CEOs Widen Gap Over Rest of Us

How much is too much when it comes to pay for corporate executives?

That's the underlying question as we learn how much chief executive officers and other top execs of public companies made last year in salary, bonus, perks and stock.

For years, shareholders have been seeking a say in what top corporate executives earn, and they now have that right under new federal legislation.

It requires all publicly traded companies to submit executive compensation to shareholder votes and to disclose the ratio between the CEO's pay and that of their average worker.

The so-called say-to-pay votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act are non-binding, but they do give investors a voice in executive pay at a time when the gap between compensation for CEOs and other employees continues to grow.

Although that voice is advisory, it has already led some companies — including such biggies as Walt Disney Co. and General Electric Co. — to change some terms of their compensation packages, said Tim Smith, former executive director of the Interfaith Center on Corporate Responsibility in New York.

In a filing with the Securities and Exchange Commission, GE said it had put new conditions on stock options granted to CEO Jeffrey Immelt after some shareholders "expressed the view that additional performance conditions should be applied."

And Disney said it dropped a tax benefit from employment agreements for four top executives based on investor feedback.

The new rules also are having an effect on compensation committees, the independent members of the boards of directors who determine CEO pay packages, said Bruce Ellig, an adviser to corporate boards and author of "The Complete Guide to Executive Compensation."

"Shareholders are going after them," Ellig said by phone.

That's especially true of perquisites, he said. Shareholders don't mind benefits related to business, such as use of the company plane, but they are objecting to having the company pay for personal expenses such as country club memberships or tax payments — perks "that pay for position, not performance."

CEO salaries are determined mostly by position and peer comparisons — everyone seems to want to be in the upper quartile, Smith said.

But performance, as measured by revenue and stock performance, are the primary factors in determining big chunks of the compensation package, and even with greater transparency and investor influence, they continue to grow.

CEOs at 20 of the 32 companies in The Record survey took home more money in their most recent fiscal year than they did a year earlier, and in almost every case, the difference was stock awards and options.

All but nine of the 32 made more than $1 million, led by Francisco D'Souza, CEO of Cognizant Technology Solutions Corp. in Teaneck, who made $25 million — almost all of it from stock options ($13.9 million) and stock awards ($9.8 million) as Cognizant's stock gained more than 61 percent in value.

D'Souza's salary increased by less than 4 percent, and that is not unusual as CEOs at many companies — from the Fortune 500 to small public entities included in The Record's 16th annual report on CEO pay — have received small increase or had their base pay frozen.

In that way, the CEOs have something in common with their rank-and-file workers.

But while salary is the major part of most workers' pay, it is just the starting point for top execs, noted Paul Dorf, managing director of Compensation Resources, Inc., an Upper Saddle River-based consulting company.

The big money comes from stock — through outright awards or options — and "incentive compensation," the new term for bonuses. And that's where the gap between boss and employee continues to grow, Dorf said.

A report issued last week by Equilar, an executive compensation data firm, put the median compensation in 2010 for S&P 500 CEOs at $9 million, up 28.2 percent from 2009. Salaries rose only 5 percent, but bonuses increased by 43 percent, stock awards were up 39 percent and stock options rose by 16 percent.

An earlier analysis by the AFL-CIO put the average compensation package of CEOs at 299 of the nation's biggest public companies at $11.4 million last year, an increase of 23 percent from 2009. About half came from stock awards and options.

With either numbers, it's a lot more than the average worker made at the end of last year: $779.76 a week — or $40,548 for the year — according to the Bureau of Labor Statistics.

There has always been a gap between CEO and workers, but never to the extent we've seen in recent years. Back in 1965, CEOs in major American companies earned 24 times more than an average worker, and the ratio grew to 71 by 1989.

Triple-digit ratios started to appear in the mid-1990s, and thanks largely to stock awards and options, the spread has grown, Dorf said.

And that disparity is going to continue, because many stock awards and options were granted when stock was depressed, he said.

But prices have risen steadily over the past two years and CEOs will enjoy a windfall when they finally sell their stock or exercise their options.

There have been periodic calls for closing the compensation gap between the CEO and workers, but it's more complicated than it might seem, Ellig said.

Do you include stock options awarded but not exercised, as is done on Securities and Exchange Commission filings and some CEO compensation tables? Or do you ignore options until they are exercised, as The Record does in our annual review? Likewise, how do you deal with part-time and minimum-wage workers who make up a large part of the retail work force?

"I can make the number anything you want," Ellig said.

A bigger issue could be the law of unintended consequences.

If people start paying too much attention to earning ratios, companies could start cutting low-paying jobs or shipping work offshore to improve their numbers, he said. "Top management is not going to decrease their compensation."

Smith, who is senior vice president of Walden Asset Management, a Boston-based investment company that is active on social and governance issues, dismisses that argument.

"I think that's silly," he said. Pay ratios merely provide one more factor for each compensation committee to look at to decide on executive pay.