By Joann S. Lublin
A substantial part of American CEOs' pay is now tied to
performance. But that doesn't mean their compensation follows their
results in lockstep.
The Wall Street Journal's annual pay survey looked at
compensation for 300 CEOs and the returns the chiefs delivered to
their shareholders. Broadly speaking, CEOs did well when their
investors did. All 10 of the CEOs posting the best shareholder
returns were paid more than they had been a year earlier, and all
but two of the 10 worst performers got pay cuts. The results come
as pressure from investors has prompted companies to tie a greater
percentage of their top executives' pay to measurable results.
But there were anomalous results, too, highlighting the fact
that some boards' ideas of success don't always line up with what
pays off for investors. In addition, long-term commitments like
pensions and multiyear stock grants can drive pay higher even if
annual performance falters.
Only one of the 10 highest paid CEOs ranked among the top 10% by
investor performance in the survey, conducted by the consultancy
Hay Group. That was Brent Saunders, chief of Actavis PLC, which has
since renamed itself Allergan PLC.
Meanwhile two of the 10 best paid CEOs-- Viacom Inc.'s Philippe
Dauman and General Electric Co.'s Jeff Immelt--got higher
compensation even though the value of their shareholders'
investments in the company fell.
Compensation for Mr. Dauman, a regular in the Top 10, rose 19%
to $44.3 million, putting him at No. 7 on the list. Total
shareholder return at the media giant, meanwhile, came in at a
negative 6.6%, ranking Viacom 263. His compensation, like that of
most CEOs, includes a mix of near-term and longer-term rewards.
Last year, his salary rose by $371,000 to $3.9 million, his bonus
for the year rose by $3.1 million to $20 million, and his annual
stock-option award rose by about $1.5 million to $7.5 million.
Viacom owns cable channels such as Nickelodeon, MTV and Comedy
Central. Its net income slipped 0.2% in 2014, and it has faced
ratings troubles at its biggest networks. The company's directors
praised Mr. Dauman in the proxy, however, for delivering record
per-share earnings and for more qualitative accomplishments
including "directing significant investment in content
creation."
The company also pointed to a record of strong performance since
Mr. Dauman took command in 2006. Viacom has delivered average
annual shareholder returns of 18.9% over the past three years.
CEO pay and investor returns can diverge for a number of
reasons. Performance metrics could be linked to company-specific
goals like subscriber additions or industrial revenue instead of
share-price appreciation, for example. Or share-price targets could
be benchmarked against peers in the industry, which in theory can
highlight better leadership when outside forces weigh on an entire
sector.
Companies face heightened risks of conflict with their investors
these days when pay gets out of line with performance. The 2010
Dodd-Frank financial law mandates regular nonbinding shareholder
votes on pay practices, and activist investors are paying closer
attention to compensation. A pending SEC rule will require
companies to disclose how well pay for top executives tracks
investor return.
Some companies appear to be doing well on that score. Rite Aid
Corp. CEO John Standley delivered the highest shareholder return in
this year's survey, at 292%. His pay rose by 6.5% to $8.3 million.
Gary Kelly, CEO of Southwest Airlines, delivered a 126% shareholder
return and was paid just $5 million, up 23.9% from a year
earlier.
Compensation for executives at the top of the investor-return
rankings generally rose. One exception was John Hammergren, head of
medical-products company McKesson Corp., whose pay slumped 49.9% to
$25.9 million, while investors reaped a return of 64.6%.
The decline mainly reflected a drop in the value of Mr.
Hammergren's pension. Heeding complaints from investors, the CEO
agreed last year to cut his record-setting $159 million pension
benefit by $45 million, and McKesson revamped its incentive
compensation program for top executives.
"Since last year, we have continued to enhance our
executive-compensation program in response to shareholder
feedback," said Kris Fortner, a McKesson spokesman.
Overall, total compensation for the CEOs in the Journal's survey
climbed by a median of 13.5% to about $13.6 million, nearly
two-thirds of which was linked to performance. That's well above
the 2.2% average rise in wages and salaries for U.S. private-sector
employees overall last year, according to the Labor Department. But
shareholders did even better, with a median return including
share-price appreciation and dividends for companies in the survey
of 16.6%.
