CEO compensation has been a hot topic over the past few years, especially when American taxpayers saw their money being used to bail out companies and banks that were on the brink of failure. To many, it looked like a reward for poor performance and a reminder that some companies seemingly are "too big to fail". (The proxy statement can help determine whether a CEO is well compensated - or just overpaid. See Executive Compensation: How Much Is Too Much?)
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The debate reached a peak in November, 2008 when the CEOs of the three major auto companies arrived in Washington via private jet to attend congressional hearings. While the companies all said this was standard procedure to protect the safety of top executives, that justification didn't go over well with taxpayers who are footing the bill for the auto bailouts.
Here are five things about executive pay that some CEOs wish could be kept secret.
- Top 500 CEOs Made $8 Million Each in 2009
According to Forbes, chief executives across the U.S. have seen a reduction in total compensation for the third year in a row. They reviewed the 500 biggest companies using a composite ranking based on assets, market value, sales and profits. The 30% decline in 2009 followed two consecutive declines of 11% in 2007 and 15% in 2008. It's been two decades since CEO pay dropped three years in a row.
In 2009, the CEOs of the top 500 companies earned an aggregate $4 billion in total compensation. That equates to an average pay package of $8 million that typically consists of a myriad of pay options designed to reward both short and long-term performance. Most include a base salary and annual bonus that is usually pegged to the prior year company financial results. The bonus is a cash payment that does not include other types of compensation such as stock options, stock awards, pension benefits, perquisites ("perks"), and other deferred compensation.
- Top Earners Make Nine Figures
It's no secret that companies offer a dizzying array of alternative pay options designed to disguise the total compensation. Many companies have shifted away from cash and into stock for tax reasons. When the various pay elements are added together, the bottom line compensation for executives can be well into nine figures. Here are the top five for 2009, based on data compiled by Forbes:
- H.Lawrence Culp, Jr. (Danaher) – $141 million
- Lawrence Ellison (Oracle) – $130 million
- Aubrey McClendon (Chesapeake Energy) – $114 million
- Ray Irani (Occidental Petroleum) – $103 million
- David Novak (Yum! Brands) – $76 million
- Get Pampered with Perks
The perks tend to get a lot of attention by shareholders because they are given to those who can most afford to pay their own way. Among the most popular are company jets, free home security, vacation condominiums, chauffeured limousines, personal assistants, bodyguards, private office space, estate planning, tax preparation, hi-tech communications systems, professional sports tickets, country club memberships and life insurance policies.
One poster boy for over-the-top perks is John Thain, formerly of Merrill Lynch. In early 2008, he remodeled his office and reception area at Merrill at a cost of $1.2 million. Among the items purchased for the renovation were a 19th century credenza ($68,000), commode on legs ($35,000), pedestal table ($25,000) and area rugs ($87,000). (Though these two jobs are perceived as being opposites, the compensation can be quite comparable. To learn more, read Compensation Myths: Burger Flipper Vs. Investment Banker.)
- $1 Million Tax Deduction
Reporting requirements for publicly held corporations were first established by the Securities Exchange Act of 1934. Since then, new statutes have been passed and changes to the Internal Revenue Code have been made that affect corporate taxation and the deductibility of expenses.
In 1993, the corporate tax deduction for nonperformance-based pay was limited to $1 million for covered employees. These include the CEO and the next four highest paid officers of publicly held companies. This limitation applies only to cash and in-kind compensation paid as remuneration for services rendered. Contributions to qualified plans and performance-based compensation such as stock options are generally excluded from the limit.
- Parachute to Safety
Most top execs don't have much to worry about if their company is taken over or if they lose their job. Their contracts often include a "golden parachute" clause that grants them a generous severance package that they take with them even if their company is performing poorly. In some cases such clauses are used as a lever to discourage hostile takeover attempts.
The 2008 financial meltdown didn't prevent many executives from walking away with large chunks of their corporate treasury. When Countrywide Financial failed and was taken over by Bank of America, Angelo Mozilo took home $188 million. At the same time at Citigroup, after a poor quarterly performance, Charles Prince retired with a package worth almost $100 million.
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The Bottom Line
In the midst of the economic meltdown, President Obama appointed Kenneth Feinberg as his "pay czar". He immediately cracked down on companies that were bailed out by American taxpayers by imposing salary caps. In turn, the companies complained that they wouldn't be able to attract the best talent if they couldn't offer competitive pay packages.
Despite all the attention and focus on executive pay by both the government and public, top executives at most companies continue to rake in huge salaries, bonuses and other perks. Executive pay will likely be a controversial subject for years to come, especially if unemployment remains high in a weak economy. (Could bloated CEO compensation be to blame for the widening gap between the rich and the ultra-rich? Check out Reining In CEO Rewards.)
For the latest financial news, see Water Cooler Finance: Goodbye 2010 (And Good Riddance?)