The rich just keep getting richer. Or at least the CEOs do.
Chief executive bonuses jumped nearly 50% last year to a median of $1.14 million. That’s the biggest percentage gain and highest level in at least five years, according to a Mercer Human Resource Consulting survey conducted for The Wall Street Journal.
The study found that the median direct CEO compensation was $4,419,300, or about 160 times the earnings of the average American production worker. Moreover, the median bonus for 2004 was equal to a record 141% of annual salary. A separate study – this one for The New York Times – found that chief executives at 179 large companies earned an average of $9.84 million, 12 percent more than in 2003.
But even these averages may be significantly understated, since public firms are not required to disclose the values of executive pension plans. According to a new study of S&P 500 CEOs by Harvard Professors Lucian Bebchuk and Robert Jackson, executives’ pension plans had a median actuarial value of $15 million.
Chief executives aren’t just earning record amounts. Many are also raking in the bucks while their companies are struggling. Take Hewlett-Packard’s ousted Carleton S. Fiorina. She banked $42 million after Hewlett-Packard’s board forced her out of the top spot because of poor financial results.
Fiorina is not alone. Blockbuster CEO John Antioco earned $51.6 million in direct compensation last year, while the company lost $1.25 billion. Raymond V. Gilmartin of Merck pocketed a $1.38 million bonus in the same year the drug maker had to pull Vioxx off shelves.
Adding insult to shareholder injury, companies rarely – if ever – ask the CEOs to return their bonuses when financials are restated. Look at William A. Wise, the chief executive of El Paso Corp who was handsomely compensated when the energy company reported a $93 million profit for 2001.
In addition to his salary of $1.3 million, Wise reaped a cool $3.4 million bonus, 768,250 stock options, $1.7 million of restricted stock and $3.7 million in “other compensation.”
Turns out, though, the earnings were fictitious. Last year, the energy company disclosed a loss of $447 million in 2001. Although Wise was pushed out in 2003, he held on to his bonus.
(Ed. note: Berman DeValerio is co-lead counsel in a securities fraud case against El Paso, representing the Oklahoma Firefighters Pension and Retirement System.)
Not surprisingly, El Paso has not tried to recover any of the payments to Wise. Most companies in similar situations display comparable lethargy.
“Directors seem reluctant to pursue bonus payments after a restatement because they desperately want to avoid a public flap or the appearance of wrongdoing by the company,” said Michael Lange, a Berman DeValerio partner. “Either way, shareholders lose.”
If boards and shareholders are relying on regulators to step in and recoup executive pay, they may be out of luck. Although the Sarbanes-Oxley Act of 2002 includes a bonus payback provision when financials later prove false, the Securities and Exchange Commission has yet to exercise its authority in the matter.
“Corporate mega scandals and new regulatory requirements have stretched the SEC pretty thin,” Lange said. “That means, more than ever, it’s up to the boards to take the lead.”
Still, shareholders shouldn’t hold their breath. In many cases, the boards of directors are reaping big rewards of their own.
Yet another recent study evaluated stock options granted to CEOs from 1992 to 2002. The study focused on the increasingly common practice of what the authors call “timing opportunism” – that is, the granting of stock options just before good or just after bad company news.
Baruch College Professors Donal Byard and Ying Li found that the likelihood of timing opportunism increased when board members themselves received large proportions of stock options as part of their pay packages.
All of this means that even supposedly independent directors may be more aligned with top management than they are with investors.
“Boards need to remember their duty to uphold shareholder interests, not to pad their own pockets and line those of rich CEOs,” said Lange. “Most people wouldn’t give their waiter a generous tip if the service was awful. Neither should the boards.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.