Friday, December 09, 2022

As CEO pay gets bigger, so does its complexity

NEW YORK ( Associated Press) — CEO pay is a difficult thing to explain.

within eight- and nine-digit signs Trumpets to CEOs every year, just a tiny fraction of what’s real cash. Last year, only a little over a quarter of the compensation for the typical CEO at an S&P 500 company came from cash salaries or bonuses. At the top of the ranking, cash can make up 1% or less of total compensation.

Instead, the majority of a CEO’s salary comes from grants of stock and grants of stock options, which give the CEO the opportunity to purchase shares of stock at a certain price in the future. This is often by design, as shareholder advocates have pushed for CEO salaries to be more closely aligned with their own returns.

Because of that, exactly how much a CEO is able to capitalize on will ultimately depend on the performance of the company — and the CEO.

“Such progress has been made over the past decade in correcting pay and performance decisions,” said Melissa Burek, a director of Consulting Partners, a consulting firm that helps boards prepare executive pay. “I would say we have a more acute awareness of these issues.”

For grants of stocks and options, the numbers listed in the companies’ annual proxy statements provide an estimate of how much they are worth.

Consider Apple CEO Tim Cook, ranked No. 4 in Associated Press’s salary survey With a package of $98.7 million this year. Out of that only $3 million is salary.

The vast majority came from grants of restricted stock, valued at $82.3 million. It’s the first grant Apple’s board has given Cook since becoming CEO in 2011, but he won’t be able to buy anything with it anytime soon.

The stock grant is made up of two batches. One will be available to cooks in installments over three years starting next April. The second will be available to Cook only if Apple’s stock surpasses certain performance targets in the coming years.

Since Cook debuted as CEO, Apple stock has returned more than 1,100% and the company is the most valuable on Wall Street.

Cook also received a $12 million bonus as Apple’s 33% increase in net sales and 64% growth in operating income over the past fiscal year surpassed previous targets. Apple’s board had the option of adjusting payments up or down based on the company’s performance on environmental, social and governance criteria, known as ESGs. But because Cook’s pay was maximized after meeting performance targets, the board did not do so.

This was the first year Apple’s board considered such ESG issues in determining Cook’s pay, and it joined a small but growing group. They are the latest addition to the often complex formulas that companies have created to determine the salaries of their CEOs. Other considerations from companies include everything from customer satisfaction to worker safety.

Ultimately the people in charge of setting CEO salaries are on the company’s board of directors. Those directors should represent all the shareholders of the company, who have some voice in the process.

At companies’ annual meetings with shareholders, investors regularly have the opportunity to vote in a “say on pay” tally, although the results are advisory only and do not force the board to make any changes. Such votes routinely have more than 90% support, but Wall Street’s biggest investors are paying more attention to the topic.

For example, BlackRock is often one of the largest shareholders of any company due to the size of its index fund. It says it will not vote on “say on pay” and against nominees for the board’s compensation committee when it sees a company has failed to align pay with performance.

Such measures have not put the brakes on CEO compensation, which continues to grow as many boards view their CEOs to be paid the same or better than their leaders as rivals are paying their leaders. The typical package for the S&P 500 CEO jumped 17.1% last year to an average of $14.5 million as stock prices and corporate earnings rose.

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