Despite “Normalization,” CEO Salaries Remain High

It began across the pond, in the palatial expanse of a concert hall, of all places. Outside the 2,900-seat Royal Festival Hall in southeast London, United Kingdom, groups of protesters—some wearing green Robin Hood-style hats, others donning blue eagle masks and thick garlands of fake cash—gathered under dreary spring skies to vent their fury at Barclays CEO Robert E. Diamond and other leaders of the world’s fourth-largest bank.

Inside the famously Modernist building, a different kind of protest was brewing, courtesy of an equally livid bunch of shareholders who for weeks had been seething over Barclays’ executive pay program. Investors particularly were incensed about the “blank check” mentality of the bank’s top brass—epitomized by their nonchalant payment of Diamond’s 5.75 million pound ($9.2 million) tax bill in 2011, and in their open-ended commitment to cover the Concord, Mass., native’s U.S. taxes during his reign as chief executive. Adding to the ire was the 6.3 million pounds bonus (which included 2.7 million pounds in deferred stock) Diamond received in 2011 despite the bank’s abysmal performance (it reported a 6.6 percent annual return on equity).

To quell the chorus of executive compensation criticism that intensified in early April, Barclays leaders instituted a performance-based pay initiative for Diamond and Finance Director Chris Lucas. To receive their 2011 full deferred stock bonuses, officials reasoned, the company’s return on equity cannot exceed its cost of equity over the next three years. (Lucas already has sacrificed his 2012 bonus to a damaging interest rate rigging probe that ended the careers of both Diamond and Barclays Chairman Marcus Agius. Diamond also has voluntarily relinquished bonuses worth $31 million).

Though the pay-for-performance measure placated most investors, some considered it a half-hearted attempt to curb growing public resentment with the bank’s generous compensation program. It was this contingent of still-steamed stakeholders that launched a worldwide revolt on April 27 against excessive corporate pay. At Barclays’ annual meeting on that steel gray morning, roughly 27 percent of shareholders voted against the company’s annual executive compensation package; 5 percent abstained.

Though the bank’s executive compensation package survived investor scrutiny (68 percent backed the plan), such deep-seated opposition nevertheless sparked a firestorm of rebellion against superfluous executive pay this year.

“The average level of dissent on these issues is about 10 percent,” shareholder advisor Sarah Wilson told BBC News after the Barclays vote. “So I think in terms of shareholders getting their point across, this is going to go down in the books as one of the most serious rebellions that we’ve seen for a long time.”

It also could go down as one of the most professionally lethal revolutions in recent memory. Within weeks of the Barclays vote, the movement—dubbed “Shareholder Spring” by business analysts and financial journalists—had claimed the scalps of several top executives, including those at insurance multinational Aviva plc, pharmaceutical giant AstraZeneca and Trinity Mirror plc, the U.K.’s largest newspaper group. CEOs at Credit Suisse Group (Zurich, Switzerland), WPP (Dublin, Ireland), Citigroup Inc. (New York, N.Y.) and Cairn Energy (Edinburgh, U.K.) survived shareholder revolts at their companies but took significant cuts in salary, while top-tier leaders at Pendragon plc, Inmarsat plc, online sports betting company William Hill, Swiss mining firm Xstrata plc and Zurich-based UBS AG barely escaped with their jobs and salaries intact.

American CEOs fared significantly better in the uprising, weathering the “Shareholder Spring” virtually unscathed. Despite a loud protest outside the Bank of America’s annual meeting in Charlotte, N.C. (where participants staged a mock “Bank vs. America” boxing match with oversized gloves), executive pay in the United States seemed almost immune to investor outrage.

Yet there were some casualties. Shareholders nixed executive pay packages at 11 S&P 500 companies this year, including the $1.25 million base salary and $132 million in stock awards Simon Property Group Inc. managers planned to give Chairman and CEO David E. Simon through 2020, and the $21.3 million Mylan Inc. bigwigs were prepared to pay former CEO Robert J. Coury last year in addition to his $900,000 “discretionary bonus,” according to data from Compensation Advisory Partners, an independent executive compensation consulting firm based in New York, N.Y. The mortality rate spiked significantly at companies outside the S&P 500, however: Compensation Advisory Partners statistics show investors rejected 38 administrative pay plans.

