2012 CEO pay report


1012 CEOPay Graph MarkParker NEWOur analysis of executive compensation at Oregon’s 20 biggest public companies.

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BY BRANDON SAWYER

CEO pay has often been the target of public outrage, but especially in the past five years amid layoffs, high unemployment and weak stock prices. CEO pay also has long been the target of board of directors’ executive compensation committees that fine-tune these pay programs in order to retain competent leaders. The compensation of public-company CEOs has changed dramatically over the past 20 years, shaped by government policy and boards with more independent directors, as well as efforts to connect it with shareholder return. Public companies must disclose more about executive pay than ever before, and while total CEO compensation has reached new heights, its value has become increasingly volatile and dominated by at-risk pay.

To see how executive pay has played out in Oregon, we analyzed the 20 public companies with the biggest market caps as of July 2012 that also had the same CEO for the past five years. (Lithia and Cascade Bancorp changed CEOs this year.)

Of our 20 CEOs, 17 earned more last year than they did before the recession, but eight of the companies they led were less profitable, including Cascade Bancorp, Columbia Sportswear, ESI, Greenbrier, NW Natural, Pacific Continental Bank, Schnitzer Steel and StanCorp. Only three CEOs — Raymond Davis of Umpqua Bank, Robert Warren Jr. of Cascade Corp. and Robert Sznewajs of West Coast Bancorp — earned less than five years ago.

The design of CEO compensation increasingly aims at long-term company performance and shareholder return with a greater proportion of equity and deferred compensation, the ultimate value of which is impossible to predict. Examining their pay as a whole has become less meaningful than an inventory of the components, such as salary.

Three companies that would have made our list of the top 20 because of market-cap size — Blount International, Lattice Semiconductor and Rentrak — were excluded because their CEOs changed in the turbulence of the past five years. Aaron Boyd, director of research at Equilar, says CEO turnover nationally spiked in 2008 and 2009.

“There’s less job security,” Boyd says. “You’re much more likely to take the blame when things go wrong and to get ousted, and have a shorter leash than a rank-and-file person.”

For this story, we analyzed the U.S. Securities & Exchange Commission’s Edgar system for Oregon CEO pay and company financials; Equilar for information on S&P 500 CEOs; MarketWatch BigCharts for historical stock prices; and the Conference Board for proxy-voting data. Here is what we found.

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ILLUSTRATIONS BY PJ MCQUADE 


Median pay for all 20 Oregon CEOs has remained less than a third of the S&P 500 CEO pay. 

That median pay rose from $2.1 million in 2007 to $3.0 million in 2011. Equilar produces an annual S&P 500 CEO Pay Study, which shows that prior to the recession in 2007, median S&P 500 CEO pay was approximately $8.7 million. It fell the next two years; then, as stock markets recovered, it roared back to $9.6 million in 2011. Nike, Precision Castparts and FLIR are currently the only Oregon companies included in the S&P 500 index.

Nike CEO Mark Parker’s total pay was more than a third of the $103 million paid to our CEO group.

Parker earned more than $35 million for the year ended in May 2012. Two-thirds of Parker’s pay was stock awards, which could rise or fall in value by the time he can exercise them. He received no bonus and his salary was only $1.6 million.

Looking at Nike’s performance, net income only declined once, in 2009, and was at an all-time high of $2.2 billion for 2012. Nike’s stock price is also flying high, elevating the grant-date value of Parker’s equity.

CEO pay and company performance seesawed wildly during the past five years‚ mostly in synch‚ but sometimes not.

Nationally, S&P 500 CEOs saw their median compensation decline in 2009, then rise the next two years, roughly in line with company net income, which shifted higher and lower than pay.

Likewise, average CEO pay for the top 19 companies in Oregon (excluding Nike) fell in 2009, then rose the next two years, increasing an average of 11% per year. Company net income followed the same — more extreme — pattern but only rose an average of 2% per year.

Individual companies, though, often strayed from company earnings. Parker’s percentage change in pay rose three times as high as net income in 2010, fell in 2011 when earnings continued to grow, then shot up 219% in 2012, while net income grew just 4%.

