Paul Hodgson: the surprising reality about the declines in US chief executives’ pay

It all started with Coca-Cola, though no one seemed to be able to decide if the CEO’s pay had gone down by 33% or 16% (neither, as it happens). Then there was Sprint, then Chrysler, Heinz, GE, IBM, eBay. Pretty soon my e-mail inbox was filling up with news stories about declining CEO pay. Poor, hard done-by US CEOs, I thought. But then I began to suspect that these stories – it’s much more newsworthy to report a decline in a CEO’s pay package than a 3.9% increase – might not reflect reality. After all, while the US stock market was hardly bullish last year, it wasn’t entirely bearish either.
So I checked a few of those figures.
Let’s start with Coca-Cola. Headline figures show that pay declined by 32% if you include the increase in pension, and 17% if you exclude it. The increase in pension is often excluded from what is called SEC Total Compensation (it’s the total figure the SEC mandates) because it does not represent decisions made by the remuneration committee. Well, not this remuneration committee, perhaps, but the accrual rates for the pension were certainly set by a Coca-Cola remuneration committee, at some point, and CEO Muhtar Kent’s pension increased by about $8 or $9m in two of the last three years disclosed, and that’s just the increase, his total pension is worth around $33.5m, so even if his pay did go down, his financial security is… well, secure. His pension did not increase by as much in 2013, and his cash bonus declined. Everything else basically stayed the same, thus the decrease. Except that in reality, the decrease was much, much larger. Twice as large in fact.
The headline figure includes an estimated value for stock options and other stock awards; a guess at what they might be worth when they vest. For this reason they can be a good indication of what the board thinks of a CEO in any particular year. In this case, the board seems to think no differently of him since the estimated value of these awards in 2012 and 2013 is virtually identical. But what shareholders are actually interested in is what Kent really made in 2013 compared to 2012 and whether this was tied to performance in any way.In this instance, it actually was. In 2012, in addition to salary bonus and that pension, Kent vested in around $4m worth of performance stock units (PSUs) because the target of compound annual growth in economic profit (which I happen to think is one of the best indicators of long-term value growth around) was exceeded. In 2013, the company missed the threshold and therefore no PSUs vested. Similarly, although performance against the annual financial metrics was satisfactory, the remuneration committee exercised its negative discretion and reduced bonuses from the maximum fairly substantially for all executives because of other factors. Interestingly, one of the other factors considered is sustainability. Coke aims to “embed sustainability-minded innovations into every aspect of its business, including sourcing ingredients, increasing beverage options, aspiring to be water neutral and recovering packages for recycling.”
So that’s Coke, what about all the rest? At IBM, new CEO Virginia Rometty earned less because of missing targets for the annual bonus, which was worth $4m in 2012. But the decrease was not 14%, but 46%, because last year, her first as CEO, she vested in $15.8m of performance and restricted stock units, while this year she vested in about half that.
And GE? Immelt’s real pay fell by 53.5% – not the 23.4% widely reported because his cash bonus dropped from $12m to a mere $2.4m as in 2012, his cash bonus included a long-term element. In this case, helpfully, GE includes a real pay figure, which it refers to as “W-2 realized pay”, after the US tax form issued by employers to employees summarising their annual pay. But despite including three separate links to an “explanation” as to how this is calculated in the remuneration report, when shareholders reach the final link they are told to go to the “helpful resources” section of the company website which is incredibly unhelpful.
In almost every other reported decrease, the real decrease was much, much larger. In many cases twice as much or more.

The two exceptions were eBay, and pizza parlour Papa John’s. There has been much trumpeting in the press about the 53% drop in eBay CEO John Donahoe’s pay, probably to gain governance kudos in the proxy battle with Carl Icahn. However, due to vastly more profitable stock and stock options in 2013, his real pay more than doubled. And while the change to Papa John CEO John Schnatter’s headline pay was a minimal decrease, his real pay more than doubled because of stock option exercises and other vesting stock.
With the majority of these companies in mind, you might begin to wonder why they aren’t doing more in the push to change the way the SEC requires pay to be disclosed – realized pay is one of the options. If companies disclosed what actually happened to pay, then the publicity surrounding these decreases would garner even more benefit to the companies. You might also be tempted to claim that the link between performance and pay was actually working. Well, working at some of these companies, anyway.But the corollary is likely also true; that any real increase could turn out to be twice as high as the headline increase, and that’s a completely different kind of publicity to have to deal with.
On Wall St, for example, a very different story is being played out. There, despite billions of dollars in fines, all bank CEOs have seen increases in their headline pay – substantial increases in most cases. James Dimon at JPMorgan saw a headline rise of 74%, Morgan Stanley’s CEO James Gorman would seem to have received an increase of around 45%, Lloyd Blankfein, CEO of Goldman Sachs, saw a rise of around 10%, and Michael Corbat at Citigroup had a rise of around 42%. Citigroup is the only one of these banks to have filed its proxy statement and therefore the only bank, so far, where we can check that the increase was a real one or not. In fact, the increase in Corbat’s realized pay in 2013 is only 25%; less than the headline increase, though still substantial.

Paul Hodgson is an independent governance analyst.