The latest findings on CEO and director compensation show that total pay levels for both groups rose in 2004, confirming trends reported in other recent research.
Median total compensation for CEOs at over 3,000 public companies in 2004 was higher than the year prior in all 14 industries surveyed, with the energy industry showing the greatest jump at 46.1 percent. The financial services and transportation industries also saw large percentage increases in median total compensation, jumping 31 percent and 27.3 percent, respectively, in 2004 from 2003. The findings are from The Conference Board’s 2005 Top Executive Compensation Report, based on 2004 proxy and financial statements data compiled by eComp Data Services.
Peck
“The pattern of CEO pay in 2004 was very much same as the prior year,” says Charles Peck, one of the report’s authors and principal researcher and program manager on compensation for The Conference Board. “CEO pay increased, as it invariably does every year, but the increase was much less dramatic than the big increases we saw in the ‘90s when the market was booming and executives were getting huge stock option grants. Companies have scaled back on option grants, so the increase is slower.”
However, Peck says he hasn’t necessarily seen a move away from stock options altogether. “There’s been a shift toward smaller option grants and greater use of restricted stock, which can be deceptive, since a restricted stock grant may be smaller, but it’s more valuable,” he notes.
“There really were no surprises,” says Peck, who notes that the report’s large sample size “tends to have a normalizing effect.”
As Compliance Week covered last week, a study released by governance watchdog The Corporate Library claimed that many CEOs unjustifiably pocketed outsized salaries, reported a median increase in total CEO compensation between 2003 and 2004 of 30.2 percent, significantly higher than the prior year’s 15.0 percent jump. The TCL data were based on a matched set of 1,522 CEOs who were in the job for all of 2003 and 2004 (see box at right).
According to The Corporate Library report, the average increase in total CEO compensation was 91.2 percent, driven in part by 27 CEOs who received increases of more than 1,000 percent, while total annual compensation rose by a much smaller median of 11.8 percent. The report cited the smaller increase in total annual compensation as evidence that growth in the incidence and value of long-term incentive pay outs—such as restricted stock awards, profits from the exercise of stock options, and other long-term payments—are driving soaring CEO pay.
But Peck says most of the increase in CEO compensation reported by the companies in The Conference Board report came from short-term incentives; specifically, from annual bonuses. “Profits have been fairly good over the last couple of years, so annual bonuses tied to profitability are paying off, and that’s accounting for the increase,” says Peck.
Steady Ratcheting Up
According to the latest report, median total current compensation (salary plus bonus) for CEOs was also higher across the board, with the financial services, energy and construction industries seeing the largest change in total current compensation from 2003 to 2004, at 26.5 percent, 22.3 percent and 20.3 percent, respectively.
PAY BY INDUSTRY
The chart below is from The Conference Board's "2005 Top Executive Compensation Report." The chart shows pay levels by industry. According to The Conference Board's research, median CEO total compensation (salary plus bonus plus value of long-term incentives), total current compensation (salary plus bonus), and salary were highest in construction:
Industry
Total Comp.
Total Current Comp.
Salary
Construction
$2,836,000
$2,032,000
$730,000
Financial Services
$2,288,000
$1,990,000
$521,000
Insurance
$2,118,000
$1,472,000
$675,000
Utilities
$1,710,000
$1,167,000
$650,000
Energy
$1,314,000
$930,000
$456,000
Communications
$1,200,000
$1,077,000
$650,000
Diversified Service
$1,143,000
$903,000
$500,000
Manufacturing
$1,127,000
$958,000
$550,000
Telecommunications
$1,095,000
$1,001,000
$500,000
Trade—Retail
$1,068,000
$1,021,000
$638,000
Trade—Wholesale
$977,000
$900,000
$491,000
Commercial Banking
$960,000
$801,000
$495,000
Computer Services
$833,000
$768,000
$430,000
Transportation
$803,000
$673,000
$434,000
Courtesy The Conference Board: 2005 Top Executive Compensation Report ($495 From TCB)
Median CEO total compensation (salary plus bonus plus value of long-term incentives), total current compensation (salary plus bonus), and salary were highest in construction. However, Peck says that may not be the case for 2005. “This year, financial services—which, historically, is also a high payer—may come out higher because Wall Street had a good year and it looks they’re going to pay big bonuses,” says Peck.
As for the recent backlash against runaway CEO pay, Peck says, “There’s been an effort to introduce more control, but I don’t know how effective it is.”
However, Peck said he has seen improvements due to changes to proxy reporting rules requiring companies to disclose the compensation of their five highest paid officers. “Reporting has been clearer during the past year, compared to a few years ago, when it was a nightmare to extract the data from the text of proxy statements,” he notes.
Other improvements seem to be the result of more active, inquisitive boards and committees. “There’s more pressure on and scrutiny of the compensation committee,” says Peck. “There have also been attempts to improve the disclosure and the regulation of executive pay, but whether they’re working, I don’t know.”
