Paul Hodgson: The surprising reality behind the increases in US CEO pay

A week or so ago my e-mail box was filling up with news stories about US CEO pay decreases. True to form, that did not last long and it has since been filling up with articles about pay increases. As ever, the headline pay levels do not tell the full story. So – following my recent look at declines in US chief executives’ pay – I have examined so-called pay rises for 14 CEOs.
In order to find out what actually happened to pay I looked at the headline figure for total compensation, the figure mandated by the Securities and Exchange Commission, which includes an estimated value for stock options and other stock awards; a guess at what they might be worth when they vest. But I also looked at what I have called “real pay”, what the CEO actually took home in his or her pay packet, including profits from stock options and the value of stock awards that actually paid out. These two figures, in almost all cases, tell a very different story. In fact, the only examples where the two increases are the same are where CEOs received no stock awards at all, and so did not complicate the issue. These included the ubiquitous Warren Buffett, CEO of Berkshire Hathaway, who received an increase from 2012 to 2013 of 14.6% due to a small increase in his modest bonus. The CEO of Publix Supermarkets also received a small increase in cash remuneration, his only form of pay.
For everyone else, the figures were markedly different.
The highest increase in headline pay went to Sprint CEO Daniel Hesse – who received a 313% rise, with virtually every element of pay increasing by substantial amounts. Real pay, however, went up by a mere 129%, driven by an increase in short and long-term cash bonuses. In fact, headline pay went up by more than 100% for a total of five CEOs in the sample, with most increases larger than those for real pay. Indeed, for two CEOs – Jeffrey Sprecher at IntercontinentalExchange and David Nelms at Discover Financial Services – real pay actually fell compared to headline increases of 115% and 113% respectively, both driven by the award of substantially more stock in 2013 than in 2012.The opposite was the case at only one of the top five, for Phebe Novakovic CEO of General Dynamics. Novakovic was only one of two female CEOs of huge defence contractors among the top five increases in headline pay. The other was Marillyn Hewson at Lockheed Martin who received real and headline increases of 77 and 121% respectively. Both these CEOs were promoted in early 2013 to their current positions – and this position change was the main driver of their headline increases in each case. But for Novakovic, the real pay increase was 253%, compared to a headline increase of 176%. The real increase was driven by a significant exercise of options in 2013, options that were granted many years prior to her promotion. Interestingly, given President Obama’s scathing attack on sexual discrimination in pay during his state of the union address, and the fallout regarding the pay of Mary Barra, CEO of embattled General Motors, Novakovic had higher headline pay than her male predecessor, while Hewson received only slightly less.
For only five CEOs in the sample was the increase in real pay higher than that for headline pay. The highest increase in real pay was a massive 334% earned by David Cordani, CEO of insurer Cigna, driven by substantial stock option profits and vested stock. His headline pay barely changed, which was also true of John Martin, CEO of Gilead Sciences, while Martin’s real pay increased by almost 100% because his option profit in 2013 of $159 million was more than double the $77 million profit in 2012.
Two CEOs were picked up as having headline increases in pay only because the Associated Press excludes the figure for increases in pensions and other retirement benefits from headline pay – a practice I wrote about in my piece on decreases – based on the claim that increases in pensions are outside the remuneration committee’s control because they are sometimes driven by changes in interest rates. The two CEOs for whom this was the case were Wendell Weeks, CEO of Corning and James McNerney, CEO of Boeing, yet another defence company in the sample.

Of course, McNerney’s increase led to headlines of “soaring pay”, but his pay only took off [sorry] if you omitted the $6.4 million pension increase he received in 2012. In fact, his real pay increased by more than his headline pay, 44% compared to only 10%, due to much higher value stock vesting in 2013.
The concept of measuring and disclosing real or take-home pay is often criticized – especially by corporations (Cigna would be an obvious candidate here) – because, it is claimed, it is so volatile and depends on the whim of a CEO deciding to exercise a stock option award one year and not the next. But as these figures clearly demonstrate, headline pay can be quite as volatile, depending as it does on the whims of remuneration committees.Both figures are valuable in different ways but it would be helpful if companies disclosed both of them according to standard practices if for no other reason than so I could spend less time on my calculator and more on my keyboard. But if companies want to show investors that pay is related to performance, a better job of explaining the relationship needs to be done than is demonstrated by most of the remuneration reports looked at here. It is easy to see what has happened, it is a lot more difficult to see why.

Paul Hodgson is an independent governance consultant.