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How Much Do CEOs Make? Are You Sure You Added That Up Correctly?

There is a lot of talk about how much public company CEO’s make, especially at companies performing poorly, those repaying TARP money, and those handing CEOs large bonuses, while the business is imploding. Every April, the whole world has the chance to shine a spotlight on these CEO paychecks.  That’s because spring is the annual proxy statement season, and calendar-year public companies disclose compensation numbers. This means General Counsels work with JDs at law firms and MBAs at consulting firms to do valuations and finalize their SEC filings. It’s interesting to see how pay can swing like a pendulum from one year to the next depending on firm performance.  But perhaps more interesting is the fact that levels also happen to change when they are interpreted by a a different valuation firm. Even in the same year.

Just last week, the New York Times and Wall Street Journal published respective lists of the top 200 CEO’s pay packages from last year.  But to my immediate surprise, I noticed that each list ended up with pretty different results. Compensation for some CEOs was different on WSJ than on NY Times, and in some cases, the spread was significant.  HPQ’s CEO, for example, was paid a total of ~$11MM according to the WSJ though the NY Times reported ~$24MM.  But more surprising, and maybe more scary, was that both valuation firms are considered highly-reputable, industry experts when it comes to executive compensation.

Given the resources used for the studies, I didn’t expect to see such inconsistently.  In today’s environment, where executive pay is already under scrutiny, and where banks are doing little to help the case, companies have no incentive to make compensation even harder.  That said, the herculean task of figuring out executive compensation is critical. Company reputations are at stake and executives will have even less chance in the court of public opinion. And conversely, it would be a real economic breakthrough for economists and businesses to figure out how to balance rewards with incentives.

To that end, below, I’ve provided a few details below about the two studies. I’ve included (A) Links to the studies (B) Information on firms that carried out the studies (WSJ and NYT simply reported the information) (C) A few big picture takeaways (i.e. my opinions)

(A) Links To Studies
1. New York Times Study
(i) Pay Table
(ii) General Discussion
(iii) Valuation Techniques

2. Wall Street Journal Study
(i) Pay Table
(ii) Discussion
(iii) Valuation Techniques

(B) Firms Behind The Studies

1. The NY Times study was put together by a firm named Equilar. Equilar is the undisputed industry leader in compensation research. Its analysts dig through proxy statement for a living, and they tend to be consistent in their approach. Many top compensation consulting firms utilize services from Equilar, and some use them extensively.
2. The Hay Group put together the WSJ study. Its Compensation Consulting group is very good and competes with top firms for projects. However, in my experience, it does not always hang with Mercer, Towers Perrin, Watson Wyatt, and Aon for top clients. I suspect all of the firms here, including Hay Group use, or have used, Equilar quite a bit.

– Comparisons aside, both firms should have more than enough resources and experience to do this study, and the real challenges are (i) finding all the numbers, (ii) maintaining consistency of methodology of those numbers across the 200 companies, and (iii) using a sensible option pricing model to calculate the expected stock value (i.e. black scholes). Not a cake walk by any means, but doable.

(C) What does this mean? For what it’s worth, here’s my opinion:

1. Stock compensation is hard to value. There are a large number of assumptions in every calculation, many of which change depending on the effective date and are subject to late disclosure, non-disclosure, or improper disclosure by the companies. It also depends on all the black-scholes assumptions.
2. If these expert firms can’t come up with consistent numbers, then the media definitely has no business putting out numbers in magazines and papers, which influences and persuades the general public.
3. Similarly, articles bashing “Pay for Performance” should also be assessed on the merits of the research and experience of the researcher. And to be valid, they should be back with a good data set.
4. Governance standards for proxy filings still has room for improvement. I suspect they will continue to refine the rules, come up withe more standard approaches, and further incent companies to follow. In the past few years, they’ve made some progress.

But these are all high level ideas, easier written about in a post than driven forward, and easier discussed than executed. Executive pay analysis is difficult, not only because it’s highly-technical and nearly impossible to interpret inconsistent and non-standardized data, but also because many numbers are never even disclosed and because the rules of the game are continuously changing. The good news is that the U.S. has taken strides over the past few years, and they’ve taken leaps and bounds as compared to the rest of the world.

But now that we’re in a bit of a standstill with the economy and there are so many questions about valuation, how do we know that these plans even work? And what can we do to continue to incent executives to drive companies forward?   Well, for one, I suspect companies will eventually figure out a more consistent methodology to use when analyzing CEO pay plans–the SEC can do it’s part by making more targeted rules. But they should also allow the best leaders at companies to continue leading.  Not only through developing performance and compensation schemes, but now also by giving them incentive to be creative, innovative and develop as leaders.

That’s because the most successful companies spend more of their time talking about new possibilities and walking down the path of innovation than they do about money.  After all look at companies like Google and Apple, where innovation is king!  Don’t get me wrong, these guys get paid well and they spend a lot of time coming up with the right pay packages, but that’s not the primary driver. And in the meantime, maybe U.S. companies will finally spend more time thinking about that and eventually find a bit of insight into what really drives CEOs and how to harness that to achieve better results.  Some theorists suspect that finding this would lead to even better company performance, suggesting that incentive programs actually destroy intrinsic motivation. It’s an interesting debate.