The Advisors' Blog

– Gregory Schick, Sheppard Mullin Richter & Hampton

The April 5th issue of Business Week included an article – “CEO Pay Drops But . . . Cash is King” – that provided an early look at 2009 compensation for CEOs at 81 large companies. The article’s survey data covered companies whose CEOs had been the same person in both 2008 and 2009. The data was obtained from proxy statements that were publicly filed by March 12, 2010.

For corporate governance advocates who have been railing against perceived excessive compensation, the article happily reports that CEO compensation dropped by 8.6% as compared to 2008. But, the article also reports that CEO cash compensation rose 8.3%. Furthermore, employer contributions to CEO pension plans reportedly gained an average of 15.4%.

As noted in the article, for cash and pension compensation to have materially increased at a time when economic growth (and inflation) were at relative lows does not appear to be consistent with paying for long-term performance and which seek to ensure that CEOs have skin in the game.

The article reports that, apart from TARP companies which were subject to federal limitations on compensation, declines in equity compensation were the principal reason why total compensation decreased. This would mean that at-risk long term incentive compensation was being replaced with short-term cash compensation which is not as directly linked with the welfare of shareholders.

The article measures the drop in equity compensation in dollar terms and reported that option values decreased by 30% and stock awards by 12%. Ideally, all of the survey’s proxy statement data would reflect the SEC’s new equity compensation reporting rules which now utilize FASB ASC Topic 718 grant date values, rather than annual expense amounts so that equity value comparisons are one-to-one (calendar year companies filing their Form 10-Ks and proxy statements before February 28, 2010 would have been permitted to file under the SEC’s pre-amended rules).

Note that a decline in reported FASB 718 dollar values would not necessarily translate to a decrease in the magnitude, or potential value, of equity awards. This is because, all other things being equal, lower share prices at the time of grant will result in lower FASB 718 grant values. The article did not comment on whether differences in stock prices (or other option valuation variables) at the times of grant were accounted for in concluding that equity compensation values had decreased.

In the very near future, there will be much more 2009 CEO compensation data to digest and analyze. It will be interesting to see if the Business Week survey findings will continue to be representative of CEO pay trends when compensation information from other companies becomes available.