Some of North Carolina’s biggest companies gave their CEOs higher pay last year even as their shareholders saw lower returns.
An Observer analysis of CEO compensation at North Carolina’s 50 largest publicly traded companies found that a third gave their top executives higher compensation in fiscal 2011 despite negative returns for shareholders. At the same time, nine CEOs whose companies had positive returns for shareholders actually saw lower pay.
The findings show CEO pay doesn’t always track shareholder return, even as critics call for stronger links between pay and performance. Charles Elson, head of the University of Delaware’s Weinberg Center for Corporate Governance, said boards that don’t effectively tie pay to performance risk backlash from the public and from their own workers.
“I think it’s a disaster,” Elson said. “It destroys public confidence; it destroys employee morale. It’s very corrosive to the organizations.”
Companies have a variety of explanations for the apparent disconnect.
CEO pay packages are complicated, with percentages of each component tied to different measures, such as profit or revenue, not just returns for shareholders. Companies say they don’t want their CEOs focused relentlessly on the stock price and say they assess executive performance over multiyear periods.
But one of the nation’s largest shareholder advisory firms, Institutional Shareholder Services, says shareholder return is the single best yardstick by which to judge executive performance, since it tells investors how much they’re making or losing. The company looks at shareholder return over one year, as well as multiyear periods.
“Executive pay-for-performance alignment is one of the most critical topics facing investors,” Cheryl Gustitus, ISS spokeswoman, said earlier this year. “TSR (total shareholder return) is the key long-term metric we use because it’s most meaningful for investors.”
In its annual look at executive compensation, the Observer counts salary, bonus, the value of stock and option awards, above-market interest on deferred pay, and perks.
In this year’s analysis, the newspaper also found:
Overall pay continued to rise, but not as fast as the year before. The median compensation for North Carolina’s top 50 CEOs rose more than 11 percent, to $4.2 million in fiscal 2011. The previous year it rose 30 percent as companies’ revenues rebounded after the recession.
• The median CEO salary rose 6.8 percent in 2011, to $795,000. The median stock award rose 11 percent to $2 million, and the median stock option award rose 12.7 percent to $1 million. Perks were also up: The category that includes company aircraft, club memberships and executive physical exams rose 9.1 percent to $101,737.
• Bonuses fell, as boards set tougher targets for executives. The median bonus fell 11 percent to $1,003,300. Many executives missed the tougher targets, as companies lagged their 2010 performance amid the unsteady economic recovery.
• The North Carolina CEO with the biggest yearly increase was Robert Toth, head of Charlotte-based Polypore International. His pay jumped more than 727 percent, thanks to a $13.4 million multiyear stock option award he received in 2011. The company had a positive shareholder return of 8 percent.
• Stephen Light, head of Raleigh-based Xerium Technology, saw the steepest slide in pay. His compensation fell more than 75 percent to $980,989, due to receiving only $49,926 worth of stock in 2011. In 2010, he was awarded nearly $2.8 million worth of stock. The company had a negative return of 59 percent for shareholders in 2011.
Executive compensation, on the rise for decades, has become a more prominent issue since the recession and financial meltdown. “Say-on-pay” votes have now been required for two years, allowing shareholders a nonbinding up-or-down vote on compensation for the top executives. More than 98 percent of companies passed such votes last year.
Nationwide, CEO pay also rose. The Associated Press found the median salary for a CEO at large public companies rose 6 percent to $9.6 million. That’s the highest since the AP began tracking CEO pay in 2006.
Executive pay is getting attention overseas as well. Britain unveiled plans last week to give shareholders of British companies a binding vote on executive pay. The country’s business secretary said the move is designed to end the “annual upward pay ratchet.”
And while many companies remained profitable in 2011, the year was tough for many workers in North Carolina. The state ended the year with an unemployment rate of 9.8 percent, above the national average. According to the state Division of Employment Security, the median annual wage for North Carolinians rose 1.7 percent in 2011 to $31,093.
Tying pay, performance
While much has been made of conditions to ensure “pay for performance” and nonbinding shareholder votes on CEO pay, compensation still doesn’t always line up with a company’s results. The Observer found 17 North Carolina companies with negative shareholder returns for fiscal 2011 whose CEOs were given more pay, compared with only five whose CEOs received less pay.
That’s more than during fiscal 2010, when seven companies with negative returns gave their CEOs higher pay. Part of the reason is there were fewer stocks with negative returns in 2010.
Elson, with the Center for Corporate Governance, faults the way most boards set compensation: by looking at peer companies and resolving to pay their executives toward the high end of that group. That tends to push pay ever higher, Elson said.
“It is the mechanics of the process which drives the pay, even in boards that are considered quite good,” Elson said. He advocates throwing out the peer group process and instead setting compensation based strictly on measurable returns and a multiple of what employees lower on the corporate ladder are making.
