By Theo Francis And Joann S. Lublin
With the stock market scraping against record highs, big-company
CEOs are moving into cash.
Cash compensation for chief executives rose at its fastest rate
in at least four years in 2014, swelling to 37.3% of total CEO
compensation, higher than it has been since 2010, according to a
survey of early proxy filings by the Hay Group for The Wall Street
Journal.
The rise in cash pay contrasts with trends just after the
financial crisis, when shares had cratered and companies filled out
their top officers' pay packages with equity grants.
Executives reaped big gains from those awards as the market
recovered. But with big-company shares near record highs, the
prospect of further gains looks more limited, and awards of company
stock in its various forms have become less attractive.
The resulting shift in compensation in part reflects concern
among increasingly vocal shareholders that their investments could
be devalued by companies issuing new stock to support big equity
awards, compensation consultants said. They also indicate that
company insiders--like some investors--are worried the market may
be nearing a top.
"When the market may have peaked, those grants are not
necessarily going to deliver what is intended," Carol Bowie, head
of Americas research for proxy adviser Institutional Shareholder
Services Inc., said of equity-based awards.
Overall CEO pay rose more rapidly last year than it has in
recent years, according to the Hay Group survey, which looked at 50
companies that posted more than $8.7 billion in revenue and filed
their annual proxy statements by early March. Total pay was up by a
median 6.9% to $12.2 million, bigger than the 4.3% increase a year
earlier.
Shareholders did better, with a total return of 23% in 2014
among the companies that were analyzed.
Proxies that didn't make the survey cutoff continue to trickle
in. Discovery Communications Inc. disclosed earlier this month that
it paid CEO David Zaslav more than $156 million, much of it for
signing a new employment agreement. The Journal will report results
of the full survey of CEO compensation at 300 companies in May.
CEO pay packages can be a complex mix of moving parts. Cash
typically comes largely from bonuses pegged to annual results and
base salaries. Another dollop is sometimes tied to long-term
performance measures that typically pay out over three years,
provided targets are met.
Cash was the fastest-growing component of pay for the surveyed
CEOs last year. Their salaries and annual bonuses rose by a median
7.8%, up sharply from the previous year's 1.2% and a decline in the
year before that.
In the immediate aftermath of the financial crisis, many
companies raised the number of restricted shares or stock options
granted to executives, because it took more of that less-valuable
stock to hit intended dollar values. Meantime, low exercise prices
on the options made them substantially more valuable as the market
recovered.
Companies and pay consultants at the time called the equity
awards a sign that boards were more serious about tying pay to
company performance. But with stock prices hovering near the
S&P 500's all-time high of 2117.39 on March 2, cash is
back.
Cash pay for Michael McNamara, CEO of electronics company
Flextronics International Ltd., more than doubled last year to $3.6
million, just over a quarter of his $13.4 million in total pay. A
year earlier, cash made up about 16% of his $10 million total.
Mr. McNamara's salary hasn't changed in seven years, and much of
his compensation, including his cash bonus and last year's rise in
pay, is tied to performance, Flextronics spokeswoman Renee
Brotherton said. The company's stock rose 37% in the year that
ended in March 2014, the year for which his pay was set. Counting
stock gains since his pay was awarded, the growth of the equity
portion of his pay has outstripped the cash portion, she said.
Walt Disney Co. CEO Robert Iger's pay rose $12.2 million last
year, to $46.5 million, and nearly all of the gain was in cash. Mr.
Iger's bonus jumped to $22.8 million from $13.6 million, a 68%
increase. By contrast, his stock and option awards showed little
change at a combined $17.3 million.
Disney's proxy says strong operational results drove the
increase in Mr. Iger's bonus. Equity awards beyond a minimum level
are granted only at the board's discretion, which it hasn't
exercised in recent years. Ninety-two percent of Mr. Iger's pay is
based on performance, spokesman David Jefferson said.
Cash pay nearly quadrupled to $3.45 million for Mark Durcan, CEO
of chip maker Micron Technology Inc., thanks to a 12% raise and a
$2.45 million bonus. Cash made up 30% of Mr. Durcan's $11.5 million
total pay, up from 13% the prior year and about 22% the year
before. Micron recorded annual total shareholder return of 142% as
of late August.
Spokesman Daniel Francisco said Micron performed well. He said
the jump in cash pay looked bigger because the company had scrapped
cash bonuses the prior year--even though executives met performance
targets--in recognition of difficult market conditions and risks
assumed by acquiring a Japanese competitor that was in
bankruptcy.
Companies may have reason to be wary about making big equity
awards to their CEOs. Shareholders have pushed back against company
proposals to issue more shares for ever-larger stock compensation
programs, which often have to be approved in votes at companies'
annual meetings.
Their concern is dilution: Big awards reduce investors'
percentage stake in the company and spread earnings across more
shares. Plus, ISS has revamped how it evaluates equity-pay plans,
giving companies a new yardstick for deciding whether to extend
them.
"It definitely has gotten harder for companies to get the share
allocations that they used to get," said Irv Becker, U.S. leader of
board solutions for Hay Group. "Companies pretty much were able to
get the equity they wanted to get for a number of years. And the
last few years, it's just gotten tougher."
Coca-Cola Co. came under fire a year ago from investors
including activist David Winters and billionaire Warren Buffett
over what Mr. Buffett called an excessive equity pay plan. Two of
Coke's biggest investors took the unusual step of voting against
the company's equity pay plan.
The plan nevertheless passed handily, but last fall Coke said it
would hand out less stock to employees and provide more information
about its equity compensation practices. The company said dilution
would remain below 1% a year under the new arrangement. Still, this
year, Mr. Winters' investment firm renewed its attack on Coke's pay
practices.
Coca-Cola spokesman Petro Kacur said grants of shares under the
company's long-term incentive programs shrank this year. The
company intends to continue discussing compensation issues with
shareholders, he said. CEO Muhtar Kent's equity awards in February
this year totaled about $7.7 million in stock and options, down
from $15.8 million granted in 2014, the company's proxy said.
Liquefied natural-gas infrastructure company Cheniere Energy
Inc. faced vocal opposition from investors over a plan to issue up
to 30 million shares as compensation over five years and litigation
over its equity pay practices. Cheniere delayed its annual meeting
and then withdrew the proposal. The company settled the litigation
last month, agreeing to make corporate-governance changes and
paying $5.5 million in legal fees.
A spokeswoman for Cheniere declined to comment.
Pay made mostly in cash can also reflect a decision to space out
big slugs of equity. Stephen Luczo, CEO of digital storage company
Seagate Technology PLC, got virtually all of his pay in cash last
year--$2.6 million in salary and bonus. His salary was increased
11%, but overall, his pay was down 87% from the prior year, when he
received a larger bonus and $16.5 million in stock and options.
In explaining the year's compensation decisions in Seagate's
proxy statement, the company noted that revenue declined 4% and
said bonuses were paid out at 81% of their targets. The company
said Mr. Luczo didn't receive a long-term incentive award, because
last year's awards were intended to apply for two years.
Some of the very highest-paid CEOs on the list flouted the
trend. Larry Ellison, head of Oracle Corp. until September, made
$67.3 million in his last year as CEO, only $741,385 of it in
cash.
Write to Theo Francis at theo.francis@wsj.com and Joann S.
Lublin at joann.lublin@wsj.com
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