This week, USA Today published its annual executive compensation survey, with the feature article combining granted pay and pay realized from stock vesting and option exercises without providing context for the realized awards. The article, titled “Millions by Millions, CEO Pay Goes Up” focuses heavily on the ongoing theme of inequality, arguing that the largest rewards are the product of “employment contracts, benevolent corporate boards . . . and [the] bull market” which has lifted the value of stock and option awards "issued at depressed pre- and post-recession era prices" The survey of 200 S&P 500 companies with proxies filed between the first of the year and March 27 where the CEOs had been in place for two fiscal years, notes that median realized pay for the group increased by 13 percent to $10.5 million compared to the 32% increase in the S&P 500. The article argues that “corporate earnings gains [in 2013] continue to come mostly from job cuts and streamlining instead of organic growth…underscore[ing] the disconnect between boardrooms and Main Street.” However, the article leads readers to a conclusion that CEOs are overpaid:
- Faulting companies for granting practices during in a poor economy: The article makes a blanket assumption that many of the equity incentives that vested or were exercised were granted during in years where the stock market experienced lows, despite relatively consistent grant practices. In reality, most companies have applied consistent grant practices, with the mix of long term incentives shifting away from options since 2007 for other reasons. It would have been helpful if the article had explained which awards were exercised, what the performance was during the period and what pay resulted in order to educate readers about how pay for performance was -- or was not -- aligned. Stock ownership and retention requirements are also not referenced.
- Failure to Distinguish Granted Pay and Realized Pay: The article repeatedly states that realized gains by CEOs from vested stock and option exercise are earned in addition to the pay disclosed in the summary compensation table. In reality, pay realized by vesting of stock and option exercise consists of aggregated sets of awards which have accumulated over a period of years and are exercised at a given point in time. Most readers will conclude that all of the pay is exercisable immediately.
- Pay Ratio: the Other Element of Say on Pay: In light of overwhelming say on pay support, the article indicates that the pay ratio will provide investors with insight to meaningfully evaluate these compensation packages in a way that could sway more say on pay votes. In reality, the pay ratio is a misleading piece of information which cannot provide investors with any helpful information.
The New York Times and Wall Street Journal surveys are expected in the next month.