Regardless of their overall success rate, though, the mere presence of these votes illustrates the new power investors have seized since the 2010 adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation brought the most significant changes to U.S. financial regulation since the New Deal reforms of the Great Depression. One of the bill’s provisions requires companies to submit executive compensation plans to non-binding shareholder votes at least once every three years. The votes have had an immediate impact, forcing many corporate boards to explain their executive compensation logic to shareholders. But a certain level of futility also exists in these elections—shareholders get their say on pay only after the numbers have been set by corporate boards. And, since the votes are non-binding, companies are not required to abide by stakeholders’ decisions.

Still, some corporate boards appear to have taken their shareholders’ concerns to heart, particularly on contentious issues like the seven-figure cash bonuses that helped define hyperwealth during the boom. An economy scarred by years of carefree excess and a ruinous recession has prompted most companies to tie executive pay more closely to long-term business performance.

Even so, CEOs still earn a pretty good living, especially those in charge of healthcare firms. Top executives in the field received a median total pay of $10.8 million last year, a 3.8 percent increase
compared with the $10.4 million they earned in 2010, according to an S&P 500 CEO Pay Study conducted by Equilar Inc., an executive compensation data firm based in Redwood City, Calif. Healthcare CEOs earn more than their counterparts in any other industry, including the financial services sector, the technology arena, industrial goods, consumer goods, basic materials and energy, and utilities.

They also earn significantly more money than even the highest-paid medical professionals. Data from the U.S. Department of Labor Statistics indicate that healthcare CEOs earn 156 times more than registered nurses, 60 times more than family/general practitioner physicians, 52 times more than orthodontists and 46 times more than surgeons. The wage gap is considerably wider for the average American worker, who would have to toil for 239 years to accrue the salary healthcare executives make in just 12 months.

Such superstar status, though, generally begets super responsibilities and high expectations. Over the last few years, the bar has been set particularly high in the healthcare sector, where executives have been tasked with overcoming a difficult U.S. regulatory landscape and shrinking reimbursement rates to grow their companies’ bottom lines.

It often takes more than a boost in profit, however, for healthcare executives to qualify for a pay raise. Usually, corporate boards also base compensation on market trends, salaries at rival firms, and in some cases, advancing the company mission.

That confluence of factors likely helped former Johnson & Johnson Chairman and CEO William C. Weldon qualify for a 5.5 percent increase in his base salary last year and a staggering 55 percent jump in his annual performance bonus. The latter increase partially reverses a cut he received in 2010 for fumbles with product recalls (roughly 30 since 2009) and the marketing of powerful schizophrenia drug Risperdal for unapproved uses (the New Brunswick, N.J.-based conglomerate is attempting to resolve a federal investigation into off-label uses of the drug).

The total value of Weldon’s 2011 compensation package fell nearly 6.7 percent to $26.8 million due to a smaller increase in his pension value and non-qualified, deferred-compensation earnings compared with 2010. Performance-based aspects of his compensation increased, however.

“The board believes Mr. Weldon performed well in 2011 to advance our mission as a global leader in healthcare,” J&J board members wrote in a U.S. Securities and Exchange Commission (SEC) proxy statement that explained the firm’s compensation formula. “Mr. Weldon successfully managed our company through a challenging economic environment in 2011, marked by progress in stabilizing the business, while continuing to ensure our long-term success.”

St. Jude Medical Inc. Chairman, President and CEO Daniel J. Starks received similar high marks for leading his company to its most profitable in history. And while he was awarded with a 3 percent salary hike (from $995,000 in 2010 to $1.03 million last year), the value of his total compensation package plummeted 30 percent to $6.6 million, an SEC proxy filing showed.

Part of the reason for such a dramatic decrease in total compensation can be attributed to smaller bonuses and an increase in restricted stock. Equilar’s report found that median total bonus payouts for S&P 500 CEOs fell 6.8 percent to $2 million last year. Bonus payouts represented only 23.9 percent of a CEO’s total compensation package last year, down from 26.5 percent in 2010, while restricted stock became a larger part of the mix, representing more than 40 percent of 2011 executive salaries.