As a share of pay‚ salary has been in retreat for decades.

Don Lindner, executive compensation practice leader for WorldatWork, a nonprofit association focused on compensation education, says that base pay used to comprise about 50% to 60% of CEO compensation until the 1980s.

Then came IRS Section 162(m) in 1992, stipulating that corporations could deduct no more than $1 million of executives’ non-performance pay. To avoid tax liability, annual bonuses rose dramatically, says Lindner, and mega-grants of stock and options were invented, raising the prominence of equity awards. Regulators effectively had placed a limit on salary, but the unintended consequence was to rapidly increase total compensation, albeit in a leveraged form.

Among Oregon’s top 20 CEOs, average salary grew 5% per year since 2007, but as a share of total compensation it declined from 22% in 2007 to 14% in 2011. Salary accounted for just 10% of the S&P 500 CEOs’ 2011 pay. This decline of salary’s share is exacerbated by rising equity awards — much riskier and less liquid than cash.

“To replace base pay, which is a sure thing, with at-risk pay like options, you have to give them a whole bunch more [stock and options], because they’re worth less,” says Lindner.

 


Stock and option awards have proliferated since the 1990s.

This is evident with our sampling of Oregon CEOs: For the first time in five years, possibly longer, stock awards accounted for more pay (38%) than options (17%) and are the largest component.

With so much of it valued in stock, it’s no surprise that CEO pay rises and falls, often in tandem with the company stock price. Stock and option awards accounted for 63% of Equilar’s S&P 500 CEO pay in 2011, and 55% of the 20 Oregon CEOs’ pay, up from 43% in 2007.

Restricted stock, subject to vesting periods or other conditions, and performance shares, subject to meeting performance targets, have risen in proportion to options, notes Lindner, after an accounting change in the early 2000s made companies expense option grants the same as stock. Prior to that, options were most of the equity in CEO pay.

14 top 20 CEOs received an increase in total pay this last fiscal year.

CEOs who received less included Precision Castparts’ Mark Donegan, Columbia Sportswear’s Tim Boyle, Mentor Graphics’ Walden Rhines and Umpqua Bank’s Raymond Davis, all companies whose annual net income grew.

Notably, Mentor Graphics faced pressure in recent years from well-known activist investor Carl Icahn, who got three of his nominees elected to the board. But Rhines has led the company back to profitability the past two years, and Mentor’s board has managed to fend off Icahn’s attempts to shake it up, replacing two of his picks this year.

All 20 companies passed their most recent “Say on Pay” votes.

One of the first rules to be enforced from 2010’s Dodd-Frank Act requires companies to hold nonbinding “Say On Pay” votes at annual shareholder meetings, asking investors to OK executive comp plans. This year, Columbia Sportswear had the highest pay approval, 99.6%, while Greenbrier and Schnitzer Steel had the lowest, 52.1% and 58.6%.

Boyd thinks that Say on Pay has had a positive impact on company engagement with shareholders, particularly larger institutional investors. “For the most part they all like it,” he says, “and I think companies are finding value in it. What it’s doing is really opening up the dialog between companies and shareholders.”

CEO pay may be an issue to some investors, but not all. George Hosfield, the chief investment officer of Portland-based Ferguson Wellman Capital Management, which manages more than $3 billion in mostly large-cap equities, says this is not a criterion by which he screens companies. “We’re more concerned with CEO competence than we are the compensation,” he says.

Hosfield says that “the more transparency, more sunlight, the better as a general sense,” but he also worries that the cost of regulations like Say on Pay could hurt performance, especially at smaller companies less able to absorb the cost. “Regulation with respect to how costly and burdensome it is as an impediment to business has gone up exponentially in the last decade.”

The prospect of more Dodd-Frank and other regulations hitting small companies could make it a little tougher for our CEOs to do their job and for boards to govern them. But greater regulation has boosted communication between executives, boards and shareholders, as well as cast much more light on CEO pay. At least for now, the majority of the 20 companies we tracked are making a bigger profit and rewarding their CEOs with a bigger paycheck.

Brandon Sawyer is the research editor of Oregon Business. He can be reached at [email protected].




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