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April 29, 2010
CEO Pay Declines for Second Year in a Row
    by Robert Kropp

A preliminary report by The Corporate Library finds that compensation for CEOs of the largest companies has declined the most, largely due to the poor stock market.

Executive compensation has been a central corporate governance issue for shareowner activists and responsible investors for several years, and in the wake of the financial crisis and the subsequent TARP bailout the issue is now a preoccupation of mainstream investors as well. According to the 2010 Proxy Season Preview published earlier this month by As You Sow, more than 50 shareowner resolutions addressing executive compensation, or say-on-pay as they are popularly known, have been filed this year.

In light of the attention being given to the issue, the data compiled thus far this year on CEO compensation by
The Corporate Library, although preliminary, has yielded some interesting findings. The data, which has been gathered into a report entitled The Corporate Library’s Preliminary 2010 CEO Pay Survey, reveals that “For the second year in a row, there has been a decrease in the annual compensation of CEOs.”

Furthermore, according to the report, “Since we began conducting The Corporate Library’s annual survey of CEO pay in 2002, we have not seen a median ‘all CEOs’ total realized compensation figure as low as the one found in this preliminary survey for the 2010 proxy season.”

And as Paul Hodgson, Senior Research Associate at The Corporate Library and co-author of the report, told, “We may have to revise this finding when we complete our full survey, but we noticed that all of the compensation maps measuring perquisites and other bonuses actually went down this year, which is the first time this has happened since added disclosures on compensation were required by the SEC back in 2006.”

The largest decrease in compensation was found among CEOs of the large companies listed in the S&P 500. On average, their annual pay decreased by more than 11%. Annual compensation is defined by The Corporate Library as including base salary, bonuses, non-equity incentives, and perquisites and benefits.

When total realized compensation is analyzed, the decline in CEO pay at the largest companies is even greater. When the exercising of options and the vesting of other equity, as well as changes in pension and retirement benefits, are added to annual compensation, the decline reaches 15.34%.

Hodgson explained, “The S&P 500 was certainly the group where pay decreased the most, because the larger portion of S&P 500 CEO compensation packages is made up of equity. Last year, many stock options were underwater, where the exercise price was actually higher than the market price.”

The S&P 500 CEOs whose annual compensation declined the most last year include David M. Cote of Honeywell International, Vikram S. Pandit of Citigroup, and Dinesh C. Paliwal of electronics company Harman International.

The highest paid CEOs in the survey were Lawrence Ellison of Oracle and—“surprisingly,” according to the report, “given the current housing crisis”—Robert Toll of house builder Toll Brothers. “In a startling break with tradition,” the report continued, “and a direct result of the economic crisis’ effect on the compensation of financial services executives, the highest paid investment bank CEO was at number 49. As little as two years ago there were four bank CEOs in the top 15 most highly paid CEOs out of 3,242.”

Which is not to say that CEOs at the largest financial institutions are not still extremely well-compensated. According to the
AFL-CIO, total compensation in 2009 for the CEOs of the six largest banks that received TARP bailout funds ranged from a low of $9,274,494 for James Dimon of JPMorgan Chase to a high of $29,930,431 for Thomas Montag of Bank of America.

Over the years, The Corporate Library has expanded its annual CEO compensation report to include mid- and small-cap companies as well. Hodgson said, “We used to cover the S&P 500, and now we cover the Russell 3000 and an additional 200 companies that tend to move in and out of that index.”

CEOs of S&P mid- and small-cap companies saw much less of a decline in their annual compensation. In the case of mid-caps, the decline was less than 0.1%, and for the small-caps it was 1.16%. When total realized compensation for mid-cap CEOs is analyzed, however, the decline is 12.52%, close to that of the large-cap CEOs. For small-cap CEOs, total realized compensation declined by only 2.8%.

The complete report will be published later this year, after the proxy season is finished.


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