April 21, 2010
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
The weak economy has forced boardrooms to cut executive pay for a second year running. By any standard, however, utility chiefs are still getting paid well.
It's easy to take pot shots at corporate executives when they get rewarded on a scale that is incomprehensible to most working Americans. So, the aim of most corporate boards now is to pay them in relation to how well their companies' stocks perform over time. In other words, if the value of a business continually trends higher because of current corporate policies then those in charge make money.
Obviously, the angst that most people have is that the pay is disproportionate to the rank-and-file -- and that such compensation tends to be excessively high even in bad times when others are losing their jobs. If it makes them feel any better, the top dogs saw their pay fall by almost one percent last year to a median value of just less than $7 million, according to the Hay Group and Wall Street Journal that survey 200 companies.
"During a year when compensation committees faced unprecedented shareholder, governmental and public pressure, many expected to see landmark changes in the way CEOs were compensated in 2009," says Irv Becker, national practice leader of the U.S. executive compensation practice at Hay Group. "Instead, we found many compensation committees were focused on retention of their top talent, putting significant long-term value back on the table for executives and lowering the bar on annual performance targets. The combination of the two made pay programs less performance-based."
The Hay Group reports that base salaries were flat at $1,030,000, while annual incentives grew 3.4 percent to $1,523,701, yielding an overall cash compensation increase of 3.2 percent to $2,637,884. When factoring in long-term incentives, however, which fell 4.6 percent to $5,007,556, total direct compensation fell a modest 0.9 percent to $6,947,976.
The trend in 2009, it adds, is to favor time-vested plans. Still the consultancy adds that the year saw higher bonuses for less profitable results.
A separate analysis performed by USA Today found that the top paid utility executive is Exelon's John Rowe, who took in a total of $12 million last year, or a 1 percent decrease from the year before. Exelon's stock fell by 8 percent during that time.
AES' Paul Hanrahan made $8.8 million, which is 22 percent rise in compensation. But his company's stock rose by 62 percent over the year. PSEG's Ralph Izzo made $7.1 million, or 2 percent less than the year before, although the value of those business shares climbed by 19 percent. AEP's Michael Morris made the same. But his pay is 27 percent less than last year even though the value of his company's stock rose by 11 percent.
In all of the USA Today cases, base-pay averaged around $1 million a year. The real money came in the form of annual bonuses and stock options.
Shareholder Empowerment
It's interesting to note that the Hay Group-Wall Street Journal study says that shareholder return increased despite a decline in company performance. That indicates that investor optimism is returning, which over time will boost CEO pay. Specifically, the median net income fell by 5 percent from 2008. But the total shareholder return rose by 21.5 percent.
Given the government's role in bailing out some banking institutions and some auto manufacturers, the Obama administration has gotten involved, generally speaking, with trying to make recommendations as to executive pay. While it will not set strict limits, the Washington Post reports that the administration's pay czar, Kenneth Feinberg is advising that executive pay should be tied to long-term incentives -- not quick upturns or downturns in the company's stock value, so as to discourage excessive risk taking.
That would translate into less salary, fewer perks and more company stock that must be held for longer periods of time, the newspaper reports. Consider Dukes Chief Executive Jim Rogers: His five-year contract says that he is paid no salary or bonus. Just about all of his $6 million pay came in the form of stock in 2009. Also, Goldman Sachs' CEO Lloyd Blankfein took his bonus in restrictive stock that he must hold for five years.
"Incentive compensation is changing," says David Chun, head of Equilar, in his blog. "Performance awards are being amended to provide longer performance periods, some firms have put relative measures in place, and others have adjusted threshold, target and maximum level." What that means, he says is that companies are forcing their executives to hold "restrictive shares" and keep their stock for longer time periods.
Compensation is made up of salary, cash bonuses and long-term incentives, traditionally stock options that give executives the right -- but not the obligation -- to buy stock at a fixed price at some point in the future. Cash bonuses are calculated using such benchmarks as revenue increases, return on assets or return on equity. Stock price is also a popular measurement, although it is typically used to gauge longer-term results.
According to the Hay Group, corporate boards must assure that pay standards are transparent. At the same time, the process to assign compensation must be fair and not conflict with employee benefit policies that apply to everyone else. Shareholders, in fact, display antipathy for CEOs who get richly rewarded for mediocre performance.
"Looking forward, it's clear that shareholder empowerment and the role of risk in compensation will impact the way compensation committees evaluate executive pay," says Hay Group's Becker. "As companies prepare for 2010 and beyond, it's critical that they learn what really matters to shareholders, and engage them in a productive dialogue about these executive pay issues."
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