Business | Features
Finding out how much top bosses get
Figuring out how companies come up with compensation packages for their CEOs can be very difficult, but it's not impossible
- by Carola Hoyos
- Published: 00:00 December 4, 2009
Comparing the compensation of chief executives is a complicated business that rarely wins friends for those who undertake it.
Proxy statements that US-listed companies must send to the US Securities and Exchange Commission are long and sometimes barely comprehensible, even to the expert.
Often companies that use the highest number of pages to explain how closely linked their pay is to performance actually provide shareholders with the least information.
Carol Bowie, head of the Governance Institute at RiskMetrics, the investor advice firm, says figuring out how some companies arrive at their compensation packages can be "extremely difficult, if not impossible".
Difficulty
"Very often the pay outliers have great difficulty explaining their pay programmes," she said, adding: "Often, the less complex the pay programme of a company, the more reasonable the size of the compensation."
Cash bonuses that are not part of the SEC's summary compensation can distort the value of an executive's compensation package. This is the case with the performance-related bonus of up to $89 million (Dh326 million) that Occidental Petroleum last year awarded Ray Irani, its long-time chief executive and one of the industry's most generously compensated individuals.
One of the biggest challenges is choosing one yardstick with which to measure all the chief executives, regardless of the size of their company or the type of work they do.
The Financial Times's list includes 35 energy companies that range in market capitalisation from $1.8 billion to $359 billion and uses data from January 1 to December 31, 2008.
The companies are global energy groups, US onshore natural gas producers, refiners, and providers of equipment. The group includes companies that are largely owned by a national government and those that are still run by their founders.
Some chief executives have been at the helm of their companies for more than a decade, while others arrived during 2008.
As shareholders and regulators have pushed companies to link pay to performance, compensation packages have grown and become more complicated, with the value of stocks and stock options dwarfing the value of a chief executive's yearly salary.
Assigning a value to the stocks and options is tricky. Ultimately the value of much of the package will depend on the company's share price at a future date and on whether future performance measures are met.
Equilar, the company that compiled the compensation data for the Financial Times, reports equity awards in the year they are granted and uses the widely accepted Black-Scholes method when grant-date values are unavailable.
Cashing in
In contrast, the Corporate Library, another source of compensation data, looks only at realised value, which has shown oil industry executives earning huge amounts in 2008 as they took advantage of high oil — and therefore also stock — prices and cashed in on awards they were given throughout their tenure.
In spite of all these hurdles, measuring pay and performance is a worthy endeavour because compensation packages provide "a window into the soul of a board", as several shareholders interviewed put it.
Guy Jubb, head of corporate governance at Standard Life, the UK equity fund manager, notes: "Remuneration policies provide non-executive directors with one of the very important levers with which to influence the behaviour of executives."
Shareholders argue that re-establishing the power of those levers has become particularly important since the financial meltdown in 2008, which was widely seen as having been caused by the excessive risks taken by powerful executives unchecked by weak non-executive directors and toothless shareholders.
Within the energy industry, shareholders in 2008 signalled their disapproval of pay packages at BP and Royal Dutch Shell in non-binding votes.
In the US, shareholders have less power to voice disapproval but have begun to lobby the SEC vigorously for a greater degree of control over the nomination of individual board members.
This focus on pay makes identifying a good-value chief executive more critical and in doing so highlights the pay trends within one of the world's most lucrative and important industries.
It also means that the new insights generated by such an exercise — imperfect as it may be — far outweigh the risk of creating new enemies.
— Financial Times
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