CEO compensation: The $400 Million Dollar Man

May 17, 2007

UPDATE: See PayScale's infographic on CEO-to-work pay.

CEO compensation articles seem to abound these days. Stockmarketblog.com recently reported that Ray Irani, chairman and chief executive of Occidental Petroleum, received a $400 million dollar CEO compensation package. So how does Irani's $400 million break down? According to a company filing, his annual salary in 2006 was $1.3 million and he got a cash bonus of $1.4 million. Stock, option awards and benefits raised his compensation to $55.6 million. Stock and dividends from a deferred stock program added $93.3 million.

Irani also received $270.2 million from the exercise of options awarded from 1997 to 2006; clearly, this CEO compensation built up over many years. However, this salary and stock compensation report does not top past executive compensation packages. If we survey executive compensation over recent history, we find that in 1998 then-Walt Disney head Michael Eisner received $570 million in CEO compensation. Topping that, Oracle CEO Larry Ellison took home $706 million from stock options in 2001.

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Executive Pay Justified

Irani’s nine-figure CEO compensation (from 2006) is far more than the median large company CEO compensation of $8.2 million, according to the Mercer Human Resource Consulting 2006 CEO Compensation Survey (mentioned on labmgr.com). The survey also said that CEO compensation – salary, bonus, incentives – increased by 8.9 percent in 2006, as did corporate net income which rose 14.4 percent, a little higher than 2005 when it increased by 13 percent. Total shareholder return was a whopping 15.1 percent, way up from the 6.8 percent gain in 2005.

While Irani’s CEO compensation (also reported on signs-of-the-times.org) may seem beyond the range of mere mortals, the shares of “Occee Peety” (as my uncle used to call Occidental Petroleum) definitely went up. According to the company’s annual proxy statement (filed with the SEC in March), Occidental Petroleum’s stock rose to from $9 to almost $40 (a share) during Irani’s reign – December 1990 through 2005. That’s a shareholder return of 699 percent; an enormous gain by any standard on Wall Street (note to self: build time machine and invest in OC).

Survey Executive Compensation

The Mercer Human Resource Consulting 2006 CEO Compensation Survey (of proxy filings of 350 large public companies) had some more interesting tidbits (as reported on labmgr.com): “CEO base salary increased to a median $995,000 after having been at $975,000 for two years. Constant incumbent CEOs received a median increase of 4.1 percent, higher than the median increase of 3.6 percent in 2005.”

“In 2006, about one quarter of the CEOs did not get a pay increase; boards were tougher in 2005, when one third of the sample did not get a pay increase. Median total cash compensation – salary and annual bonus – rose to $2.6 million, slightly higher than the $2.4 million reported in 2005. The median increase for constant incumbent CEOs was 7.1 percent, the same rate as in 2005. An increase in total cash is not surprising given strong corporate performance. Median net income rose 14.4 percent.”

CEO Compensation Performance

Another interesting note in the Mercer Human Resource Consulting 2006 CEO Compensation Survey was how more CEO compensation was tied to performance, probably due to the many outraged shareholders who tire of seeing CEO compensation go up, while company stock prices drop down. Now, more shareholders are requiring CEO compensation to be linked to performance. More CEO’s get long-term incentives (LTI) that are linked to performance of the company; LTIs often include “performance shares” of company stock.

For CEOs, this meant their option grants declined from 192 to 185 (from 2005 to 2006) and their stock grants dropped from 181 to 172. However, the number of CEOs receiving performance shares and performance-contingent restricted stock, increased from 111 in 2005 to 178 in 2006. The portion of CEOs’ compensation that was comprised of performance-based shares increased from 21 percent to 31 percent. Apparently more company heads are actually having to earn their CEO compensation via actual results; what a novel idea =o)

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Cheers,

Dr. Al Lee