It re­ally, re­ally pays to be a CEO

Sur­vey shows that top ex­ec­u­tives al­ready earn­ing huge sums are get­ting even big­ger pay­outs

The Mercury News - - Front Page - By Peter Eavis The New York Times

This is not a dif­fi­cult time to be a chief ex­ec­u­tive.

The solid econ­omy has bol­stered com­pa­nies’ sales, and Pres­i­dent Don­ald Trump’s cor­po­rate tax cuts have juiced prof­its. A huge in­crease in stock buy­backs has lifted share prices.

De­spite all the struc­tural forces aid­ing com­pa­nies’ bot­tom lines and stock prices, boards con­tinue to act as if CEOs have unique pow­ers to de­liver bet­ter re­turns — and have gone to great lengths to com­pen­sate them. The most prom­i­nent ex­am­ple: Tesla ap­proved a pay pack­age to Elon Musk val­ued at as much as $2.3 bil­lion. It’s not just the high­est sum for last year; it’s the big­gest ever, ac­cord­ing to com­pen­sa­tion ex­perts. (More on Musk be­low.)

Some­thing about this feels in­evitable. Ev­ery year, Equilar, an ex­ec­u­tive com­pen­sa­tion con­sult­ing firm, con­ducts a sur­vey for The New York Times of the 200 high­est-paid chief ex­ec­u­tives in Amer­ica. And nearly ev­ery year, CEOs al­ready earn­ing huge sums get even big­ger pay­outs. In 2018, our anal­y­sis shows, they did par­tic­u­larly well: The me­dian boss re­ceived com­pen­sa­tion of $18.6 mil­lion — a raise of $1.1 mil­lion, or 6.3%, from the year prior.

CEO pay in­creased at al­most twice the rate of or­di­nary wages. In 2018 — a pretty good year for the la­bor mar­ket — the av­er­age Amer­i­can pri­vate-sec­tor worker got a 3.2% raise, or an ex­tra 84 cents per hour.

These gains at the top are de­spite re­cent ef

forts to re­strain CEO pay. Ear­lier this decade, Con­gress re­quired that com­pa­nies disclose the ra­tio of their chief ex­ec­u­tive’s pay to that of their me­dian em­ployee. Law­mak­ers also gave share­hold­ers a spe­cial but non­bind­ing vote on the mat­ter. An­other trend the­o­ret­i­cally con­tribut­ing to ac­count­abil­ity is that com­pany boards, un­der pres­sure from some share­hold­ers and ad­vi­sory firms, have tied a lot more of a chief ex­ec­u­tive’s pay to a com­pany’s per­for­mance.

And yet the com­pen­sa­tion ma­chine still spits out big­ger and big­ger re­wards. Musk topped Equilar’s list by more than $2 bil­lion. In sec­ond place was David M. Zaslav, the chief ex­ec­u­tive of Dis­cov­ery, an en­ter­tain­ment com­pany, at $129.5 mil­lion.

Palo Alto Net­works, which pro­vides cy­ber­se­cu­rity ser­vices, gave its in­com­ing chief, Nikesh Arora, a pack­age that it said was worth $125 mil­lion. Or­a­cle awarded each of its two co-chief ex­ec­u­tives pay­outs of $108 mil­lion and gave its chair­man, Larry El­li­son, slightly more. One of the co-CEOs, Safra A. Catz, was 2018’s high­est-paid woman, one of only eight on the Equilar list.

Uber’s chief ex­ec­u­tive, Dara Khos­row­shahi, who got a $45.3 mil­lion award, would have been 10th on Equilar’s list. But since the com­pany was not pub­lic last year, it was not in­cluded in the rank­ings. Also miss­ing: the CEOs of pri­vate eq­uity firms and hedge funds, whose com­pen­sa­tion can run into the hun­dreds of mil­lions.

Five take­aways from the 2018 re­port:

• CEOs get paid re­gard­less of logic

When Tesla an­nounced its multi­bil­lion-dol­lar award for Musk in Jan­uary 2018, it was hailed as a bold ex­per­i­ment, fit­ting of a vi­sion­ary en­tre­pre­neur. Sure, the multi­bil­lion head­line num­ber was big enough to ap­pease the gods, but the award was struc­tured in such a way that Tesla would have to reach highly am­bi­tious mile­stones for Musk to re­ceive any of it. Tesla’s mar­ket cap­i­tal­iza­tion is now $35 bil­lion. To gain all the op­tions in the award, its mar­ket value would have to in­crease 18 times over, to $650 bil­lion.

“Elon’s en­tire com­pen­sa­tion is di­rectly tied to the long-term suc­cess of Tesla and its share­hold­ers, and none of the eq­uity from his 2018 per­for­mance pack­age has vested,” said Kam­ran Mum­taz, a spokesman for Tesla.

The award’s struc­ture was driven by con­cern that Musk’s at­ten­tion could wan­der to his other ven­tures, like SpaceX, or that he could leave Tesla al­to­gether. In de­scrib­ing the com­pen­sa­tion pack­age, the board said it wanted to “mo­ti­vate Mr. Musk to con­tinue to not only lead Tesla over the long term, but par­tic­u­larly in light of his other busi­ness interests, to de­vote his time and en­ergy in do­ing so.”

