Well, it’s finally happened. CEO pay went down.
But only just.
Total annual compensation for the entire universe of U.S. companies covered by The Corporate Library (with available data) declined by a median of just less than one-tenth of a percentage point. The median decrease in total realized compensation (including option profits and vested stock as well as the salary and bonus included in total annual compensation) was slightly greater with a median change of negative 6.38 percent.
But this minimal decline has to be set against the dramatic downturn in the U.S. equity markets in 2008 when the S&P 500 Index fell by more than 37 percent. In this context one might expect CEO compensation to decline, but surely by more 0.08 percent.
And only the most marginal of a majority of CEOs saw a decline in total annual compensation. Just six more CEOs saw a drop in annual compensation than saw an increase or a freeze. One of the reasons for the small size of the decrease is that, while the level of many bonuses declined, though not by as much as performance faltered, boards evidently came up with ways to justify awarding cash incentives.
As we said way back in early April in “A Sneak Peek at Pay,” 2008 pay looked like it was going to be much less affected by the economic downturn than might have been expected. And we said then that we would have to wait until 2010 to see whether the effect on 2009 pay is much greater. The mild economic recovery, however, would seem to indicate that this minimalist decline might be it. Especially if Wall Street’s reaction to the uptick is anything to go by.
CEOs have had many years of benefiting from the whole of the upside of a bull market, whether it was due to their superior management or not, but the whole of the downside of the bear market has been severely mitigated by discretionary bonuses, repriced stock options, mega grants of stock and options, negotiating generous new employment agreements, guaranteed bonuses, and “retention” awards.
Paraphrasing the words of Mark Twain, rumors of the death of CEO pay have been greatly exaggerated. In fact, far from falling on its face – like the economy did – it has barely stumbled in its steady climb. And there is no way that it can even be remotely claimed that these “decreases” in compensation show that pay is closely related to performance, and that former excesses are no longer a problem. Someone recently claimed that even when pay is more closely related to performance it will still not go down.
Well, boy, let me tell you a story. Back in the 90s in the U.K., when stock options were regarded with even more vitriol by shareholders than they are here in the U.S. right now, there was a wholesale movement towards long-term performance-based equity awards. With a discipline seen only in a handful of companies in the U.S., British boards awarded performance shares that would only vest if the executives outperformed at least half of their peers. Guess what? That means that only half of them paid out. This caused consternation throughout the land, but pay went down… for those underperformers.
That’s what performance-related pay means.
Finally, again as was predicted in April’s “A Sneak Peek at Pay”, base salary, thank you very much, has held up very strongly, with a median increase of 4.54 percent. Of course, most decisions about base salary increases for CEOs were made in the last weeks of 2007, when only the investment banks were imploding, so this is less of a surprise than it might have been but I have a suspicion – and it’s just a suspicion mind you – that that just might not have been the experience of most employees….
To purchase a copy of The Corporate Library's 2009 CEO Pay Survey, released today, please visit our online store.
Paul Hodgson — Senior Research Associate
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