The Conference Board Finds Changes Underway in CEO Compensation

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Press Release, The Conference Board 12/24/2008 >

Press Release / News >

The Conference Board Finds Changes Underway in CEO Compensation >

Dec. 24, 2008>

While the recent catastrophic events in the U.S. financial markets will most certainly dramatically affect CEO compensation reported in 2009, The Conference Board Top Executive Compensation report released today shows that changes are already underway. >
Key findings of the report include:>

Compensation mix is reallocated towards stock. Almost all industries show a reallocation of compensation towards stock and away from total cash compensation and stock options. In financial services (non-banks), for example, the average percent of total compensation delivered in non-equity incentives fell by 2.62 percentage points (from 24.19 to 21.57). >

Cash may be losing share-but the median CEO still earns more of it. Median cash compensation increased in more than two thirds of the industries studied (as did total compensation overall). The largest median gainer in cash compensation is insurance (up by 34.39 percent to $1,227,371). The only notable negative is construction, an outlier showing a 22.36 percent decrease. >

Food and tobacco executives are the top earners. Among the 22 industries represented, food and tobacco shows the highest median CEO total compensation. It tops the list with $6.34 million in median total compensation, and $2.7 million in median total cash compensation, followed by utilities, insurance, and financial services (non-banks). >

CEOs already have plenty of "skin in the game." Of the largest 10 percent of companies in the sample, the median CEO holds almost 100 times (99.97 percent) of his/her salary in total stock and stock options holdings in the company. Across industry, the largest median multiple (94.44) is seen in the financial services industry (non-banks), the smallest is commercial banks (23.31). >

"Companies must assume their top executives' compensation will come under greater scrutiny from within >and without," says Linda Barrington, Research Director, The Conference Board. "The financial market crisis and U.S. recession have contributed to eroding public trust in business leadership.">

Certainly, from a macro-perspective, median CEO compensation should fall during a recession if such compensation is based on U.S. revenue performance. Since the current recession did not start until December 2007, it won't be until next year's proxy data that this hypothesis can be best tested. "Whether or not this year's upward trend in cash compensation continues will bear watching in 2009 when the data reflecting a year of economic downturn are available," adds Kevin Hallock, co-author of the report and Professor, IRL School, Cornell University. >

Using data reported from firm proxies as of June 2008, The Conference Board 2008 Top Executive Compensation Report provides extensive analysis of median compensation by industry, revenue, and compensation type, for CEOs and companies' five highest-paid executives.>

Defining Terms — Elements of Compensation >

To provide a consistent view of total compensation, compensation data were compiled from proxy statement tables filed as of June 2008 for fiscal year 2007. The terms used in this report are defined as follows:>

Cash Compensation — Cash compensation is the sum of annualized salary, bonus, and non-equity incentive compensation. These data are from the Summary Compensation Table. >
Total Compensation — For this report, "total compensation" was calculated using the sum of the individual elements from a combination of tables as described below, not the "Total Compensation" column from the Summary Compensation Table. Total compensation is the sum of annualized salary, bonus, non-equity incentive compensation, the reported grant date present value of options, the value of stock awards, the change in pension value and earnings on non-qualified deferred compensation, and all other compensation. >

Salary — The annualized salary, regardless or whether paid or deferred, as reported in the proxy. Salary is reported in the Summary Compensation Table "Salary" column (c).>

Bonus — Cash bonus awards, regardless of whether paid or deferred, as reported in the proxy that are discretionary or subjectively determined; bonuses that are not based on pre-established, substantially uncertain criteria; bonuses that are guaranteed and not strictly performance-based (see non-equity incentive compensation for strict performance-based compensation). For example, "bonus" includes sign-on bonuses which are paid before performance can be judged. Any award paid above and beyond salary and formula-based incentive compensation is defined as "bonus." Bonus payments are reported in the Summary Compensation Table "Bonus" column (d).>

Non-Equity Incentive Compensation — Short-term and long-term awards (cash-not denominated in stock) that are based on pre-established, performance-based criteria where the outcome is substantially uncertain at the time established. The SEC requires companies to report all performance-based cash awards, both long-term and short-term, in the year in which they are paid. These payments are reported in the Summary Compensation Table "Non-Equity Incentive" column (g). This is payment above and beyond salary and is awarded based on performance against pre-determined criteria. While not called "bonus," it is a performance based award paid in addition to both salary and "bonus" as previously defined. (Confusion may arise for the layperson because in common lexicon non-equity incentive is often informally referred to as a bonus, which it technically is not.) >

The Value of Stock Options Granted — This is the reported grant date present value of options (from the "Grant of Plan-Based Awards Table" of the proxy statement). >
The Value of Stock Awards — This is the value as reported in the Summary Compensation Table "Stock Awards"column (e). >

Change in Pension Value and Non Qualified Deferred Compensation Earnings — The amounts reported represent the actuarily determined change in the value of defined benefit pensions and nonqualified deferred compensation earnings, including supplemental plans. This is reported in Summary Compensation Table "Change in Pension Value and Non Qualified Deferred Compensation Earnings" column (h). >

All Other Compensation — Incremental cost of perquisites ($10,000 or more), tax gross-ups, company contributions to qualified and non-qualified defined contribution plans, preferential stock purchase, relocation, etc. Reported in the Summary Compensation Table "All Other Compensation" column (i). >

Data Source >

The data used in this report were taken from the Summary Compensation Table and the Grant of Plan-Based Awards Table in proxies filed as of June 2008 for fiscal year 2007. As stock is treated differently according to the requirements of each proxy table it is important to note that the value of option awards was taken from the "Grant of Plan-based Awards Table" to capture the company's estimate of the present value of options granted to the executive at the time of the grant. The annualized salary, bonus, non-equity incentive compensation, value of stock awards, change in pension value and earnings on non-qualified deferred compensation, and value of all other compensation were taken from the Summary Compensation Table. All underlying data used for this analysis were provided by Salary.com. >

Source: Top Executive Compensation in 2008Report #1438-08-RR, The Conference Board >
Read this report > http://www.conference-board.org/publications/describe.cfm?id=1583 >
For further information contact: > Frank Tortoriciat (1) 212 339 0231.f.tortorici@conference-board.orghome

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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.