Top executives' pay edges up amid downturn

Yet even as median pay rose, filings by the companies with the federal Securities and Exchange Commission showed that efforts to more closely link pay to performance, increasingly called for by investors and regulators, are starting to have an impact on compensation.

About a third of the executives studied did not receive performance-based short-term bonus or incentive payments in 2008, the SEC filings showed. That was nearly three times as many as missed such payments, made for meeting financial goals, in 2007.

The struggling economy also has cut, in many cases drastically, the estimated value of the pay packages reported to the SEC. More than half these executives' total pay was tied to stock and stock option awards, which have dropped in value along with the rest of the market. Executives won't receive the full estimated value of their pay packages unless their companies and stock prices rebound.

Corporate pay has come under fire as excessive for several years, and scrutiny of compensation packages has increased in a year of bankruptcies and government bailouts. The Obama administration this past week outlined proposals to tie executive pay more closely to long-term performance, requiring more shareholder input, and ensuring more independent corporate compensation committees.

Experts say performance-based pay reforms already appear to be taking hold, and more are likely, through both government action and efforts by activist shareholders.

As a result, said compensation expert Jim Reda, the continuing economic downturn could have a greater impact on 2009 pay packages, which won't be reported until early next year.

"We think the [pay for performance] system is working to some degree," said Reda, founder and managing director of James F. Reda & Associates, an independent corporate compensation and governance firm with offices in New York and Atlanta.

Coke execs tops again

The AJC's calculation of pay packages included salary, bonuses, incentives, above-market returns on pension plans, the estimated value of stock and options granted in the year and other perks, such as car allowances, reported to the SEC.

Neville Isdell, former Coca-Cola Co. chairman and chief executive officer, ranked first in the AJC survey with a pay package valued at $23.1 million, up 7 percent from the year before.

Muhtar Kent, who became Isdell's successor as Coke CEO midway through 2008, was second at $19.6 million —- 87 percent higher than his pay the year before. Kent also become chairman in April 2009 after Isdell retired from that role.

In its filing, Coca-Cola's board said its executives were rewarded for increasing volume, improving operating profits and grabbing a larger share of the global beverage market. For Kent, previously Coke's president and chief operating officer, the huge bump in pay came with his new position, primarily through added stock options.

Stock and option grants, which give the right to buy stock at a preset price, were a significant part of the pay packages for most executives. Because the value of those grants varies with the stock price, many are now worth far less than originally reported.

Almost 70 percent of the estimated pay for Isdell and Kent was tied to stock and options. Calculated using current stock prices, Isdell's pay package is now worth an estimated $13.9 million and Kent's an estimated $9.2 million.

"Compensation at the Coca-Cola Co. is tied to company and individual performance as well as the stock price," Coke spokeswoman Crystal Warwell Walker said. "A significant portion of the reported compensation is in stock options and/or performance share units that do not pay out unless the company performs."

Delta Air Lines CEO Richard Anderson ranked third in the AJC survey at $17.4 million. His pay rose 54 percent from his 2007 compensation.

Anderson received stock and options valued at $16.7 million, an amount equivalent to 96 percent of his overall pay package. By April, however, those awards were worth $8.1 million.

Like that of all employees, pay for Delta executives was affected by special one-time awards for Delta emergence from bankruptcy in 2007 and merger with Northwest in 2008.

"Every Delta employee shared in the company's successes in 2008," Delta spokesman Kent Landers said. "Delta granted a 15 percent ownership stake in the new company to employees upon the closing of the Northwest merger, implemented across-the-board pay increases for non-management employees and paid 12 monthly performance payouts for meeting operational goals."

John Brock, chairman and CEO of Coca-Cola Enterprises, Coke's largest bottler, was fourth at $11.9 million, down 8 percent from 2007. Daniel Amos, chairman and CEO of insurer AFLAC, was fifth at $10.8 million, down 10 percent.

CEO pay an issue

While the median pay of all executives reported in the filings rose in 2008, CEOs as a group saw their median pay fall. Typically their companies' highest-paid executives, top Georgia CEOs saw their median pay drop by 7 percent to $5.5 million.

That drop was in line with national figures compiled by the Corporate Library, a corporate governance research firm. Its report, based on 218 companies in the Standard & Poor's 500 index, showed that median pay last year for a CEO at a major U.S. public company was $7.7 million, about 10 percent less than in 2007.

The details of many pay packages, though, show that the CEOs are not having their compensation dramatically cut, said Vineeta Anand, chief research analyst for the AFL-CIO Office of Investment. The AFL-CIO, a group of 56 unions representing 11 million members, tracks CEO pay through its annual Executive PayWatch report.

Executive pay remains out of touch with the broader economy, Anand said.

