OCTOBER 2007: TOP CEO PAY
UNRAVELING CEO PAY
The Top 10
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1
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Mark G. Parker
NIKE
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$11,485,109
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2
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Don R. Kania
FEI
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$7,949,917
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3
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Mark Donegan
PRECISION CASTPARTS CORP.
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$7,638,197
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4
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John D. Carter
SCHNITZER STEEL IND.
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$5,421,676
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5
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Andrew A. Wiederhorn
FOG CUTTER CAPITAL GROUP
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$4,999,079
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6
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Eric E. Parsons
STANCORP FINANCIAL GROUP
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$3,959,701
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7
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Walden C. Rhines
MENTOR GRAPHICS CORP.
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$3,943,553
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8
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Nicholas Konidaris
ELECTRO SCIENTIFIC IND.
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$3,404,033
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9
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Earl R. Lewis
FLIR SYSTEMS
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$3,004,814
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10
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Richard H. Wills
TEKTRONIX
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$2,849,134
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It’s not only about how much, but why.
By Linda Steffen and Bill
Smith
As a result of mounting investor pressure in recent years, the
U.S. Securities and Exchange Commission has changed the
requirements regarding the way companies disclose and value
various elements of executive compensation in their annual
proxy statements that go to all shareholders.
The SEC changes are an attempt to force companies to better
disclose not only how much they are compensating CEOs and other
top executives but also the process and logic behind their pay
decisions. Of the companies represented in this year’s
ranking of the highest-paid public-company CEOs in Oregon, 34
had fiscal year-ends after Dec. 15, 2006, and thus were subject
to the new disclosure rules.
As was the case with last year’s Top 50 list, we
continue to rank CEOs by summing the following components of
compensation: base salary, actual bonus earned, the value
associated with the opportunity of earning a long-term
incentive and all other compensation.
Oregon’s highest-paid CEO on this year’s list is
Mark Parker of Nike. His total compensation of $11.5 million
included restricted stock and option awards totaling roughly
$8.8 million. Parker was not on our list last year, as he was
appointed Nike’s president and CEO in January 2006.
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CEO PAYLIST BY
THE NUMBERS
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TOTAL COMPENSATION:
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$94,050,369
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AVERAGE TOTAL COMPENSATION:
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$1,881,007
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AVERAGE SALARY:
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$460,221
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AVERAGE STOCK AWARD:
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$282,954
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AVERAGE BONUS:
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$456,081
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TOTAL BONUS AWARDS:
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$22,804,032
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This year’s Top 50 highest-paid CEOs in Oregon saw a
modest increase in their average total compensation. On
average, total CEO compensation was $1,881,007, up $59,777 from
2005. The average base salary decreased by a relatively small
amount. While the average bonus increased by $170,806,
decreases in stock grants and stock option awards respectively
tempered the overall increase. Five executives received bonuses
of more than $1 million this year, compared to last
year’s ranking, when only two executives received bonuses
of more than $1 million.
Pay for performance: The new disclosure requirements are
intended to help investors evaluate the connection between
executive pay and company financial performance. Companies must
now disclose the measures, expected levels of performance, the
degree of difficulty associated with meeting performance goals,
and the logic behind awards.
Bonuses: Twenty-two
companies reported target bonuses, with the median CEO bonus
target (as a percentage of base salary) of 78%.
Equity Summary
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EQUITY INSTRUMENT
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% IN 2006
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% IN 2007
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Option awards
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65%
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52%
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Restricted stock
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31%
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36%
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Performance shares
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4%
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12%
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Total
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100%
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100%
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New reporting requirements enable investors to compare the
actual bonus earned for the year with what the CEOs were
targeted to receive for expected performance. Twenty companies
provided information that allowed for a calculation of a bonus
achievement rate (actual bonus amount divided by target bonus
amount). By comparing a company’s bonus achievement rate
to its total return to shareholders for the year, investors can
better assess the link between pay and performance.
Breakout of total compensation
Compensation
Mix
The above chart illustrates the role of
the various elements of compensation to the
Top 50 CEOs. Average movement in the broad
categories of CEO pay was as follows:
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Average base salary down $573 (-0.1%)
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Average bonus up $170,806 (37.5%)
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Average long-term incentive (LTI) down $111,602
(-12.4%)
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In theory, there should be a positive correlation between bonus
achievement and total shareholder return — companies with
a CEO who’s earned more than their targeted award would
be expected to have a positive total shareholder return. Most
companies in Oregon showed the expected correlation between the
pay and total shareholder return.
Long-term incentives:
Long-term incentive equity grants continue to shift away from
stock options and have moved to performance shares, restricted
stock and cash-based long-term incentive programs instead. Even
with this change, stock options continue to represent over half
of the value granted in equity-based programs. Both restricted
stock and performance shares displayed gains of 5%-6% of the
total equity granted.
Other disclosure
changes: The new disclosure regulations required
additional pieces of information to be disclosed or elaborated
upon. While the items that follow are noteworthy, they did not
impact our calculations for 2006.
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Deferred compensation. Although summary compensation must now
include any above-market interest earned on deferred
compensation, this amount is not included in the ranking
calculation. Companies must report contributions and ending
balances for deferred compensation for each executive in a
separate table. Often, long-tenured executives will have
large deferred-compensation balances. Such balances represent
a type of tax-sheltered savings for the executive as well as
a loan to the company from the executive.
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Pensions. Under the new reporting requirements, each company
must provide an actuarial estimate of the current value of
all defined benefit pension programs. This amount is not
included in our ranking calculation because of the various
uncontrollable factors (age, years of service and other
assumptions used for the calculation) that may trigger a
substantial increase or decrease in the value of the pension
from year to year.
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Termination scenarios. To inform investors of any potential
compensation that an executive may receive in the future
under existing agreements, the company must disclose payment
under all possible termination scenarios. Executives often
receive payments upon leaving the company, including:
voluntary termination, involuntary termination without cause,
change in control, death or disability. Termination scenario
disclosure allows an investor to determine if a company has
golden parachute arrangements and to see the potential payout
levels upon termination.
Although the new disclosure rules have required companies to
provide broader and deeper data, the greatest challenge
investors face is finding meaningful ways to interpret this
information and form meaningful conclusions not only about how
much is paid but also about why various programs are used.
Linda Steffen and Bill Smith
are members of the Northwest Compensation Consulting Practice
of Watson Wyatt Worldwide, an international human resource
consulting firm.
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E-mail feedback@oregonbusiness.com