“On average, pay levels have moderated,” Doug Friske, the global head of executive compensation consulting at New York, N.Y.-based human resources consulting firm Towers Watson, told The New York Times earlier this year. “Now we are seeing normalization.”

Maybe for some CEOs but not for everyone. Former Stryker Corp. Chairman, President and CEO Stephen P. MacMillan, for instance, doubled his pay last year despite a reported dalliance with an ex-employee that cost him his job over the winter. MacMillan’s total compensation package rose from $4.7 million in 2010 to $9.5 million in 2011, thanks mostly to hefty hikes in stock (nearly $3.6 million) and options ($3.1 million). The increases represent a marked change from MacMillan’s 2010 decision to defer a pay raise that year due to the “challenging business environment.”

Despite the massive increase in his 2011 compensation package, MacMillan’s earnings still were considerably less than his counterparts. Former 3M Chairman President and CEO George W. Buckley, who retired from the St. Paul, Minn.-based technology company on June 1, earned nearly three times as much as MacMillan, pulling in $25.4 million last year in salary, stock, bonus and options.

The total compensation package for Miles D. White, Chairman, CEO and Director of Abbott Park, Ill.-based Abbott Laboratories fell 6 percent in 2011, but he still earned four times as much as St. Jude’s Starks. White’s base salary rose slightly to $1.9 million, up from $1.893 million in 2010, but he was given less stock and option awards ($9.76 million and $1.83 million respectively, down 10.4 and 37.2 percent from 2010), according to an SEC proxy filing.

At $4.7 million, William H. Kucheman’s total pay last year was about one-sixth of White’s, but it nonetheless represented a 48.3 percent increase compared with his 2010 salary. Kucheman’s base pay jumped 28 percent to $630,754 after he was named interim CEO of Boston Scientific Inc. in October 2011. Besides the hike in base salary, Kucheman’s cash bonus more than doubled and his “other” compensation quadrupled to $1.2 million.

Kucheman’s eventual replacement, Michael F. Mahoney, received $11.7 million in total compensation last year and will receive an annual salary of $900,000 when he assumes the CEO title on Nov. 1. He is entitled to a sign-on bonus of $1.5 million and an additional bonus of $750,000 to be paid within 30 days following his promotion to president and CEO. He also stands to receive $9.5 million in preferred stock.

“American workers are having to make do with less,” Brandon Rees, deputy director of the AFL-CIO office of investment griped to the Times, “while CEOs have never had it better.”

Some CEOs, however, might argue otherwise. Zimmer Holdings Inc. President and CEO David C. Dvorak, Cardinal Health Chairman and CEO George S. Barrett and STERIS Corporation President and CEO Walter M. Rosebrough Jr. fared much better in 2009 and 2010, when their salaries rose by leaps and bounds. Barrett’s total pay package more than quadrupled in 2010 due to generous increases in stock and option awards. Dvorak’s salary skyrocketed 35 percent that year to $9.5 million; in 2011, his pay slipped 3.5 percent to $9.2 million.

Medical Device Chief Executive Officer Salaries, 2011

Source: U.S. Securities and Exchange Commission filings, 2012.

Still, Dvorak’s and Barrett’s lower wages last year are no match for the $1 that Federico Pignatelli earns as the CEO of Biolase Technology Inc., an Irvine, Calif.-based medical and dental product developer. Pignatelli set his annual pay package at $1 and 35,000 shares of company stock when he assumed the role of vice chairman in July 2010, about a month after he was terminated as president.
Pignatelli became CEO later that summer, after shareholders voted out an entire slate of directors and five other board members resigned. Since then, he’s become an advocate of sorts for more
equitable CEO pay.

“It is my firm belief that a CEO’s compensation should be tied only to the financial performance of the company he leads, and not to arbitrary, extravagant and exorbitant numbers decided by an irresponsible and friendly board of directors,” Pignatelli said in prepared remarks. “I invite the many other CEOs of American companies to follow my example.”