CEO take-home pay rockets as economy rebounds

Over the next three months leading up to their annual shareholder meetings, about two dozen of Georgia’s big public companies will once again disclose eye-popping pay packages for 2012 that — in the case of Coca-Cola CEO Muhtar Kent — maybe weighed in at roughly $30 million.

First up is Atlanta-based Genuine Parts, which is expected to disclose its executives’ 2012 compensation Tuesday. In 2011, the auto parts retailer paid its top five executives total compensation of $15.2 million — over half to its chief executive, Thomas Gallagher.

So what can we expect to see in this year’s proxy statements?

By the way executive pay is typically reported in the proxies, CEO pay probably went up modestly in 2012, some experts said. Most companies’ profits rose with the recovering economy, and the rising stock market lifted most share prices — both factors that companies’ boards pay attention to when setting pay.

Top executives’ pay raises were “probably mid-single digits” in percentage terms, said Joe Mallin, managing director in Atlanta for executive compensation consultant Pearl Meyer & Partners.

However, there’s another way of adding up corporate chiefs’ pay that’s increasingly being used by big investors and advisers who care about how well executive pay tracks company profits and shareholder returns.

It’s called “realizable pay,” a sort of take-home pay measure that includes the cash or sellable stock CEOs put in their pockets during the year, as opposed to the value of long-term compensation packages.

And by that measure, several Georgia CEOs’ compensation has skyrocketed thanks partly to bargain-basement stock awards they got during the 2007-2009 stock market crash and can now cash in if they choose.

According to an analysis by Equilar, an executive pay data firm:

* Home Depot CEO Frank Blake’s realizable pay shot up nearly 10-fold between 2007 and 2011, from $2.4 million to $22.1 million. His official pay as reported in company proxies rose from $7.8 million to $10.8 million during the same period.

* Coca-Cola Enterprises CEO John Brock’s take-home pay rose more than 600 percent during the same period, from $3 million to $21.2 million. His official pay rose from $10 million in 2007 to $12.6 million in 2011.

* UPS CEO Scott Davis’ realizable pay rose at a similar trajectory, from $1.5 million when he took over the reins in 2008 to $7.2 million in 2011. In its proxies, UPS reported that Davis’ compensation rose from $6.3 million in 2008 to $13.1 million in 2011.

Why are companies and compensation experts looking at these so-called “realizable” pay figures, and why do they vary so much from the official versions?

One reason is that they’re based on different ideas. The official numbers that the U.S. Securities and Exchange Commission requires in companies’ proxies tally the total compensation awarded that year, including estimates for the value of stock and option awards, pensions and other items that may not be available until years from now.

The take-home pay measure, on the other hand, starts with the idea of tallying what an executive can sell, deposit in the bank or benefit from now. It includes cash salaries and bonuses, perks, and stocks that the executive took ownership of that year through vesting or option exercises. It generally leaves out the estimated value of pensions and stock or option awards that the executive doesn’t own yet because they haven’t vested.

Institutional Shareholder Services, which advises many pension funds and big investors on corporate governance, began looking at “realizable pay” this year to see how well it links to executives’ performance.

‘There’s a growing belief that it is better” at tracking what executives are actually paid over time, said Mallin.

The downside of realizable pay figures, the experts say, is they’re not very precisely defined yet, and they’re sometimes distorted by executives’ decisions to cash in several years’ worth of stock options at one time.

For instance, Aflac CEO Daniel Amos gained $70.8 million on exercising stock options in 2007. The Columbus insurance company CEO’s $75.2 million realizable pay that year dwarfed his annual pay by any measure since then.

Still, experts are increasingly focusing on take-home-like pay measures because executives’ pay packages are growing increasingly complex and hard to put a value on. Under pressure from big investors like pension plans — especially through so-called annual “say on pay” votes — more corporate boards of directors are loading new performance triggers and claw-back conditions into executives’ pay packages.

“They’re putting a lot more performance requirements in,” said Mallin. “I think the main driver is the say-on-pay votes.”

Most companies’ executive pay packages have easily passed the non-binding shareholder votes, which were mandated under the 2010 Dodd-Frank financial reform law. But they’ve become “a very big deal,” said Mallin, for companies that don’t pass or that get a thumb’s down from firms like ISS that pore over CEO’s pay and performance.

Most of the attention, he said, has been on the big stock and option awards that are the biggest chunk of executives’ pay and the most difficult to put a value on.

Besides a salary, annual bonuses and perks like the use of company jets, top executives often get annual stock and option awards aimed at rewarding them over the long term if the company and its shareholders prosper.

Normally, executives don’t immediately own these stock awards or get to cash in the options; they “vest,” or become the executives’, over three years or so.

But with increased pressure from investors, more corporate boards are switching to so-called “performance shares” that require executives to not only keep their jobs for the three-year vesting period, but also to hit some specific profit goals or other targets in order for the stock awards to vest.

If they miss, “they don’t get it,” said Mallin. While that’s good news for investors who want executives’ pay to track their companies’ profits, it also means the stock awards reported in earlier proxies as part of those executives’ pay sometimes disappear, making the earlier numbers inaccurate.

“It’s led to the concept of realizable pay,” said Mallin.

That’s exactly what happened to executives at Duluth-based NCR Corp. The ATM maker’s top five executives had to forfeit their 2008 and 2009 stock awards, which were supposed to vest in 2011, because the company didn’t hit profit targets.

However, NCR turned around and issued “ad hoc” stock awards in 2011 to three of its top executives, including a $1.8 million stock award to CEO Bill Nuti. NCR said at the time that the ad hoc stock awards were needed because Nuti was an “outstanding leader” and that it could lose “top talent who are critical to the long-term success of the company.”

Partly as a result of those ad hoc and earlier stock awards, Nuti’s official compensation rose from $2.4 million in 2007 to $11.7 million in 2011. But after the various forfeitures, what he actually got in terms of realizable pay fell from $7.5 million in 2007 to $5.4 million in 2011, according to Equilar.

But the story’s not over yet.

When NCR’s boards awarded the new “ad hoc” stock last year to the three executives, the awards didn’t come with any performance conditions. The executives just had to keep their jobs for the next two, or in Nuti’s case, three years.

But then ISS, the corporate governance group, told NCR’s shareholders last year that they should vote against the plan.

A few days before the shareholder meeting, NCR re-tooled Nuti’s 2011 stock award. If NCR doesn’t meet certain profit and shareholder return measures this year, Nuti’s stock award “will be forfeited completely,” the company said.

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