Peck cites two problems fundamental with CEO pay, which he says are nothing new. “When they set CEO pay, companies tend to look at the pay level of a peer group of 12 to 20 companies—they usually look at the median CEO compensation and position their compensation where they want to be in relation to the median,” he says. “Big companies, especially, often set their target above the median, at the 75th percentile, with the justification that that’s necessary to retain, attract and motivate highly performing executives. If all of the companies do the same thing, and they all set CEO pay above the median, there’s a steady ratcheting up,” he says.
“In cases where the CEO is also the chairman of the board, as is the case at most big companies, there inevitably has to be the question of, ‘How much of a free market, arms’ length transaction it is for the compensation committee to set the pay of the person who is or will be their boss?’,” adds Peck. “While there’s more attention being paid to the compensation committee—and more effort to have independent directors on the committee—when the CEO is the chairman of the board, it puts the CEO in a powerful position in terms of influence.”
And while there have been calls for companies to separate the CEO and chairman roles, Peck says that those changes are not widespread. “That separation is not showing up in big companies that I’ve seen,” he says. “Most claim that the company can’t be run effectively with a split role.”
Board Trends
Meanwhile, director pay levels crept up slightly in 2004, according to a separate report by The Conference Board. That report is in line with findings from three studies reported on by Compliance Week back in September, which showed increased board responsibilities driving increased in overall director pay (see box above, right).
“Director pay tends to go up one year as companies make adjustments and increase the amount of their retainers or stock grants, and then stays level for two or three years before it blips up gain,” says Peck. “You don’t see the year-to-year fluctuation that you see with executive pay.”
CORPORATE BOARDS
The following excerpts are from The Conference Board's "Directors' Compensation And Board Practices In 2005":
Chairmen
49 percent of companies report that the CEO is
also the chairman of the board, while 31 percent report
an outside chairman. The remaining 10 percent report
a chairman who is an employee but not the CEO. Last
year’s percentages were 66 percent, 24 percent, and 10 percent, respectively.
Lead Directors
The proportion having a Lead Director—an outside
board member who assumes specified leadership
responsibilities in situations where the Chairman of
the Board is also CEO—is 50 percent, up significantly
from 37 percent last year.
Stock Ownership
Forty-eight percent of all companies report that they
have stock ownership guidelines in place for outside
directors. Last year 42 percent reported guidelines.
Meetings
The number of regularly scheduled board meetings ranges
from 1 to 14, but 6 is most common. ... Board meetings are reported as typically lasting
from 1 to 25 hours with most companies reporting
meeting lengths between 2 and 6 hours.
Composition
Median board size ranges from 9 to 11 members, depending
on industry. The median number of outside directors is
from 8 to 9.
Minorities
From 68 to 80 percent of companies, depending on industry,
have at least one woman board member in 2005. From
51 to 57 percent report one or more racial/ethnic minority
member.
Source
The Conference Board: Directors' Compensation And Board Practices ($495 From TCB)
“We’re seeing higher retainers for some committees, particularly for the chairman of the audit committee,” notes Peck. “That’s not surprising, because the audit committee has the most regulatory oversight. Compensation committee pay is also starting to going up, since the comp. committee is being asked to spend more time and meet more frequently.”
Based on a survey of 425 companies, the median amount given as “payable in cash” to outside directors in 2005 across all industry groups was $47,500, compared with $45,000 in 2004. Ninety-three percent of the companies reported payment in some form of stock payment (all or part of basic pay in stock, annual grants of stock, restricted stock, stock options, onetime grants of stock, or other periodic grants). Stock options are still the most popular form of stock compensation, reported by 54 percent of the companies.
“We saw some companies turning away from stock options, but they’re still the most widely issued stock ownership device for outside directors,” says Peck. However, he adds, “the size of the grants is going down and we’re seeing an increase in restricted stock grants.”
Similarly, a report by Shearman & Sterling showed that the number of Fortune 100 companies that reported grants of stock options as a component of director compensation decreased to 55 in 2004, down from 70 in 2003, while the number that reported grants of stock and restricted stock this year increased to 36 and 47, respectively, from 31 and 25 in 2003.
The Conference Board report found that the proportion of boards having a lead director—an outside board member who assumes specified leadership responsibilities in situations where the chairman of the board is also CEO—rose significantly, to 50 percent, up from 37 percent last year. That’s in line with similar findings showing more companies establishing the role of “lead director,” in response to corporate governance concerns. According to a survey of the 100 of the largest U.S.-based companies listed on the NASDAQ and the New York Stock Exchange by Frederic W. Cook & Co., 27 NASDAQ companies and 40 NYSE companies have lead directors. Another survey by executive recruiting firm Spencer Stuart found that 94 percent of all S&P 500 boards have a lead or presiding director, compared with 85 percent last year and just 36 percent in 2003.
Fifty-nine percent of companies report that the CEO is also the chairman of the board, while 31 percent report an outside chairman, The Conference Board reported. The remaining 10 percent report a chairman who is an employee but not the CEO. Last year’s percentages were 66, 24, and 10, respectively.
Related reports, coverage and resources are available from the box above, right.
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