Maybe you sensed CEO pay was soaring. Well, the numbers are in, and they will blow you away.
Total pay the combined value of salary, bonus, stock options and other compensation granted in 1999 jumped 20.9 percent for the median CEO among 347 major U.S. companies that had the same chief executive in 1999 as 1998, according to a study I recently performed.
And what did these bosses deliver to earn such a boost? A median total return on their stock of 4.7 percent.
In every category of pay, executives are enriching themselves faster than their shareholders, according to the survey. Five CEOs earned more than $100 million in 1999, led by Charles Wang of Computer Associates International Inc., whose pay of $655.4 million was so staggering it led to a shareholder lawsuit and a court ruling that he give almost half of it back.
At the other end of the pay spectrum was Apple Computer Inc.’s Steve Jobs, who earned precisely $1 in 1999.
Options explode
By far the biggest increases in CEO pay came from stock options. Encouraged by an accounting system that doesn’t require them to expense any cost for options except in unusual cases, U.S. companies are passing out stock options hand over fist.
I examined the proxy statements of 439 companies that ranked among the 1,000 largest companies in the United States by market cap near the end of 1999. The survey examined only CEOs and included proxies filed between May 1, 1999, and March 24, 2000. The combined pay of all the CEOs surveyed was $4.55 billion.
The median CEO in the group earned $4.4 million in total pay in 1999. But the average pay of the group was $10.4 million. Why the disparity? Because the average was skewed by the biggest gainers. There’s no way a CEO can earn negative pay, but the sky’s the limit on the high end.
At the top of the pay scale were Wang and four other CEOs whose total pay exceeded $100 million by my estimates, thanks to huge option grants: Tyco International Ltd.’s L. Dennis Kozlowski ($157 million), Global Crossing Ltd.’s Robert Annunziata ($141 million), Qwest Communications International Inc.’s Joseph P. Nacchio ($136 million) and Citigroup Inc.’s Sanford I. Weill ($117 million).
At the bottom was Apple’s Jobs. Before you rush out to beatify the personal computer pioneer as a pay saint, note that in January he accepted the largest option grant in the history of man 10 million shares at one sitting. That option, which had an estimated present value when it was granted of a whopping $471 million, will put him at or near the top of the pay list in next year’s survey. He also accepted his board’s gift of a personal jet and the money to pay the taxes on the jet, a package worth $90 million.
Don’t make the mistake of assuming the big money is all being made on options in high-flying technology companies. Companies across many industries are increasing the amount of plain old cash they are doling out to their top people.
The median base salary of the CEOs surveyed rose 6.5 percent in 1999 and the median combination of salary and annual bonus rose 12 percent to $1.55 million. Topping the list for cash pay was Joel Horowitz, CEO of the decidedly non-tech clothing designer Tommy Hilfiger Corp., who earned $15.9 million in salary and bonus for the fiscal year ended March 31, 1999.
Free stock
While options were the favorite way of rewarding CEOs in 1999, there was a resurgence in grants of free stock, which doesn’t carry the risk of expiring worthless that comes with an option. Bank of America Corp.’s Hugh McColl carted away $45 million in free shares, while Tyco’s Kozlowski got $26 million.
For a good picture of how much money a CEO can make even when the company’s stock is lagging, look at Harold Messmer of Robert Half International Inc., a temporary staffing company.
Messmer earned $15.5 million in total pay in 1999, a year in which the company’s stock fell 36 percent. His pay was quadruple the competitive level, based on an analysis of other companies of similar size and performance. That made him the most overpaid CEO among those whose companies ranked in the bottom quartile based on stock performance.
Computer Associates’ Wang was the most overpaid CEO on an outright basis, measured by the difference between what he got and the competitive level for companies with similar size and performance. He was followed by Qwest’s Nacchio and Global Crossing’s Annunziata both top performers from a shareholder’s point of view.
Jobs was the most underpaid CEO, followed by Amazon.com Inc.’s Jeff Bezos, who earned just $83,000.
What determined who made the most money? It was not primarily how good a job the CEO did for shareholders. Despite all the talk about pay-for-performance among companies and their compensation consultants during the past decade, the size of a company still matters a lot more than its performance when it comes to pay scales.
Using regression analysis to track the variation in executive pay against variables such as a company’s revenue or stock performance, my study found that 32 percent of the variation could be explained by differences in company size. The bigger the company, the more it pays its CEO, all else being equal.
When total shareholder return in one-, two- and three-year time windows was added to the statistical stew, it only improved the explanation of pay variation by 5 percentage points, to 37 percent.
What explains the other 63 percent of the variation in CEO pay? That is the eternal mystery of executive compensation.
Graef Crystal is a columnist with Bloomberg News.
