June 01--Pay for chief executives of the Chicago area's largest companies is rising despite added scrutiny by shareholders.
The 2014 Chicago Tribune/Equilar CEO Compensation Study found that median compensation for CEOs rose 5.4 percent last year to $5.2 million. The survey of the 100 largest publicly traded companies in Illinois and northwest Indiana also reflects the ongoing shift to performance-based pay.
More than 60 percent of the 2013 median pay was in the form of stock and option grants that are generally tied to future financial performance. In 2012, 53 percent of median pay was tied to performance.
The biggest rewards go to a handful of executives. The 20 highest-paid CEOs earned 45 percent of the total compensation last year.
The survey conducted by Equilar, an executive compensation data firm, shows remarkable consistency at the top of the chart.
Last year, four CEOs took home more than $20 million in total pay, the same number as in 2012 and two fewer than in 2011. Seventeen CEOs cleared $10 million in 2013; 18 in 2012.
The CEOs in the top 20 made a total of $310 million in 2013; the year before they took home $311 million.
The top ranks were dominated by many of the same names that regularly appear among the highest-paid executives. Boeing Co.'sJames McNerney, last year's best-paid CEO with $23.3 million in total pay, was in the top five for the fourth year in a row. Abbott Laboratories'Miles White joined him in the top five for the fourth time since 2010.
Two CEOs jumped into the top five. Sandeep Mathrani, of General Growth Properties Inc., received $22.1 million, but his pay was inflated by the issuance of options for 2012 performance in January 2013. He received options valued at $9.7 million for 2013's performance.
Adjusting the option grants for the years in which they were earned, Mathrani's pay rose 10 percent last year, more than the company's 3.6 percent total shareholder return.
At $21.2 million, Discover Financial Services'David Nelms was the third-highest-paid CEO. His pay more than doubled thanks to a one-time grant of restricted stock units valued at $10.8 million designed in part to encourage him to stay at the company for the next five years.
The increase in median pay trailed the median total shareholder return of 41.2 percent, which includes stock gains and dividends, according to Bloomberg data. Returns were fueled by a soaring stock market. The S&P 500 index rose nearly 30 percent last year.
Pay rose for more than half the CEOs, but the survey has a few notable examples of significant drops in compensation. Caterpillar Inc.'sDouglas Oberhelman saw his compensation fall 33 percent to $14.99 million. Annual revenue at the Peoria-based company fell 15.5 percent and profit tumbled 32.2 percent. Caterpillar's shareholder return of 3.4 percent was near the bottom of the field.
At McDonald's Corp., CEO Donald Thompson's compensation fell 31 percent to $9.5 million, coming off another disappointing year. Revenue and earnings per share rose 2 percent and 3.5 percent, respectively. Operating income came in 3 percent below the target the board of directors set for management. The fast-food company's total shareholder return was 13.6 percent.
The compensation declines reflect that pay is appropriately aligned with financial performance, the two companies said in their proxy statements.
But boards of directors also tweak compensation packages in ways that appear to undermine their commitment to a pay-for-performance philosophy. Two CEOs received substantial raises even though shareholder returns were negative.
Equity Residential boosted the compensation of its chief executive, David Neithercut, by 41 percent to $9 million, while its shareholder return fell 5.2 percent last year. Included in his package was a special share award of $2 million for the completion of a major acquisition. Other executive officers and employees also received the special bonuses.
A Equity Residential spokesman declined further comment.
Exelon Corp.'sChristopher Crane was paid $17.2 million last year, a 69 percent raise, while the company's shareholder return fell 3.5 percent. The board boosted Crane's pay to better align it with that of his peers and also gave him a one-time $3.7 million stock award to compensate for an adjustment made to the long-term incentive plan.
An Exelon spokesman said shareholder returns are lower as the result of several factors management does not control, including a prolonged decline in natural gas prices, sluggish demand and competition from subsidized generation.
"The revised compensation plan rewards management for making long-term decisions that will grow the company, increase revenue as the market recovers and help reverse the decline in share price over the past several years," the spokesman said in a statement.
But Exelon's changes didn't sit well with some stockholders. Thirty percent of shareholders voted against Exelon's executive compensation plan this year, up from 23 percent last year. The results of Equity Residential's "say-on-pay" vote won't be known until after its annual shareholders meeting June 12.
Anything more than 20 percent disapproval on a "say on pay" vote is a warning sign for companies, said Greg Kinczewski, director of proxy services at the Marco Consulting Group, a Chicago-based investment consultant to union pension plans.
"If companies get less than 80 percent (approval), they realize they are outliers," Kinczewski said. "These things average more than 90 percent approval."
The nonbinding say-on-pay vote has not stopped the upward drift in executive compensation, but it has made boards of directors more responsive to investor concerns, shareholder activists say.
Shareholders of Middleby Corp. have been handsomely rewarded the past few years. From 2011 to 2013, the food-service equipment company has an annualized shareholder return of 41 percent. Its sales and profits have more than doubled since 2008, according to its proxy statement.
But stockholders have balked at CEO Selim Bassoul's pay. His total compensation has dropped each of the past three years, from $27.7 million to $10.5 million to $9.1 million. In 2012, the company received 53 percent approval of its executive compensation. Last year, its approval rate dropped to 48.5 percent. Middleby was one of 71 companies that failed its say-on-pay vote, according to Broc Romanek, editor of CompensationStandards.com.
After reaching out to stockholders for additional feedback, the company made a number of changes to its compensation plan, including reducing the potential cash bonus for Bassoul and implementing more challenging financial performance targets. The changes took effect this year.
Bassoul received an $8 million cash bonus in each of the last three years, in addition to his $1 million salary. His $9 million in cash compensation last year was the second-highest in the survey.
Middleby said in its proxy that Bassoul voluntarily recommended to the board to decrease his compensation because of shareholder feedback. But shareholders apparently weren't that impressed with his concession. Only 52 percent of shareholders approved Middleby's executive compensation this year.
A Middleby spokeswoman declined to comment on Bassoul's compensation and the latest say-on-pay vote.
As of Wednesday, 32 companies in the Russell 3000 have failed their say-on-pay votes, including Chicago-based Allscripts Healthcare Solutions Inc., according to Semler Brossy, a compensation consultant.
"Allscripts respects the 2014 results of the nonbinding shareholder vote regarding "Say-On-Pay" and looks forward to an ongoing, meaningful dialogue with investors regarding our compensation program," the company said in a statement.
Companies whose pay policies receive overwhelming support also are listening to shareholders. Boeing, for example, replaced stock options that vest over time in 2014 with restricted stock units that are tied to financial metrics. It also introduced a second metric, three-year total shareholder return, to further align pay with performance.
"Say on pay has encouraged an unprecedented level of engagement and cooperation," Kinczewski said. "Companies are sensitive about it."
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