By Theo Francis
Big companies tend to pay their chief executives big bucks --
that much is widely known.
Less familiar: Many of those CEOs wind up receiving much more,
often well after the compensation is initially disclosed.
The $190 million that Oracle Corp. reported paying co-CEO Mark
Hurd over three years was valued at $267 million by the end of that
period. At consulting firm Gartner Inc., $33.6 million of pay for
Eugene Hall swelled to $65.7 million. The $53 million McDonald's
Corp. reported paying Stephen Easterbrook grew to about $85
These gains are propelled in part by a robust stock market,
which has driven up the value of executive equity awards, but also
by intricate pay structures that can multiply the number of shares
and options those awards ultimately provide.
The Wall Street Journal compared what S&P 500 companies
reported paying their CEOs over three years with a measure of what
that pay was worth at the end of the period, called realizable pay,
using data from ISS Analytics, the data-intelligence arm of proxy
adviser Institutional Shareholder Services. (For more information,
see the methodology note at the end of this article.)
On average, the value of the pay at the end of the period was
16% higher than originally disclosed. Pay rose at three out of five
companies. And at one-third of companies, pay rose by more than
"Realizable pay allows us to see how pay scales up with
performance," said Simiso Nzima, investment director for the
California Public Employees' Retirement System, or Calpers, which
has begun using its own five-year measure of realizable pay in
evaluating company pay programs.
Equity of all kinds made up about two-thirds of disclosed CEO
pay last year, and these stock and option awards drove the gap
between disclosed pay and realizable pay -- but not just because
share values change over time.
Share-price gains accounted for about three-quarters of the
overall difference. At McDonald's, $26.6 million of the increase in
Mr. Easterbrook's pay came from market returns, while $5.2 million
came from other factors.
A McDonald's spokeswoman said the company has gained $71 billion
in market value during Mr. Easterbrook's tenure.
For many companies, a key reason compensation rises or falls is
an increasingly common variety of stock and option awards called
These awards are designed to give executives more shares -- or
sometimes more stock options -- if the company meets performance
targets set by the board. These thresholds can be based on measures
such as profitability or cash flow, or meeting any of a variety of
operational goals, sometimes spread over several years.
Notching better performance against these metrics means CEOs
receive additional options or more shares of stock, raising the
value of the award beyond any share-price change. Poor performance
against the metrics means receiving fewer shares or options.
Performance shares made up at least part of long-term pay plans
at 83% of S&P 500 companies last year, up from about half in
2008, pay consulting firm Farient Advisors LLC found.
"The biggest trend in executive compensation for the last 10
years has been the growth of performance shares," said Marc Hodak,
a partner at Farient Advisors.
But CEO compensation figures can omit significant amounts of
pay. Most companies haven't yet determined how many shares their
CEOs will receive under performance-equity awards by the time they
must disclose annual pay figures.
To put a value on the award in the proxy disclosure, companies
make an assumption about how well the chief executives will meet
performance targets, often assuming they will meet midrange targets
without triggering more stringent "stretch" goals that would yield
additional shares. (Companies usually disclose the maximum possible
award value, at award-date share prices, in a footnote.)
The result: Executives can ultimately receive many more shares
and significantly greater value than initially disclosed, even
before considering movements in share prices.
Vincent Forlenza made about $15 million in 2018, as reported in
December by the company he runs, Becton, Dickinson & Co., which
makes catheters, infusion pumps, syringes and similar medical
That total assumed performance-equity awards would be paid out
at target levels, or $4.49 million, based on Becton Dickinson's
share price when the awards were made in late November, a footnote
in the company's proxy says.
However, if the company were to exceed the relevant performance
measures -- tied to return on invested capital and total
shareholder return relative to other health-care companies -- by a
wide enough margin, Mr. Forlenza would get twice as many shares,
adding another $4.49 million to his total, based on late-November
A Becton Dickinson spokeswoman said performance equity is meant
to reward long-term financial results and noted that shareholders
have overwhelmingly approved the company's pay program in each of
the past three years.
"The board believes that our compensation program effectively
aligns the interests of our executives with those of our
shareholders and the long-term goals" of Becton Dickinson, the
Sometimes stock-price appreciation and performance targets work
together to boost a CEO's pay.
Gartner reported paying Mr. Hall $33.6 million from 2016 through
2018, about $18 million of it in performance shares valued at
target levels. By the end of that period, however, Mr. Hall's
realizable pay for the period was valued at nearly double the
reported figure, or $65.7 million, ISS calculated.
Stock returns contributed most of that increase, or $19.5
million. The rest, about $12.6 million, came from above-target
A Gartner spokesman declined to comment.
Strong stock returns can compensate for missed performance
Investors are less likely to worry when stock-market gains make
up for missed performance targets, corporate-governance experts
More concerning, they say, is when CEOs get more shares that
make up for poor stock-market performance.
That does happen. At Oracle, market activity reduced the value
of Mr. Hurd's pay by $17 million. Performance-equity factors helped
increase it. At the end of the three years, Mr. Hurd's pay was
valued at $77 million more than initially reported.
Oracle didn't respond to requests for comment.
The Journal compared three years of annual total pay for S&P
500 CEOs, as disclosed in company annual proxy statements, to a
measure of the value of those same years' pay at the end of the
period, using data provided by Institutional Shareholder Services.
The measure of value at the end of the period, called realizable
pay, includes cash salary, bonuses and incentives as paid; the
value realized from stock options at exercise; and the value of
restricted stock when it vests, or becomes fully the executive's.
Unexercised options and unvested restricted stock are valued using
the company's share price at the end of the period, unless
forfeited or unearnable.
Write to Theo Francis at firstname.lastname@example.org
(END) Dow Jones Newswires
September 13, 2019 17:37 ET (21:37 GMT)
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