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 lock step.
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 profit 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 industry peers, 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 is 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 firms companies to disclose how well pay for top executives
tracks investor return.
Some firms 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 investor complaints, he agreed last
year to cut his record $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 is 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, 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% a 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, plus
equity and other performance awards, some of which will pay off
only if future performance targets are met. The numbers have kept
on growing.
"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" CEO-pay decline.
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 workforce 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 firm met most performance objectives last year, including
cost cuts and rates of preventable vehicle injuries.
But the company missed its targets for free cash flow, Ms.
David-Green said. Also, between late July and year-end, its 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. His package reflects
the view of GE directors that he 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%
without an $18.4 million rise in his pension's value.
Some of the pension gain reflected the way accounting rules turn
lower interest rates and longer lifespans 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, 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 a shareholder return of negative 12.4% and
lower profit and revenue last year.
A year ago, all the senior management team members skipped their
annual bonuses after IBM's disappointing 2013 performance. 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
Access Investor Kit for General Electric Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US3696041033
Access Investor Kit for Viacom, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US92553P1021
Access Investor Kit for Viacom, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US92553P2011
Subscribe to WSJ: http://online.wsj.com?mod=djnwires