October 06, 2009
Executive Compensation Declines in 2008, but Far Less than Decline in Stock Markets
by Robert Kropp
Report from the Corporate Library describes a slight decline in total realized executive
compensation as revolutionary, but an inadequate response to much greater declines in shareowner
Excessive executive compensation, for years a target of socially responsible institutional
investors, finally became a widespread phenomenon in 2009, as the effects of the economic crisis
were felt throughout society. Many executives in the financial sectors were rewarded for engaging
in the overly risky activities that led to the crisis. Following the decisions by the Bush and
Obama administrations to bail out financial firms when the bottom fell out, the public reaction was
A significant aspect of the Troubled Assets Relief Program (TARP)
that provided bailout funds to distressed financial institutions was the requirement that companies
receiving such funds be required to provide annual shareowner votes on executive compensation.
Activist shareowners responded by introducing record numbers of resolutions addressing the issue.
As a result, the so-called "say-on-pay" resolutions gained significantly more support among proxy
voters than ever before.
In June, the Obama Administration proposed legislation that would
authorize the Securities and Exchange Commission (SEC) to require non-binding votes on executive
compensation for all public companies. The proposed legislation would require all public companies
to include in their annual proxy statements a shareowner proposal on executive compensation.
In July, the US House of Representatives passed, by a vote of 237 to 185, the Corporate and
Financial Institution Compensation Fairness Act of 2009 (H.R. 3269), which would "amend the
Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive
compensation and to prevent perverse incentives in the compensation practices of financial
institutions." The House vote occurred shortly after Goldman Sachs, a TARP recipient, prepared to
disburse more than $6.6 billion in executive compensation and bonuses for the third quarter of 2009
The bill currently awaits Senate approval, and organizations such as ShareOwners.org, which describes itself as
"a voice for the average retail investor, who has not been heard in the corporate board room,
Washington policy debates, or by the decision-makers in large financial institutions, including
mutual funds," has stepped up public calls for support of passage of the legislation.
light of public reaction and subsequent efforts to address the startling disparities between
executive compensation and corporate performance, the question of what unilateral steps US
companies are taking to mitigate such disparities is of considerable interest. The answer,
according to a recently published report by the Corporate Library, strongly suggests that the
"business-as-usual" approach to executive compensation and bonuses taken by Goldman Sachs in July
is far from unique.
The 2009 CEO Pay Survey, the most recent of the annual reports on
executive compensation that the Corporate Library has issued since 2002, bases its analysis on the
2008 compensation data of more than 2,000 companies listed on US-based exchanges. It found that
while approximately 75% of CEOs received increases in their base salaries in 2008, the total annual
compensation of just over half declined, and the realized compensation of more than 56% declined,
compared to 40% in 2007.
The report defines total annual compensation as base salary plus
bonuses, and realized compensation as total annual compensation, "plus value realized on vesting of
shares, option value realized, pension/non-qualified deferred compensation earnings and pension pay
in the latest year."
Although 2008 represents the first year in which CEO compensation was
found to decline—a development that the report describes as "revolutionary"—the decline, according
to the report, in no way matched "the magnitude of decline in the markets over the same period.
This suggests that while the downturn has affected pay, the link between pay and performance
The report found that total annual compensation declined by less than
one-tenth of a percentage point, while total realized compensation decreased by 6.4%.
During the same 2008 time period, the S&P 500 Index declined by more than 37%.
webinar entitled Big Pay, Poor
Performance: The 2009 CEO Pay Survey, Paul Hodgson, Senior Research Associate at the Corporate
Library, said, "CEOs and compensation committees indicated to us that 2009 may see more significant
declines in base salaries, and more base salary freezes. But that was early in the year, and things
have changed. Our predictions that base salaries might go down are on shakier ground now,
especially on Wall Street."
Asked about the salaries of CEOs on Wall Street in 2008,
Hodgson said, "They went down, but not as significantly as the declines in financial performance of
their companies." The report found that the average annual compensation for the CEOs of Goldman
Sachs, JPMorgan Chase, Ameriprise Financial, and the Bank of New York Mellon was about $1.6 million
in 2008. In 2007, CEOs at each of the financial companies earned more than $10 million in annual
Greg Ruhle, Associate Research Analyst at the Corporate Library, noted that
TARP restrictions contributed to the sharp decline in compensation for CEOs in the financial
The report also found that seven of the top ten most highly compensated CEOs
of 2008 were petroleum executives. The list was led by Stephen A. Schwarzman of the Blackstone
Group, a financial services company, whose total realized compensation in 2008 exceeded $700
The webinar included a list of the five highest paid worst performers among CEOs,
the criteria for which included total realized compensation of more than $30 million,
underperformance of both peers and the S&P 500 over the last five years, and tenure as CEO of more
than five years. The worst performers included Michael Jeffries of Abercrombie & Fitch, J.W.
Stewart of BJ Services, Brian Roberts of Comcast, John Faraci of International Paper, and Eugene
Isenberg of Nabors Industries.