those who work for them. Ever hear of the competing sweat shops in foreign countries?
Workers have a right to representation and we the people have the right to assemble. Big corporations have politicians representing them. Workers have the right to have representation too.
We are 180 degrees apart on this. Sorry about the disparaging remark. Your post hit me wrong. Many CEOs are scum suckers, but the majority do their jobs well. There are many bottom feeders lurking in the malodorous muck of the same pond. Have a nice day.
Posted by drivelphobe
Fine and dandy. Now where is a solid system of accountability. It seems when their big bonuses are coming they comfortably ignore the corruption in their court and do nothing about it at the expense of our people, our country and any hope of maintaining a unilaterally representative government.
Yeah, but the best representation is to be needed. Right now, management insiders who find themselves in the ''sweet spot'' of america''s corporations CAN''T be dislodged without significant corporate upheaval. And from that position of demagogery they actually make American corporations LESS competitive than they could be. Limit the size of corporations makes for MORE managements competing to make the same thing: so EACH of them becomes less vital to the enterprise as a whole. At the same time, each of the inputs to that management team, from raw materials to labor, becomes MORE vital to the enterprise, because there are many more TEAMS of managements out there competing to use up the same resources. THus labor becomes MORE vital, MORE competitive, and MORE likely to be heard when it threatens the only real bargaining chip labor has in labor/management negotiations: to quit. (its much easier to quit when there are half a dozen similar firms wanting your skill-set, just across the street. But, you quit from Lockheed or Boeing. Dude, you are toast).
Posted by ubrew1
Good points. You mention aerospace, but there are many examples even better still. In the name of efficiency small businesses are gobbled up continually and we have ended up with these huge corporations or kingdoms onto themselves that have no empathy or ear for the workers.
The right wing republicon Reagan era has been a nightmare to the posterity of the people of this nation but who infiltrated the democratic party, examples such as Joe Lieberman have exposed the whole system as a sham.
The efficiency of corporate america is to provide less service, less product, reduce overhead and maximize profits for a few beneficiaries.
True. Especially in a Global economy, many if not most of those ''beneficiaries'' aren''t even American.
On the subject of labor: I know many a welder who swore allegiance to his/her craft. I also know many a manager who swore allegiance to his/her company. There''s just no defensible reason why the former allegiance should be a road to eventual poverty, while the latter a road to corporate advancement and potential humongous reward. Not to put too fine a point on it, but the primary purpose of a corporation is to weld something, NOT to manage something. Too many corporations think their reason for being IS to manage something, and thats a sure sign of corporate welfare, which has been going on in this country for 30 years.
Posted by whitemale08 at 03:04 PM : Jun 16, 2008"
In peak housing boom Home depot CEO showed a very substandard performance and got 150 million + severance package and now he is CEO of Chrysler which laid off 12000 workers in less than 30 hours after Union ratified the contract. Fired CEOs of Citi bank, Merrill Lynch, Bears Sterns end up CEOs of some other big companies to lay off another 100,000 people to get big fat pay and options perks. Republican way of doing things.
You are so blind. France did not become communist. They simply beheaded their elite class. Americans need to do the same.
Posted by smitty448 at 02:12 PM : Jun 16, 2008
I didn''t say France became communist - I was referring to the part of your comment about re-distributing the wealth to 95% of the masses. That, my friend, is communism (or socialism if you don''t have a big enough gun), which explains my nyet and Cuba comment. Simple, really.
What I know is that half of America is owned by 1% of her population. If you want to support that 1%, vote Republican. For me, I''ll vote for the other 99% of America.
Country Ratio (CEO/Custodian Salary)
USA 433
Japan 185
Germany 97
India 86
China 76
I am sure about 433 because I was very upset at that moment.
But that''s an important ratio that allows American auto-executives, for example, to sell American''s cars that break down in 5 years instead of the global average of 8, and to completely miss the need for hybrid vehicles cuz they were so busy propagandizing Americans into buying SUVs. I mean, it takes a special leadership ability to convince Americans to buy cars that actually INCREASE the gasoline they need to run them. As oil-man Bush would say to American auto-execs, ''heck of a job, Brown-noser''
It may take many years to bring justice to these people. What we can do most useful now is to record their names and their roles, so that they can''t escape retribution in times to come, once the American people have suffered and fully understand what these guys have done to us. I can envision a website that simply lists CEO''s and corporate freaks and anonymous accusations against them; that way when the mood of the people is ready they can be brought to justice. Many of them will escape justice through death in old age, sick Hell-loving fiends like Jack Welch or Alan Greedscam for example; for those it is necessary that their children and families bear the responsibility. There must be justice, no other response is possible. For every day of their arrogant domineering lives there must be one day of abject terror and pain for them. Only then can we again believe in the American system and be successful as a people.
You don''''t get it do you? "Communist" China and Russia are both capitalist economies these days. We can still have democracy and capitalism without the aristocracy hording all the wealth for themselves.
Posted by smitty448 at 09:38 PM : Jun 16, 2008
That''s right - so go out and earn it and stop whining about the successes of others. And think about why formerly communist countries are giving it up. Communism completely ignores human nature and believes that the proles will be perfectly willing to toil for the good of the state, so that everyone can all share equally. Ya, we all know how that really turns out.
Posted by rational_1 at 11:14 PM : Jun 16, 2008
** I don''t want us to all share equally... however, I don''t think ceos should be making millions every year, if we don''t make more than 6 bucks an hour at the bottom. They should make it alot more fair than that. That is why I hate the bush tax cuts for the extremely wealthy, and why mccain extending that would kill our economy. The ultra wealthy don''t create jobs, companies do!
Posted by olebd at 09:29 PM : Jun 16, 2008
*** I totally agree with you! That is why i''m voting Obama! Mccain would continue more of what Bush has done! I''m tired of rich people getting away with everything like this!
With the cost of fuel what it is becoming, it will no longer be profitable to ship from overseas and jobs will once again be back at home where they belong!
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Posted by rational_1 at 11:14 PM : Jun 16, 2008
+ report abuse
Fascist ALWAYS, and I do mean ALWAYS, revert back to the Joe McCarthy in themselves when someone points out the wrongs they have committed. Those who negotiated those "Free" Trade Agreements should be thrown under the Jail and the Key Thrown away. We ONCE had the highest standard of living in the world then these "free" trade jerks came along and sold us all out. For who?? For the CEO''s being talked about. This pathetic Nazi implies these people worked for and EARNED this money. THAT''s a LIE! They Exploited other people to get it. Under the system developed by FDR and used by America to become the Greatest Economic Superpower on the Planet, they were forced to EARN it, right here in the good old USA! Now let''s let Old Joe know that his Commie Baiters are STILL out here... Ready?? Sieg Heil Joe!!
Enough is enough, the dwindling middle class Americans are suffering more and more.
Time to regulate salaries. it makes us more like a communist country but what the heck, the government wants to regulate everything else.
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