Studies Show Total CEO Compensation Down; Stock Options Back

Overall CEO compensation may have slowed down in 2009, but the stock option (remember that) has returned in a big way for top executives. That’s what two studies released days apart late last week by The New York Times and The Wall Street Journal show. (They hired compensation research firm Equilar and the management consultant Hay Group, respectively.)

So what do the results of these studies mean about executive compensation policies following the financial crisis of 2008-2009? Despite all the hype about high bonuses in the financial sector, it seems that other industries reined in high compensation packages for the top executives.

“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,” Irv Becker, Hay Group’s national practice leader of the U.S. Executive Compensation Practice, said in a statement last week. “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.”

And what about this year?

“Our best guess is that 2010 will look a lot like 2008,” David Wise, senior consultant for the Hay Group, told me last week. “We expect shareholder pressure will lead to [more] long-term incentives (LTI) plans.”

Since many companies were concerned about retaining their executives, they designed executive compensation plans that included more incentives. But with the fallout from the financial crisis, shareholder groups have pushed for plans that make executives earn those incentives by doing more to focus on long term value.

“As a result, CEOs were sitting on a lot of market equity value,” Wise said. As for 2009, story was more about companies trying to balance pay for performance with managing risk and compensation, he said.

Speaking of LTI, I would like to remind you about the first principle of The Conference Board Task Force on Executive Compensation, (Read report.) “Paying for the right things and paying for performance.” One of the elements for determining pay should be consideration of risk in performance measures: “For long-term incentives, vesting and holding periods are additional tools to align payouts with the time horizon of risks associated with generating the measure return.”

Going forward this year, Wise expects more compensation plans that are risk-based. “The wild card is will the risk environment make companies move away from pay for performance,” he said. “In the end, shareholder sentiment is likely to win out.”

The Wall Street Journal/Hay Group study found that average total direct compensation (base salary + cash incentives + long-term incentives) fell 0.9 percent to $6.95 million in 2009. While base salaries were flat at $1.03 million compared to 2008, annual incentives increased 3.4 percent to $2.64 million and LTI fell 4.6 percent to $5 million.

According to the study of 200 companies with more than $4 billion in annual revenue, stock options re-emerged as the dominant LTI vehicle, with 70 percent of companies using them, compared to 63 percent in 2008. Time-vested restricted stock showed the biggest increase with 48 percent of companies using them, compared to 34 percent in 2008.

The New York Times/Equilar study, which analyzed the pay of 200 chief executives at 199 public companies with revenue of at least $5.78 billion that filed their proxies by March 26, found that the median pay package declined by 13 percent last year, to $7.7 million while the average total pay fell by 15 percent, to $9.5 million. It means that the median compensation package is back to 2004 levels.

The 2009 Directors’ Compensation and Board Practices Report (Membership required.), which was released by The Conference Board earlier this year and written by Kevin Hallock, Matteo Tonello and Judit Torok, reported that the median total compensation in 16 industries remained flat in 2009, declined in two and increased in only four. (That report was based on proxy data collected by Salary.com as of May 2009 and a Conference Board survey of corporate secretaries in May and June 2009.)

- Gary Larkin