CEOs Defy Obama With More Cash Instead of Pay for Performance - 25 March 2010

http://www.bloomberg.com/apps/news?pid=20601108&sid=a1wYqBZEwV6g

March 25 (Bloomberg) -- Total compensation for U.S. chief
executive officers shrank by 8.6 percent last year, according to
data compiled by Bloomberg BusinessWeek.

Boards offset some cuts in stock awards and options by
boosting CEO salaries and bonuses, the data show.

With pay packages under pressure from President Barack
Obama and shareholder activists, average compensation fell by
8.6 percent to $9.81 million for the 81 CEOs whose companies’
proxy statements were examined. While option awards were slashed
by 30 percent, cash earnings, including non-equity incentive
rewards, rose 8.3 percent.

Cash became king in corner offices because boards
acquiesced to CEOs’ desire for dependable income, according to
interviews with 15 compensation experts. Executives, whose pay
packages were typically negotiated in 2008 and early last year,
weren’t willing to give up salaries for long-term, stock-based
awards that could decline in value.

“When the economy is reeling, the most stable form of pay
isn’t stocks, it’s cash,” said Sam Pizzigati, an associate
fellow at the Institute for Policy Studies in Washington who has
written about executive compensation and shareholder activism.
“In rough times, the surest thing is cash, and that’s what they
went for.”

That isn’t the direction preferred by the White House.

“To the extent there is more emphasis on cash than stock,
that’s unfortunate,” said Kenneth Feinberg,
the U.S. special
master on executive compensation, who was appointed by Obama in
June 2009. “We’re pushing the other way.”

New Disclosure Rules

Assuming the trend holds for other Standard
& Poor’s 500
companies, CEO compensation may have fallen for the third year
in a row. The average pay package declined in 2007 and 2008,
when it was off roughly 40 percent from its 2000 high of $14.6
million, according to research by assistant finance professors
Carola Frydman of the Massachusetts Institute of Technology and
Dirk Jenter of Stanford University.

The proxies that Bloomberg reviewed include the most
complete pay summaries that companies have ever been required to
provide. For the first time, the Securities and Exchange
Commission has mandated that the full value of stock and option
awards appear in proxy statements covering the year in which
they were given. The awards’ value was divided among several
years in the past.

For a look at how S&P 500 CEOs fared under the new
disclosure rules, Bloomberg compiled data from proxies for
companies whose fiscal years ended on Dec. 31, 2009, and that
had been filed as of March 12. For comparison purposes, only
CEOs serving in that capacity in 2008 and 2009 were included.

‘Hot Spotlight’

Printer maker Lexmark
International Inc., based in
Lexington, Kentucky, cited challenging economic conditions in
its proxy as the reason for freezing salaries. The CEO of Morris
Township, New Jersey-based Honeywell
International Inc., David
Cote, 57, requested that he not be awarded a bonus because of
the recession. Directors agreed -- and his total pay was reduced
by 57 percent.

Compensation committees also exercised caution to avoid
criticism, said Tim Smith, a
senior vice president at Walden
Asset Management, a money manager in Boston.

“The hot spotlight of public attention is on companies
more than ever,” Smith said.

The 20 financial institutions among the 81 companies cut
CEO compensation in 2009 by almost $28.1 million to $176.1
million -- accounting for 37 percent of the overall pay lost.
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.

Nothing for Lewis

Vikram Pandit,
CEO of New York-based Citigroup
Inc.,
voluntarily slashed his annual salary to $1 in February 2009.
His package exceeded $38 million in 2008, when the bank’s stock
price fell 77 percent. Pandit, 53, vowed not to take a raise or
receive incentive compensation until Citi -- 27 percent owned by
the U.S. -- returns to profitability.

At Charlotte, North Carolina-based Bank of America Corp.,
Kenneth D. Lewis
received no cash, bonus or equity compensation
in 2009. Lewis, 62, retired on December 31.

