CEO pay soars while workers' pay stalls

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The heads of the nation’s top companies got the biggest raises in recent memory last year after taking a hiatus during the recession.

At a time most employees can barely remember their last substantial raise, median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels, a USA TODAY analysis of data from GovernanceMetrics International found. Workers in private industry, meanwhile, saw their compensation grow just 2.1% in the 12 months ended December 2010, says the Bureau of Labor Statistics.

Two years of scaling back amid tough economic times proved temporary as three-quarters of CEOs got raises in 2010 — and, in many cases, the increases were substantial.

The sizable pay hikes came even though the economy’s recovery remains frail, unemployment is high and corporate profits last year were roughly flat, up 1.5%, from where they were in 2007 when the stock market peaked.

Says Kevin Murphy, professor of finance at the University of Southern California, “We have the recipe for controversy over CEO pay: big increases in CEO pay that show up following run-ups in stock prices coupled with high unemployment rates.”

Taking a look at trends show that in 2010, CEO pay:

•Climbed back toward prerecession levels. Median CEO pay in 2010 was $9.0 million, based on 158 Standard & Poor’s 500 index companies with the same CEO serving all of 2009 and 2010 that have reported CEO pay, according to the USA TODAY analysis of data from GovernanceMetrics based on proxies that have already been filed.

The median amount that CEOs actually took home — which includes salary and cash bonuses, as well as stock and options awarded in previous years that vested or were cashed in — was $8.6 million. That’s the most CEOs have pulled down since the median of $9.2 million in 2007, according to GovernanceMetrics’ analysis of S&P 500 companies.

•Bounced back in a big way. CEOs’ 2010 median pay jumped 27% from $7.1 million in 2009, one of the largest increases in recent history. The jump was a complete reversal from 2009 and 2008, when most CEOs took a pay haircut. The growth in CEOs’ median pay topped the median 21% total return that investors would have collected if they owned shares of the companies in the compensation analysis.

•Delivered big bonuses. CEOs received a median of $2.2 million from bonuses, up 47% from $1.5 million in 2009. And that comes on top of a healthy 7% boost to the median salary, which is now $1.1 million.

•Set up for an even bigger payday in the future. CEOs saw the estimated future value of stock and options awards take off in 2010, with the median value gaining 32% to $5.6 million. These stock and options, many of which were granted when stock prices were much lower than they are now, stand to create a shower of wealth when CEOs cash them in.

Tough to swallow while jobless struggle

The big increases in executive compensation are difficult for workers to swallow, given that many Americans are struggling just trying to find a job or make ends meet, says Alan Johnson of executive pay consulting firm Johnson Associates. “The fact this makes us all squirm is true.”

Still, part of the massive increase in CEO pay is a distortion, Johnson says. Because CEO pay fell the past two years, the recovery looks more dramatic. “If you drop a lot, when you come back, it’s a big percentage.”

And even though CEO pay is increasing, it’s still below 2007 levels. “Given the years of pay decreasing, there’s a certain amount of catch-up to get pay back to where it was in 2007,” says Paul Hodgson of GovernanceMetrics.

Also, the rising stock market was one of the biggest drivers of CEOs’ hefty windfall in 2010, says William Lazonick, professor at the University of Massachusetts. Given the fact the S&P 500 jumped 12.8% in 2010 and capped a two-year gain of 39.3%, shares and options many companies awarded their CEOs wound up being very valuable. Many CEOs receive roughly the same number of shares or options each year, so when the value of those shares rises, so do pay packages, says Richard Wagner of Strategic Compensation Research Associates.

Gains come from cost cuts and layoffs

Yet the fact that CEOs’ pay is rising along with stock prices underscores the disconnect between pay and companies’ true underlying performance, Lazonick says. While companies in the S&P 500 boosted profit 47% last year, much of that was due to cost-cutting and layoffs, not from the creation of businesses and growth, Lazonick says. Revenue, a gauge of the money flowing into businesses for selling goods and services, grew at a much slower pace than profit — and ended the year up just 7%.

Median pay, of course, just tells you the midpoint where half of CEOs earned more and the other half less. Focusing on that obscures what have been some of the biggest paydays received by CEOs this year:

•The highest paid of the CEOs analyzed by USA TODAY was Philippe Dauman, CEO of Viacom. Dauman was paid $84.5 million, which was not only a 149% increase from 2009, but 11% greater than the No. 2 on the list, Ray Irani of Occidental Petroleum. Viacom’s board awarded Dauman the pay, including the “significant one-time equity awards” for several reasons, including “Mr. Dauman’s leadership and performance during his tenure (he’s been CEO since 2006) at Viacom, and particularly during one of the most difficult economic environments in our history,” according to the company’s regulatory filing.

•Irani, long known for topping CEO pay lists, nearly did it again with his $76.1 million in total pay. The company, though, makes a point in the regulatory filing that 75% of the pay shown in the 2010 total is for payouts that were granted in 2007 but paid in 2010 and required to be reported for 2010 by accounting rules. Irani will retire this year amid intense shareholder discontent over his pay package.

Most CEOs with the largest pay packages also had strong stock gains. But not all. William Weldon at Johnson & Johnson collected $21.6 million even though shareholders had a negative return of 0.5%. Weldon’s pay, though, was down 5.2% from the previous year.

And in what could be a hint of a big payday to come, some CEOs are starting to cash in options they received in years when stock values were decimated. John Martin, CEO of Gilead Sciences, cashed in $35.8 million in options previously awarded, outstripping the $14.2 million he received in total pay in 2010.

http://www.usatoday.com/money/companies/management/2011-03-31-ceo-pay-2010.htm