When it Comes to CEO Pay: The "Typical" Examples Aren’t So Typical
Originally posted April 2010
In his April, 2010 article for The New York Times Dealbook (“Bargain Rates for a C.E.O.?") Devin Leonard writes: “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.” Leonard continues: “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 [that] the median [CEO] 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."
In the face of our stubborn “Great Recession,” many Americans might have a hard time conceiving of having to take a “pay cut” to a mere $9.5 million. For most people, this is more than they’ll make in a lifetime. But the important and more interesting question not addressed in the article is how representative are these compensation levels of pay at US companies?
Let’s take a closer look at that Equilar research (you can find an interactive table of the 200 companies in the April 3, 2010 New York Times article “Pay at the Top”) and the methodology used to select their study sample of 200 companies. Equilar’s “detailed description of methodology” includes the following as criteria for inclusion in the research: “The data includes information for 200 executives at 199 companies with annual revenue of at least $5.78 billion. To be included in the study, a company must be incorporated in the United States and have filed a preliminary or definitive proxy statement by March 26.” (From April 2, 2010 New York Times article "Calculating the Pay Figures".)
Is the provocative comment around CEO pay “tumbling” to $9 million typical of the broader group of publicly traded companies?
We think not. There are 10,000 publicly traded companies in the US, and probably another 10,000 or so that are private. Pay levels at the egregious “outliers” such as the “Big 5” TARP companies and those in Equilar’s 200 list may look nothing like the other 9,800 public companies. It is at best difficult and at worst dangerous to draw broad conclusions from a sample that is clearly skewed by information totally unrelated to pay (such as the date of proxy submission) and tilted toward companies that would deliver CEOs far higher pay than at a typical US company (which is often the situation found in companies with larger revenue). Maybe these flashy pay levels stir the masses and sell papers – or advertising – but it doesn’t provide intelligent insight into the state of CEO pay.
So where do we think you can get a thoughtful and insightful perspective on the state of CEO and other executive pay? You guessed it – at Grahall. Our Executive Compensation Research Report Series examines the level and mix of executive pay at publicly traded companies. Because we wanted to report on the market as a whole, we followed a methodology that would allow us to reflect the true state of executive pay in US publicly traded companies. Compensation information was collected on a managed sample that accurately reflects the majority of publicly traded companies in the US. The result of our selection process is a group of 1,020 companies with median revenue of $1 billion, nearly 80% lower than Equilar’s Top 200.
Or research asserts that “executive compensation should be considered within a strategic framework that includes many factors such as environment, stakeholders, business strategy, and people strategy. Not only does this more expansive approach provide a rational approach to evaluating executive pay, but when fully considered as part of a pay strategy, it sends the right messages to shareholders and executives.”
As we mentioned in our blog about HP CEO Hurd, Michael Graham wrote, “A guide for determining relative pay and performance is to review an unbiased research study (such as our own Grahall research on executive compensation) and determine the performance percentile of the organization on one of all of the key performance statistics. Then determine the pay percentile that matches that relative performance. If the two percentiles generally match then the reward program is operating in a reasonable zone on a “relative pay for relative performance.” If the two percentiles don’t match (either the relative pay is too high or too low given the relative performance) then it would point to the need for a review of the executive compensation program.”