In the months af­ter Musk’s fo­cus was sup­pos­edly for­ti­fied, how­ever, both he and the com­pany fal­tered. The com­pany strug­gled to pro­duce and de­liver its elec­tric cars, se­nior ex­ec­u­tives de­parted and fi­nan­cial con­cerns re­turned. Musk posted mes­sages on Twit­ter about a deal to take Tesla pri­vate that the Se­cu­ri­ties and Ex­change Com­mis­sion later de­scribed as false and mis­lead­ing. (Both Musk and Tesla set­tled with the agency.)

• CEOs get paid ex­tra to do the ba­sics

Two chief ex­ec­u­tives who ended high up on Equilar’s list, Robert A. Iger of Disney and John J. Legere of TMo­bile, are get­ting awards for lead­ing their com­pa­nies through large merg­ers.

But car­ry­ing out merg­ers could be con­sid­ered a core part of a CEO’s job de­scrip­tion, and not de­serv­ing of ex­tra pay. CVS, for in­stance, gave a few se­nior ex­ec­u­tives a spe­cial award for over­see­ing its big merger with Aetna, but its chief ex­ec­u­tive, Larry J. Merlo, did not get one.

Iger of Disney is get­ting ex­tra shares that Equilar values at nearly $74 mil­lion, an award that was de­pen­dent on the com­ple­tion of Disney’s ac­qui­si­tion of 21st Cen­tury Fox and is sub­ject to per­for­mance goals. Adding that sum to the $65.6 mil­lion that Iger was awarded last year would give him a com­bined haul of nearly $140 mil­lion.

Legere, whose com­pany is com­bin­ing with Sprint, stands to get a spe­cial merger award that TMo­bile val­ued at $37 mil­lion. He’ll get it even if the deal does not close. In its proxy, T-Mo­bile said the stock grant was de­signed to push re­cip­i­ents to max­i­mize re­turns for T-Mo­bile share­hold­ers even if the com­pany did not merge with Sprint.

• CEOs get paid re­gard­less of scan­dal

Ti­mothy J. Sloan stepped down from Wells Fargo in March, af­ter strug­gling to con­vince Con­gress and reg­u­la­tors that the bank was fix­ing its prob­lems af­ter sev­eral scan­dals. Sloan’s stock grants, worth around $24 mil­lion, ac­cord­ing to Equilar, will vest over the next three years, Wells Fargo said.

Face­book had a hor­ri­ble 2018. The Cam­bridge An­a­lyt­ica scan­dal re­vealed the com­pany’s poor con­trols on user data, and the ac­tiv­ity of Rus­sia-linked ac­tors on Face­book around the time of the 2016 elec­tion was one of the big­gest out­rages to ever hit a large tech­nol­ogy com­pany. The com­pany is now spend­ing bil­lions trying to make its net­work se­cure, and it faces reg­u­la­tory scru­tiny that could af­fect it for years.

But ex­ec­u­tive com­pen­sa­tion barely took a hit. Face­book’s board gave an $18.4 mil­lion stock award to both Sh­eryl K. Sand­berg, the chief op­er­at­ing of­fi­cer, and Mike Schroepfer, the chief tech­nol­ogy of­fi­cer. (Mark Zucker­berg, Face­book’s chief ex­ec­u­tive, is not paid like the other se­nior ex­ec­u­tives; ef­fec­tively all his com­pen­sa­tion is made up of pay­ments to cover the costs of travel and per­sonal se­cu­rity.)

• CEOs of­ten get paid more than com­pa­nies say

Equilar does its anal­y­sis based on head­line com­pen­sa­tion num­bers from proxy state­ments. But those are es­ti­mates, of­ten based on com­pa­nies’ com­plex cal­cu­la­tions of what stock and op­tions grants will be worth in the fu­ture. Some share­holder ad­vi­sory an­a­lysts do their own math and con­clude that the awards are likely to pay out far more than com­pa­nies claim.

In­sti­tu­tional Share­holder Ser­vices, for in­stance, es­ti­mated that the 2018 com­pen­sa­tion granted to each of Or­a­cle’s co-CEOs had a value of $207 mil­lion, com­pared with the $108 mil­lion in the proxy. ISS’ cal­cu­la­tions some­times dif­fer be­cause they make dif­fer­ent as­sump­tions about whether ex­ec­u­tives will achieve per­for­mance tar­gets. (Or­a­cle de­clined to com­ment.)

• CEOs get paid to invest in their com­pa­nies

Upon join­ing Palo Alto Net­works last year, Arora took $20 mil­lion of his own money and pur­chased com­pany stock. When chief ex­ec­u­tives invest a por­tion of their for­tunes, it can strengthen the align­ment be­tween the top ex­ec­u­tive and share­hold­ers. (Fa­mously, be­fore he joined Bank One in 2000, Jamie Di­mon, the chief ex­ec­u­tive of JPMor­gan Chase, spent roughly $57 mil­lion buy­ing shares in the bank, which later merged with JPMor­gan Chase.)

Musk

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