But Tom Kelly, Charlotte-based managing director of Pearl Meyer & Partners, an executive pay consulting firm, says most boards’ decisions are broader-based than that. “I think there’s a misconception that peer group data drives decisions at companies. It certainly is possible in some, but in most, it is a reference,” Kelly said.
Boards are working harder to tie pay to performance, and “trying to minimize what would be called ‘pay for failure,’” Kelly said. “You don’t want a situation where the company doesn’t perform well and the executive still gets a lot of money.”
Companies defend pay
Many companies argue that focusing on shareholder returns is too narrow to capture the scope of a company’s performance. They use an array of measures, such as profits and return on invested capital, to determine payouts.
Dan DiMicco, CEO of Charlotte-based Nucor, was paid $8.1 million, up about 20 percent from 2010. While the company’s return for shareholders was a negative 6.3 percent, DiMicco’s pay rose because Nucor hit other goals. The nation’s largest steel maker grew its revenue and return on equity, and earnings per share increased sixfold, leading to a fiscal 2011 bonus payout of $1.5 million for DiMicco, up from $540,000 in 2010.
Nucor’s total stock return has also been positive over DiMicco’s tenure, appreciating more than 460 percent, although 2011 was a tough year for steel company stocks. The company said DiMicco’s performance is measured over a longer term and said in its proxy statement that its compensation program is designed to make sure executives “share the pain and share the gain.”
“It is equally important to note that in 2009 Mr. DiMicco’s compensation decreased by 43 percent, demonstrating the effectiveness of our Compensation Philosophy,” wrote Nucor spokeswoman Katherine Miller, in an email.
SPX Corp., the Charlotte-based maker of industrial equipment, awarded CEO Chris Kearney $7.8 million for 2011, up 18 percent from 2010. Shareholders saw a negative 14 percent return in 2011, however.
The company referred questions to its proxy statement. In the proxy, SPX said “mixed operating results” and a falling stock price led to Kearney not receiving a bonus, and that two-thirds of his restricted stock from previous years failed to vest.
SPX encouraged investors not to focus on the SEC-mandated table for reporting executive compensation, which it said doesn’t give the whole picture. Under the company’s own calculations of realized pay – which includes stock that vested during the year, rather than stock awarded during the year – SPX said Kearney actually received 50 percent less than in 2010.
Educating shareholders
While companies keep paying their executives more, they’re also putting more effort into explaining their moves to shareholders.
“I haven’t seen a sea change in pay program design and decision-making,” said Kelly, the Charlotte pay consultant. “What I’ve seen in the last two years is a lot more disclosure and attempts to explain.” Proxy statements now typically include dozens of pages laying out the rationale behind pay decisions.
Jim Hlavacek, a business consultant who is the longest-serving board member of Nucor, said boards could still do more to question compensation. He said he couldn’t comment specifically on Nucor’s pay practices. But in general, he said pay packages have become too complicated and are difficult for even experienced board members to understand.
Directors need “backbone” to speak up about questionable compensation, Hlavacek said. He also said disparities in pay undermine productivity at American companies and breed resentment against capitalism.
“The free enterprise system is threatened by those that have no risk and all gain,” he said of CEOs who get higher pay regardless of performance. “It is affecting job growth, productivity.”
‘An impossible goal’
Many boards last year used bonuses to tie pay to performance. And some CEOs saw lower pay as a result.
One of those was Family Dollar CEO Howard Levine, whose pay declined 10.5 percent in 2011, to $4.7 million. Most of the drop was due to his bonus, which fell to $982,253 last year from nearly $1.6 million in 2010.
The smaller bonus payout happened in spite of the Matthews-based retailer reaching record-high sales and profits last year. The reason? Levine’s bonus is tied to the company’s pretax profits.
In 2011, Family Dollar’s pretax profit of $617 million was higher than 2010, but just short of the target the board set for Levine. That resulted in a bonus payout of 95.4 percent of Levine’s salary, or $982,253. His bonus the year before was 156.4 percent of his salary.
Compensation consulting firm Meridian Compensation Partners found in a recent survey that higher targets are likely to stick around. Forty-four percent of the companies surveyed said they set earnings targets more than 5 percent higher for fiscal 2012, while only 16 percent set their targets lower.
With cash bonuses down for some executives, a greater percentage of their pay is given through stock or options. That’s a victory of sorts for advocates of stricter executive pay requirements, since such grants are usually tied to performance targets.
In 2010, 54 percent of CEOs’ total pay was in stock and options. Last year, that proportion rose to nearly 59 percent.
Determining the appropriate pay for CEOs is likely to remain a controversial topic, especially in the absence of a single formula to correlate the executive’s pay with the company’s performance, Kelly said.
“The impossible holy grail would be a perfect formula,” he said. “It’s a nice thing to talk about. It’s an impossible goal in practice.”
