Thanks to the worst recession in decades, the titans of industry took a substantial pay cut in 2009. But it may just be a case of delayed gratification.
The chief executives of California's 100 top companies collected an average of $8.4 million in total pay last year, down 11% from 2008, according to data compiled for The Times by research firm Equilar Inc. Nationwide, CEO pay dropped about 8%.
But appearances can be deceiving.
"This year, it looks like there's a reduction, but you will see a few years from now that it has not been the case at all," said Nell Minow, editor at Corporate Library, another compensation tracker.
The reason: Stock options issued last year at bargain-basement prices positioned executives for unusually large profits in the years ahead.
California's 100 largest publicly owned companies, as ranked by revenue, last year paid more than 60% of their CEOs' total compensation in the form of company shares or, more often, options.
A stock option is the right to buy stock during a specified period at a specified price. That "exercise" price is generally set to equal the stock's market price on the day the options are granted. If the stock's price subsequently rises, the option becomes more valuable.
The lower the exercise price, the greater the potential profit from eventually exercising the option.
And because the stock market tumbled to 12-year lows last year, exceptionally low market values translated into very attractive exercise prices for the options given to CEOs.
Not only that, for each dollar — OK, for each $1 million — of stock options they were granted, executives got many more options than they would have this year for the same amount of option pay.
Looked at another way, the bear market meant shareholders last year handed out to executives bigger-than-usual stakes in their companies.
"The numbers are tricky because the market was down in early 2009, which was when a lot of the equity awards were granted," said Aaron Boyd, head of research at Equilar in Redwood Shores, Calif. "The irony … the value was a lot more than they had originally estimated."
What especially troubles corporate-pay critics is that many executives will benefit from the rising tide of stock prices — regardless of how well their company performed compared with others in its industry.
In other words, said Minow at Corporate Library, CEOs will receive windfalls for just riding the market back up to normal. The idea of pay for performance, used in the past to justify extraordinary compensation, is not supposed to reward you for just keeping up, she added.
The largess with company shares and stock options was apparent in California, where the most highly compensated executives each received tens of millions of dollars in stock-based pay.
Larry Ellison, chief executive of Oracle Corp., was the state's highest-paid CEO thanks largely to a grant of options to buy 7 million Oracle shares worth roughly $78 million.
Once his $4.7 million in cash compensation is counted, Ellison received $84.5 million in total pay, or $338,004 for each working day.
Ellison is also Oracle's largest shareholder, with a stake of 23.4%, partly because he founded the company but also because of regular grants of stock options given to him by Oracle's board.
Critics say the combination of very high pay and his big stake in the company makes Ellison a symbol of excess.
"Oracle shareholders have paid dearly for their board's stock-option generosity through the dilution of their ownership," said Brandon Rees, deputy director of the AFL-CIO office of investment. "It makes absolutely no sense to give the largest stockholder in your company these huge grants. They're giving the company away."
Oracle declined to comment on Ellison's pay.
The software executive, however, didn't benefit from the auspicious timing of option grants that other CEOs enjoyed. That's because Oracle's fiscal year ended in May 2009, so his options were granted in July 2008, before the worst of the bear market.
California's No. 2 highest-paid CEO, Carol A. Bartz of Internet giant Yahoo Inc., got a $42-million "golden handshake" of stock-based pay after joining the Internet giant in early 2009. Her total pay, including $2.4 million in salary and bonus and a $2.5-million award to compensate her for leaving her previous job, was $47.2 million.
John H. Hammergren, CEO of pharmaceutical distributor McKesson Corp., rounded out the top three with a package worth $34million — $13.6 million in cash, $15.2 million in stock and a tidy $4.8million in "other" pay.
What's "other"? In this case, it's mainly $3.8 million in additions to Hammergren's executive pension plan and preferential interest paid into his deferred compensation program. The company also paid $497,240 for "security services" — monitoring equipment in Hammergren's home and personal use of the company jet, car and driver in the name of keeping the executive safe at home and on the job.