"Hundreds of thousands of working Americans lost everything," she said. "CEOs continued to collect fat paychecks, lavish perks and taxpayer-funded bailouts to boot."

Median annual earnings for full-time U.S. workers last year rose 4 percent to $37,544, according to the U.S. Department of Labor. That figure does not include benefits. At the same time, the U.S. unemployment rate reached 7.2 percent, the highest level in more than a decade, and it has continued to climb this year.

Companies are finding ways to shift pay and continue rewarding their executives, Anand said. The AFL-CIO cited Atlanta-based SunTrust Banks as an example of pay practices it questions.

SunTrust, which late last year received $4.9 billion in bailout funds from the U.S. government, gave chairman and CEO James Wells a 2008 pay package valued at $8.1 million, including about $7 million in stock and options.

Since the original grant date, SunTrust stock has fallen from $65 to $13, dropping the value of the stock awards to about $1 million and making the options worthless.

SunTrust, though, gave Wells another set of options for 2009 at an exercise price of $9.06. SunTrust's stock rallied in February, already making the new options valuable.

"That's a reward for riding the stock price down and riding it back up to where it was before without an increase in performance," Anand said.

SunTrust defended the awards. The new options came as part of the company's overall stock compensation plan, which was approved by shareholders. More than half of those options are tied to performance measures, meaning Wells won't get them unless he and the company hit certain financial targets.

"We believe using stock options and restricted stock enhances the alignment between our shareholders' interests and executive compensation," SunTrust spokesman Mike McCoy said.

Independence, clarity key

Even before the recession hit, executive pay was receiving increasing attention. And it is likely to remain in the spotlight, said Reda, the corporate pay and governance consultant.

Corporate boards that set the pay are being more careful, Reda said. They know shareholders and activists are watching closely. "They don't want to be fighting an angry mob," he said.

Government regulation is not the best way to reform the system, he suggested, but rules that improve independence and disclosure could help.

Legislation introduced in May by U.S. Sen. Charles Schumer (D-N.Y.) would create a "shareholder bill of rights" that proposes, among other reforms, keeping the roles of CEO and chairman separate.

Many CEOs also hold the chairman role, giving them sway over their boards of directors and committee assignments, Reda said. Pay packages are usually determined by a board's compensation committee.

Companies also should be required to disclose whether consultants hired to help set executive compensation have other contracts with the company, Reda said. Consultants may not be as frank in their analyses if they're worried about retaining other contracts, he said.

"Make the process as independent as possible," Reda said. "Make the disclosure as clear as possible, and then let the market determine what to pay people."

Cover Story | Compensation

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Check our sources

Jim Reda: Founder and managing director of James F. Reda & Associates (www.jfreda.com), a consulting firm that works with companies on executive pay and other corporate governance issues.

Amy Borrus: Deputy director of the Council of Institutional Investors (www.cii.org), a nonprofit association of pension funds with combined assets over $3 trillion.

Vineeta Ananda: Chief research analyst for the AFL-CIO Office of Investment, which tracks executive pay. For more information on its reports: www.aflcio.org/corporatewatch/paywatch.

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How we got the story

The Atlanta Journal-Constitution calculated pay for more than 100 executives at the state's 20 largest public companies (ranked by revenue) by analyzing the annual proxy statements they filed with the Securities and Exchange Commission.

The calculations took into account several forms of compensation, including: base salary (typically less than 25 percent of overall pay); bonuses and nonequity incentives (rewards for meeting performance goals); stock and options (an estimated worth; the value of these fluctuates with the stock price); all other compensation (perks including car allowances, use of company aircraft, etc.)

Following the methodology used by The Associated Press, The AJC made two key adjustments:

For stock and options, the AJC used the estimated value of awards granted in the year. The summary compensation table in the SEC filing reflects an accounting expense the company took for an executive's stock and option awards. A separate table provides the estimated value of the stock and options granted in the year.

The AJC also only includes the change in pension value if it's for above-market, or preferential, returns. The SEC filing includes the full change in pension value in the summary compensation table.

Companies surveyed were provided an opportunity to review the figures before publication.

Top 2008 pay packages in Georgia

$23,132,324*

Neville Isdell, Chairman of Coca-Cola Co.

(now retired)

$19,628,585*

Muhtar Kent, President and CEO of Coca-Cola Co. (now chairman)

$17,442,655*

Richard H. Anderson, CEO of Delta Air Lines

$11,927,626*

John F. Brock, Chairman and CEO of Coca-Cola Enterprises

*Total compensation calculated from SEC filings. Inside: The top 20 pay packages for executives at Georgia's largest public companies. A16

Also inside

> The financial crisis spurs calls for shareholders' say on pay. A16