LAST year may have been unnerving for chief executives accustomed to all of the familiar ornaments of corporate life: eight-figure pay packages, corporate jets, memberships in select clubs, and on and on.
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As the country settled into the worst recession in decades, the government became unusually involved in corporate pay practices. The Obama administration appointed Kenneth Feinberg — a k a the pay czar — to scrutinize compensation at corporate behemoths like Citigroup, the American International Group, Bank of America, General Motors and Chrysler, all of which taxpayers propped up with billions upon billions of dollars in bailouts.
Mr. Feinberg came up with his own blueprint for compensation boundaries — and noted that its strictures could be applied not only to corporate wards of the state under the Troubled Asset Relief Program but also in myriad other boardrooms.
So if you were the typical American C.E.O., you may have found some of the pay czar’s prescriptions startling. For instance, he thinks you should pay golf club dues out of your own pocket. He also would like you to take less of your pay in cash and more of it in stock. In fact, the White House set a limit on how much cash top executives of the biggest TARP companies could get as part of their annual compensation: $500,000 a year. That sum that may seem princely to the average American worker but, alas, doesn’t buy much for a crowd used to Fifth Avenue triplexes, third and fourth homes, top-drawer health care and lavish private schools for their children.
Mr. Feinberg’s proposed remedies weren’t the only compensation-related issues that might have disturbed an executive’s sleep. The Securities and Exchange Commission ordered companies to disclose more information about compensation, which invariably stirs up shareholders. And the Federal Reserve also announced its own sweeping review of banker pay.
On Capitol Hill, meanwhile, Democratic allies of the White House are mulling reforms that would require public companies to give shareholders an annual “say on pay” vote. While the measure, if enacted, would be nonbinding, it would still force C.E.O.’s to publicly debate at annual meetings all aspects of sumptuous pay packages.
In short, the long-running feud between shareholder advocates and corporations over executive pay will offer an emotional flashpoint as President Obama turns his attention from health care to financial reform.
Business representatives in Washington are pushing back. “We are not taking issue with the pay master’s approach to those companies that are still receiving TARP funds,” says John J. Castellani, president of the Business Roundtable, an association of chief executives whose board includes highly paid C.E.O.’s. “But to apply that to every public company, we think, is not advisable and out of bounds.”
Even so, shareholder advocates say they see some companies recrafting pay policies to please the government and to get in front of any coming changes.
“Boardrooms correctly read the pay czar’s action as a real signal to corporate America of public dismay over excessive pay,” says Stephen M. Davis, a senior fellow at the Millstein Center for Corporate Governance and Performance at Yale. “It was a warning that if they didn’t get their act together that further intervention by the government was perhaps inevitable.”
But it’s probably more accurate to say that companies are sending a mixed message about compensation: we will follow some of Washington’s pay recommendations, but not all of them. At least, that’s the trend in the data in this season’s raft of corporate proxy filings.
Equilar, a compensation research firm in Redwood Shores, Calif., recently prepared a report for The New York Times analyzing the pay of 200 chief executives at 199 public companies with revenue of at least $5.78 billion that filed their proxies by March 26. (Only 199 companies are on the list because Motorola has two co-C.E.O.’s.)
Equilar says the median pay package — the midpoint where half of the compensation packages on that list are lower and half are higher — declined by 13 percent last year, to $7.7 million. The average total pay tumbled by 15 percent, to $9.5 million.
It was the second consecutive year that C.E.O. pay slipped, sending the median compensation package back to about where it was in 2004 and shaving off much of the increase that occurred when the economy went into overdrive and executive pay soared along with it.
Two years ago, C.E.O. compensation dropped because cash bonuses were decimated by the financial crisis. The decline last year can be largely attributed to the hammering of stock and option awards granted early in 2009, when stock prices were at their nadir. As a result, Equilar says, the median values of C.E.O. stock and option awards were down by 19 percent and 28 percent.
Of course, some chief executives have seen the value of their equity grants soar along with the stock market. This angers some shareholder advocates who say that these C.E.O.’s did little to earn their paper wealth. Still, it may be years before executives are able to actually reap the proceeds of those grants, because of vesting requirements.
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