OUR ANNUAL RANKING OF THE 50 HIGHEST-PAID PUBLIC COMPANY CEOS IN OREGON
By Linda Steffen and Bill Smith
This year’s ranking of the highest-paid public company CEOs in Oregon saw total compensation fall 0.4%, in contrast to last year’s 17.7% increase. The drop was the result of a 33% decline in overall bonus amounts.
In 2005, CEOs on our list made on average $1.8 million, a $7,414 decrease from 2004. On average, there was a $5,084 increase in base pay, up 1.1 %, while bonus amounts fell by $134,807 to $285,275.
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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.
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.
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?
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Bill Smith and Linda Steffen are members of the Northwest Compensation Consulting Practice of Watson Wyatt Worldwide, an international HR consulting firm.