Ray Irani, chairman and chief executive of Occidental Petroleum Corp., outflanked his peers to become the highest paid executive in Los Angeles last year, getting $87.5 million in compensation.
Though Irani received a salary of just $1.3 million, he was loaded up with $43 million in long-term compensation and an estimated $38.5 million in new stock options.
But Irani was also sitting on a pile stock options awarded in previous years and last year he cashed in $37.6 million worth.
Put it all together, and Irani’s aggregate compensation amounted to $125 million.
Every year the Los Angeles Business Journal compiles a list of the highest-paid executives of publicly traded companies in Los Angeles. This year, the Business Journal took a cue from the Securities and Exchange Commission by assigning a value to new stock option grants that were includes in executives’ total pay.
Stock options that were granted in previous years but exercised last year were figured separately.
And, as the numbers show, the big payoff for some executives comes in the form of stock options.
Bruce Karatz, chairman and chief executive of homebuilder KB Home, and Angelo Mozilo, chairman and chief executive of mortgage company Countrywide Financial Corp., each pocketed nearly
$120 million last year just by exercising stock options at the peak of the market.
Karatz, who received $47.7 million in company compensation, had the highest pay of any executive when cashed-in options are added in, at $166 million.
Mozilo, who held the top spot last year, received $41.3 million in compensation, which quadrupled to $160 million with options exercised.
Only John Kilroy, chief executive and president of Kilroy Realty Corp., ranked in the top rungs of pay without exercising any options. Kilroy was paid $42.5 million last year, which included $40 million in long-term incentive pay.
Even by the standards of most millionaires, executive pay continues to skyrocket especially for executives who are sitting on large piles of stock options, which can grow dramatically over time.
Because Karatz, Mozilo and Irani have worked at their respective companies for 20 years or more, they have all accumulated millions in stock options. Corporate governance experts say executives are seeing massive increases in their total compensation this year due largely to the exercising of stock options that were granted anywhere from three to 10 years ago.
“What has happened is the accumulation of stock options over time has increased their value,” said Derrick Neuhauser, senior manager of executive compensation at accounting firm BDO Seidman.
Stock options, which give the recipient the right to buy shares at a set price, are just one of many factors pushing executive pay into the spotlight this year.
A widening scandal involving the backdating of stock options and public outrage at the $400 million pay package to former Exxon Mobil Corp. Chairman Lee Raymond, are raising fresh questions about executive pay.
Backdating issue
Corporate governance experts say the rise in executive compensation can be attributed to such factors as sometimes cozy relationships between executives and board members who set their pay, and their strong ties to consulting firms, which sometimes exert undue influence over pay levels.
The backdating of stock options by at least 20 companies is likely to shine a new light on option grants. Even without backdating, critics have complained that stock options and restricted stock awards are the equivalent of corporate giveaways simply because most stocks tend to rise over long periods of time.
“One of the criticisms of stock options is that they sometimes reflect a rising tide (of the stock market) as much as they reflect a company’s performance,” said Jack Marsteller, a principal at consulting firm Towers Perrin.
Ron Bottano, a senior client partner at Korn/Ferry International, said roughly one-third of all stock options have been cashed out in the past year. With the Dow Jones industrial average at its highest point in six years, executives who have been sitting on options are cashing out at the most opportune time.
“Many executives are just taking profits, which is why options exercises were up significantly this year,” he said. “There used to be a time when companies relied solely on stock options, and it has definitely provided more opportunities for earn out.”
Stock options became popular in the 1990s as a way to link executive compensation to the performance of a company’s stock price. In some ways, they appear to be working.
A look at Karatz’s pay package shows that he received $1.09 million in salary, a $5 million cash bonus, and $31.5 million in long-term incentives paid mostly in shares of restricted stock. Meanwhile, shares of KB Home jumped 29 percent last year to $72.10 a share, though shares have fallen 18 percent so far this year as the housing market has cooled.
Last year, Karatz received an additional 250,000 in new stock options and $250,000 for the cost of his personal use of a company-owned jet.
Perks like corporate jet use, country club dues and gas money have long been a bone of contention with some shareholders.
To give more transparency to executive pay, the SEC proposed new disclosure requirements earlier this year.
Beginning in 2007, companies will have to explain “in plain English” their compensation objectives and policies. In addition, each company has to revise their compensation tables to include a “total compensation” figure for their top five executives as well as the fair value of all equity grants, the increase in pension plan benefits, earnings on deferred compensation and any tax gross-ups, related to travel expense reimbursements. According to the SEC staff, “no item of compensation can be excluded,” except for perks valued at less than $10,000.
“The amount of detail that the SEC has required in these proposed rules is four times greater than what is disclosed now,” said BDO Seidman’s Neuhauser. “When you pull up a proxy next year, it will be much larger and shareholders will be able to determine how much cash pay, how much incentive, how many perks and equity grants have been given, as well as retirement benefits.”
Some grumbling
In anticipation of the new rules, some companies have even started keeping their own “tally sheets” that include everything an executive is paid, including severance and perquisites.
Already there is some grumbling that the rules may offer transparency, but little else.
“You’re not going to see pay go down because of the new rules,” said Korn/Ferry’s Bottano. “However, the new SEC rules will shine an even brighter light on current pay packages so that shareholders have a more comprehensive understanding of how the option grants being made today may translate into significant future gains for CEOs.”
When stock options are granted, they typically carry a price that is equal to the fair market value of a company’s stock.
In the widening stock options scandal, some companies have back-dated options grants to executives at or near the stock’s 52-week low, or just before a sharp rise in the stock. That way, when an executive exercises the options, the gains would be much greater.
Another trouble spot for companies that pay their top executives lavishly is data showing the gap between executive pay and the average worker salary continues to widen.
Last year, a Federal Reserve study found that the average American chief executive earns more than 170 times the average worker’s salary, up from a multiple of 40 in the 1970s.
The average chief executive earned $11.3 million last year in salary, bonus, incentives and new option grants, a 27 percent pay increase, according to a survey of 200 large companies by compensation firm Pearl Meyer & Partners. The study did not include the value of options exercised.
By contrast, the average worker took home $43,480 in 2005, according to data from the Commerce Department.