Not all TARP recipients showed restraint. Last August, San
Francisco-based Wells Fargo & Co.’s compensation committee
approved upping CEO John Stumpf’s
base salary more than fivefold
to $5.6 million, all but $900,000 of which was awarded in shares
that vested over the rest of the year.

Stumpf, 56, received a total pay package of $21.3 million,
136 percent more than in 2008. It was boosted because TARP rules
made the bank unable to “reward him appropriately” in other
pay categories, said Melissa Murray,
a spokeswoman for the bank.

‘No Teeth’

Another possible explanation for the decline in overall
compensation was pressure from shareholders, according to John
Keenan, a strategic analyst at the American Federation of State,
County and Municipal Employees union in Washington.

More than 100 resolutions seeking advisory roles on
executive compensation were submitted last year, up from 7 in
2006, Keenan said, and 64 companies have agreed to give
shareholders a say on pay.

The resolutions that have passed are typically nonbinding.

“It’s policing executive pay with something that has no
teeth,” said Frank Glassner,
CEO of San Francisco-based Veritas
Executive Compensation Consultants LLC.

The gain in cash forms of pay and the decrease in stock and
option awards moved the companies further away from compensation
aligned with long-term performance, according to the data
compiled by Bloomberg.

Greener Pastures

“This is exactly the opposite message that was meant to be
imparted by President Obama, Feinberg and the other preachers
from D.C.,” said Graef Crystal,
a pay analyst who examined the
data for Bloomberg.

At 43 of the 81 companies, salaries and bonuses increased.
Salaries alone rose an average 8.9 percent.

“That is a large increase in any year, but few Americans
received any raises at all and many lost their entire income,”
Crystal said. “The increase for CEOs seems a gross insult.”

Salaries might have gone up been because boards saw stock-
based awards as too volatile and wanted to offer more stable
cash income as a retention tool, said Paul Sorbera, president of
the executive recruiting firm Alliance Consulting in New York.

Stock options don’t have as much “holding power on
executives” as they once did and some companies felt they had
to offer CEOs more cash so competitors wouldn’t “steal their
talent away,” said Steven Hall,
managing director of New York-
based Steven Hall & Partners, an executive compensation
consulting company. “Some of these executives need to be paid
$20 million” or they might leave for greener pastures.

‘Far Too Greedy’

Option awards declined by 30 percent, the biggest drop in
any form of compensation, according to the data. Some boards
didn’t want to give out large option awards because of the
potential for gains
that would later make the awards look
excessive, according to Kenneth Raskin,
a lawyer in the New York
office of White & Case who represents CEOs in pay negotiations.

“CEOs didn’t want the stock price to rise dramatically and
in a year seem far too greedy,” said Ira T. Kay, an independent
compensation consultant in New York.

Boards cut stock awards by 11.7 percent, putting less
emphasis on options and more on stock awards, which compensate a
CEO even when a share price stagnates. For options to pay off,
stock prices have to climb.

The greater relative reliance on share awards
“misaligned” CEO and shareholder interests, according to a
February report
by the Corporate Library, a shareholder
governance research firm in Portland, Maine.

Shortfalls and Windfalls

Meanwhile, bonuses -- including what the proxies call
“non-equity incentive plan compensation” -- rose 7.9 percent
in 2009 to an average $2.07 million.

Nine of the 81 CEOs took home a bonus in one category or
the other, after receiving none in 2008. They included Columbus,
Georgia-based Aflac Inc.’s Daniel Amos, 58, who was awarded $4.1
million, and Midland, Michigan-based Dow Chemical Co.’s Andrew
Liveris, 55, who received $4.5 million.

Some performance goals for long-term awards are being
reduced in the still-uncertain economy, Veritas’s Glassner said.

“Companies haven’t raised the bridge,” said Glassner.
“They’ve just lowered the river.”

Glassmaker Corning Inc., based in Corning, New York,
altered its performance measurements “given the great
uncertainty in accurately forecasting the impact of the global
recession” in order to “alleviate any unintended shortfalls or
windfalls in actual bonus payouts,” the company said in its
filing.
CEO Wendell Weeks,
50, received $4.8 million in an
annual incentive bonus, up from $301,584 in 2008.

