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Continue to highest-paid CEOs list... Total compensation: $91,213,317 Average total compensation: $1,824,266 Average salary: $460,794 Average stock award: $316,040 Average bonus: $285,275 Total bonus awards: $14,263,729 |
Five new companies made the list, while six of the firms from
last year appointed new CEOs. PW Eagle (No. 23) had the
highest-paid CEO out of the new companies, paying Jerry Duke
approximately $1.1 million. Nike’s William Perez was the
highest-paid CEO, earning approximately $16.5 million, the bulk
of which consisted of stock options. Perez has since left the
company.
The value of long-term incentives such as stock options,
restricted stock, performance shares and cash long-term
incentives increased an average of $111,370 (12.6%). Other
compensation averaged $67,032, down $1,762 (2.6%) from
2004.
The mixture of long-term incentives changed in 2005 because of
recent accounting changes to how options are expensed. Options
comprised 65.2% of the long-term equity incentives awarded in
2005, down from 2004 levels, when they accounted for 85.5% of
equity long-term incentives (LTI). The largest change was the
increased use of restricted stock, which rose from 5.8% of LTI
in 2004 to 31.1% of LTI awarded in 2005.
Over the past few years, there has been increasing pressure
for the U.S. Securities and Exchange Commission (SEC) to revise
CEO compensation disclosure rules. Ambiguous SEC rules have
been problematic, allowing for multiple interpretations of the
value of certain equity instruments, such as stock grants and
options. The SEC recognized this issue and in July adopted
changes to the disclosure requirements. The new rules go into
effect for the 2007 proxy season, generally affecting companies
with fiscal years ending on or after Dec. 31, 2006.
In July, the SEC approved new disclosure rules, which included
revamping the Summary Compensation Table. This table will now
capture all of the pieces of compensation in dollars, allowing
for an apples-to-apples comparison against company performance
or across peers. These new rules will help determine whether a
CEO is being compensated appropriately in relation to peers or
company performance.
Under the new SEC disclosure rules, the Summary Compensation
Table will include:
• base salary.
• bonus earned during the period.
• estimated value of full-value stock. grants (restricted
stock and performance shares).
• estimated value of options granted.
• nonstock long-term incentive plan payout.
• all other compensation.
Definitions
Stock options:
the right to buy a predetermined number of shares at a
specific price at a future date. The option holder will
only benefit if the stock price exceeds the price at
grant. For purposes of this analysis, SARs (Stock
Appreciate Rights) are also considered options.
Restricted stock:
shares of stock that are earned only after the passage of
a set amount of time. This definition includes restricted
stock units (RSUs).
Performance
shares: shares of stock that are awarded only
after certain company financial targets (earnings per
share, total revenue, etc.) are met. This includes any
vehicle denominated in company shares that are dependent
on some performance measure to earn the right. FAS123R: Financial Accounting Standards Board requirement dictating that the income statement include the grant-date fair value of stock options and other equity-based compensation issued to employees.
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A CEO’s base-salary disclosure will remain the same under
the new rules, while bonus disclosure will change slightly. If
the bonus earned during the year cannot be measured until after
the proxy filing, new rules require a current report to state
the bonus value and the new total compensation amounts, rather
than waiting until the next proxy filing to disclose the bonus
amount.
New disclosure rules state that stock grants will include any
full-value grant of shares, such as restricted stock or
performance shares. Value of the stock grants will be
calculated by taking the share price at grant and multiplying
this by the number of shares granted (according to FAS123R).
The number of years over which the shares are actually earned
and vested will not affect the value, as the full amount of the
grant will be reported in the year of grant.
Value of vested performance shares will no longer be captured
within the table and only the value of the shares granted will
appear in the year of grant. If these rules had been in place
for the 2005 proxy season, a few CEOs in our list would have
seen different values related to their performance shares.
StanCorp Financial Group’s CEO, Eric Parsons, would have
seen a $384,000 reduction if the new rules applied to the
company’s 2005 proxy disclosure. StanCorp disclosed a
value of $1.49 million for the performance shares that vested
in 2005. Under the new rules, this figure would be replaced
with a $1.06 million disclosure of the target value of
performance shares granted in the year.
New rules would have the opposite effect on Oregon Steel Mills
CEO James Declusin. The company’s Summary Compensation
Table shows no grant or vesting of any equity instrument within
the last reported year.
Under the new rules, the table would include a value of
$624,000 for the granting of performance shares during the
year.
Stock options will be in a separate column of the table under
the new rules and will express the full accounting value at
grant according to FAS123R. The FAS123R value will be
determined using a statistical model tailored for financial
reporting.
As with stock grants, the option value will reflect only
the estimated grant value and will ignore the period over which
the options are earned or if any options are actually earned by
the executive.
Flir Systems CEO Earl Lewis received a grant of 400,000
options, according to the company’s 2005 proxy statement.
The new SEC rules would require valuation of these options,
which would have been $11.2 million in Lewis’ case.
Revised reporting requirements concerning equity grants will
allow for a more consistent valuation, thereby eliminating
guesswork done by investors and list-makers. These new rules
should also eliminate any reporting advantage that an equity
instrument may have previously held.
Rule changes will also create some challenges in regard to the
use of equity in executive compensation. Compensation
committees are charged with making executive compensation
decisions and need to be conscious of the impact of large,
infrequent grants, as opposed to consistent, annual grants.
CEOs receiving one-time grants will see large spikes in total
compensation in the year of those grants. For example, Gerald
Perkel of Planar Systems in 2005 received a grant of 240,000
shares worth roughly $943,000. Large grants such as this are
often one-time grants, and skew CEO compensation figures.
Performance criteria related to performance shares should be
attainable, as grant values will be included in total
compensation in the Summary Compensation Table for the grant
year but cannot be reversed if they don’t vest when
performance goals are missed.
Under the new rules, a separate column will be created to
capture earnings on nonqualified deferred compensation and
increases in pension value.
Changes to salary and bonus payout could have an impact on
pension values. An upward adjustment to a CEO’s
below-market base pay may result in a large increase in pension
value depending on the terms of the pension.
While CEO pay has always been a hot topic, the new SEC
disclosure rules are sure to place increasing shareholder
scrutiny on executive compensation. Institutional investors
have long called for more comprehensive disclosure of all
aspects of executive pay. Now the question becomes: What will
investors do now that they have a clear picture of how much
CEOs are really making?
Continue to highest-paid CEOs
list...
Bill Smith and Linda Steffen
are members of the
Northwest Compensation Consulting Practice of Watson Wyatt
Worldwide, an international HR consulting
firm.
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