Liberty Global PLC's Michael Fries topped the best-paid list
with compensation of about $112.2 million. That was up 139.4% from
a year earlier. Shareholders booked a solid return of 13.3%.
"Our compensation plans are structured to heavily weight
long-term equity performance, which has averaged 35% per year over
the last five years," a Liberty Global spokesman said.
The survey covers CEOs at 300 large companies with at least $9.1
billion in revenue and a proxy statement filed by April 30. Those
parameters left out Discovery Communications Inc.--with 2014
revenue of $6.3 billion--where CEO David Zaslav got more than $156
million, much of it for signing a new employment agreement.
The Journal's survey measures pay granted in the most recent
fiscal year. That includes salary and annual cash bonus, but also
equity and other performance awards, some of which will pay off
only if future performance targets are met. The numbers have
continued to grow.
"Say on pay really hasn't impacted the absolute size of CEO
pay," said Irv Becker, U.S. leader of board solutions for Hay
Group. "But it has impacted the design to be more performance
based." So when corporate performance weakens, he said, "we should
see an appropriate downturn in CEO pay."
That doesn't always happen. Among the worst performers in this
year's survey was Weatherford International PLC. The oil-services
company, struggling to navigate the collapse in the price of crude,
delivered a negative 26.1% total shareholder return last year and
has announced plans to lay off about 15% of its work force by the
end of June. Weatherford's average annual shareholder return over
the past three years was a negative 7.9%, compared with a positive
20.4% for the S&P 500.
Meanwhile, compensation for CEO Bernard Duroc-Danner rose 13.4%
to about $14.9 million, in part due to higher cash incentive pay
for 2014.
Karen David-Green, Weatherford's vice president of investor
relations, explained the payout, saying the company's share price
outperformed industry peers like Schlumberger Ltd. and Halliburton
Co. through late July, when the oil-price downturn began. She also
said the company met most of its performance objectives last year,
including reductions in costs and rates of preventable vehicle
injuries.
The company missed its targets for free cash flow, however, Ms.
David-Green said. Also between late July and the end of the year,
Weatherford's stock fell 52%, compared with 23% for Schlumberger
and 46% for Halliburton.
Ms. David-Green said Weatherford's board views performance over
the long term, "which is not always captured through one-year
[total shareholder return] in a cyclical market."
General Electric's shareholder return was a negative 6.7%. Yet
Mr. Immelt's pay rose 88% to $37.2 million.
The package reflects GE directors' view that Mr. Immelt
exhibited strong leadership and performance, such as double-digit
profit growth for GE's industrial segment and $11 billion returned
to shareholders through dividends and stock buybacks, GE spokesman
Seth Martin said.
Mr. Martin also said Mr. Immelt's pay would have fallen 2% if
not for an $18.4 million increase in the value of his pension.
Some of the pension gain reflected the way accounting rules turn
lower interest rates and longer life spans into higher pension
values. But about $8.8 million reflected a gain of nearly $490,000
a year in pension checks Mr. Immelt can expect to pocket as his pay
has risen and he approaches 60 years old, the age when top GE
executives may collect full pensions.
International Business Machines Corp. boosted CEO Virginia
Rometty's compensation 38.5% to about $19.3 million, even as the
computing giant posted shareholder return of negative 12.4% along
with lower profit and revenue last year.
A year ago, all the senior management team members skipped their
annual bonuses following IBM's disappointing performance in 2013.
Ms. Rometty did get a $3.6 million bonus for her 2014 performance,
representing 90% of her target payout.
"This takes into account the shortfall in financial results
relative to expectations balanced against the substantial strategic
actions taken to reposition the company," IBM said in its proxy
statement. Her overall package reflects "the board's strong
confidence in Ms. Rometty's ongoing leadership."
IBM declined further comment.
Theo Francis contributed to this article.
Write to Joann S. Lublin at joann.lublin@wsj.com
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