Following the Money to Unexpected Places
May 4th 2012 3:38PM
Updated May 4th 2012 3:58PM
Things have been returning to the old "business as usual" in CEO compensation: corporate bigwigs banking big bucks. The AFL-CIO recently released findings that the average S&P 500 chief executive took home 380 times the pay of the average worker in 2011, but it's not the only organization keeping track.
This week, GMI Ratings released its preliminary pay report (link opens PDF file) on last year's CEO compensation trends, reiterating the idea that regardless of how the rest of the American economy is doing, chief executives have been doing pretty darn well. For the second year in a row, Russell 3000 CEOs have experienced a double-digit-percentage pay increase.
The data also reveals a fascinating trend: Last year, small- and mid-cap CEOs booked the largest increases, a different trend than the previous year.
A statistical surprise
In 2011, total CEO annual compensation (which includes base salary, bonuses, and perquisites) for the 817 companies GMI Ratings surveyed increased by just over 10% on average. However, total realized compensation, which also includes equity profits and deferred compensation, increased by more than 44% on average.
Pay increases vary, though, by the size of the company. The average realized pay for S&P 500 CEOs increased by 12% in 2011 versus 2010. However, GMI Ratings found that the average realized compensation for S&P mid-cap CEOs has risen by 17%, and S&P small-cap CEOs' average realized compensation grew by 28%.
The previous year, the annual pay boosts were most pronounced at the biggest S&P companies. This year's results seem to reverse that disparity.
Are these under-the-radar CEOs overpaid?
When one thinks of an uber-well-compensated CEO, one might think of Oracle's (NAS: ORCL) Larry Ellison, who ranked No. 1 on The Wall Street Journal's list of highest-paid CEOs of the decade last year. Oracle's market cap was $98 billion at that time, and shareholders had seen the value of their shares triple, so surely there wasn't too much to complain about performance-wise in that particular case.
Oracle is without a doubt a large-cap company, with a current market cap of $142 billion. Investors surely could argue back and forth about Ellison's reputation for high pay and whether he's worth what he's made. His good friend, Apple's Steve Jobs, told Ellison he didn't need any more money at one point, according to one anecdote in Walter Isaacson's biography of Jobs.
However, GMI's findings that small- and mid-cap CEOs clocked larger average pay increases last year than large-cap CEOs is fascinating. The recipient of the largest annual pay increase GMI Ratings has found to date is Kenneth Peak, CEO of the small-cap Contango Oil & Gas (NYS: MCF) . He received a $6 million cash bonus after meeting three out of four financial metrics last year. As of right now, Contango's market cap is a mere $837 million.
Interestingly, the top-paid CEO according to GMI Ratings' preliminary findings is Herbalife CEO Michael Johnson, who raked in total realized compensation of $84.4 million, beating out tech giant IBM's (NYS: IBM) now-retired Sam Palmisano, whose total realized compensation came in at $63.3 million.
Most of Johnson's 2011 windfall resulted from his exercise of options he received in 2003 through 2005, when Herbalife shares had tumbled below $10. He's an interesting individual to top the list, not only because most of that compensation is tied to a remarkable recovery over the years (total shareholder return is up 292% over the last five years) but also because well-known hedge fund manager David Einhorn recently criticized the company's disclosures.
The top 10 most highly paid CEOs gained about 77% of their realized compensation through option exercises and vested equity. However, a few CEOs were simply showered with cash in 2011. For example, the CEOs of Marathon Oil (NYS: MRO) and Honeywell (NYS: HON) received bonuses of $21.8 million and $23.3 million, respectively.
Guess who always seems to get ahead
Whether these particular CEOs' job performances have been worth the big bucks they've stacked up is worthy of some spirited discussion, so chime in using the comments box below. However, one thing's for sure: The overall trend to increasing CEO pay belies a lot of common sense in the remainder of the marketplace.
After all, the economic recovery is far more lackluster than many had previously believed. Regular Americans haven't seen a parallel increase in income; in fact, average Americans have been falling behind for decades now. The Economic Policy Institute recently released data stating that from 1978 through 2011, CEO pay increased by 725%, compared to a 5.7% increase in worker compensation over that same time frame.
Small- and mid-cap companies' CEOs may be making out like bandits and reversing the previous trend, but when it comes to regular Americans' wages for their work, there's no such statistical surprise bulking up the bank accounts.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Oracle, IBM, and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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