Bigger Payday

Ray Irani, CEO
of Los Angeles-based Occidental Petroleum
Corp., ranked first among the 81 executives with a $31.4 million
pay package in 2009. Irani, 75, stands to get a bigger payday
this year -- a $58.5 million cash award from an incentive plan
tied to the company’s return
on equity, or earnings divided by
book value, a common measure of performance.

Irani will get the payout if Occidental attains a 54
percent cumulative return over three years, according to the
company’s proxy. The company achieved a 94 percent cumulative
rate in 2004 to 2006, in the three calendar years before the
target was set.

Occidental’s compensation committee rewarded Irani in 2009
for continuing “to place Occidental among the best performers
in the oil and gas industry,” according to the company’s 2010
proxy statement. The board’s focus on return on equity is meant
to encourage “the effective use of capital” in profitable,
long-term investments, the proxy said.

‘An Actuarial Value’

Pension plans gained an average of 15.4 percent or $1.27
million. One reason: the 8.3 percent rise in salary and bonus
drove up the current value of what companies promised to pay
CEOs in retirement, typically calculated as a percentage of
their annual income.

While pension values in proxies are mostly book entries,
not cash outlays, they reflect changes in the real amount a CEO
would get if he took his pension in a lump sum.

Dallas-based AT&T Inc. put $8.99 million into CEO Randall
Stephenson’s pension plan, the biggest such contribution. Under
the retirement plan, Stephenson, 49, will get a pension equal to
60 percent of his highest average salary and bonus in three of
his last 10 years at the company. Although he’s not currently
eligible for retirement, his pension is valued at an estimated
$31 million today.

McCall Butler,
a spokesman for AT&T, said Stephenson’s
pension gain was “an actuarial value, not part of his actual
taxable income.”

Fewer Private Planes

In a letter
to shareholders last April supporting a say-on-
pay resolution, Carole Lovell, president of an AT&T retiree
association, said that the company’s “executive compensation
policies continue to exhibit all the worst excesses and
abuses.” The resolution did not win a majority.

In the 81 filings, “all other compensation” -- including
perquisites like private planes, security details and country
club memberships -- declined by 23.2 percent.

One casualty: Lincoln National Corp. CEO Dennis Glass,
60,
whose “other” pay dropped to $308,463 from $2.26 million.
Glass’s 2008 perks included $82,901 for personal use of aircraft,
according to the proxy. His perks in 2009 cost $16,600 for
matching charitable contributions and financial planning, said
Laurel O’Brien,
a spokeswoman for the Philadelphia-based insurer.

180 Shareholder Resolutions

Companies are backing off on criticism triggers like
private planes because “these kinds of perks just aren’t worth
it,” said David Gordon, an executive compensation consultant at
Frederic W. Cook & Co. Inc. in Los Angeles. “They are a small
fraction of overall compensation, but have the ability to get 50
percent of the attention.”

Scrutiny of pay isn’t likely to go away. RiskMetrics, an
investor consultant, counts 180 resolutions concerning executive
compensation around the country.

Legislation in Congress that would mandate say-on-pay votes
may have led some activists to “feel the battle has been won,”
said Doug Friske, head of the global executive compensation
practice at New York-based Towers Watson & Co.

The House passed the measure, which is part of the
financial regulation overhaul bill in the Senate.

Tim White, a partner with Dallas-based Kaye/Bassman
International, an executive recruiter, ties shareholder pressure
to the U.S. recession that began in 2007 and may now be abating.

“In difficult times, there is always a clamoring for the
fat cats to make less money,” White said. He predicted
executive compensation will rise as the economy strengthens.

To contact the reporters on this story:
Alexis Leondis
in New York at
aleondis@bloomberg.net;
Jessica Silver-Greenberg in New York or
jsilvergreen@bloomberg.net;
Tara Kalwarski in New York at or
tkalwarski2@bloomberg.net

Last Updated: March 25, 2010 00:01 EDT