Executive Compensation: Big CEO Paydays Return

Big Paydays Return

Chemical industry executives saw significant increases in pay as earnings bounced back from the recession. Median total compensation for chemical industry CEOs was $5.4 million in 2010, an increase of 42% from 2009 levels, according to CW’s annual executive compensation survey. Total 2010 CEO compensation also exceeded 2008’s median of $4.1 million by some 32%, but was a bit short of 2007’s median of $5.7 million. Eight CEOs took home more than $10 million in 2010, up from five in 2008 and 2009, compared with twelve in 2007.

Gallogly: $77.1million for LyondellBasell CEO.

Buckley: $23.7million for 3M CEO.

Liveris: $21.3 million for Dow CEO.

McGlade: $16.9 million for Air Products CEO.

The highest-paid CEO in 2010 was LyondellBasell’s James Gallogly with a compensation package that totalled $77.1 million, dwarfing other industry executives (table). Some $72.5 million of Gallogly’s compensation came from stock and option awards, including shares granted when the company exited bankruptcy in April 2010, that vest over the next five years. “The CEO compensation package was structured to encourage a uniquely qualified individual to leave a company where he had been employed for 29 years, and had risen to the number three position, in order to join a company in the midst of bankruptcy with $24 billion of debt,” a LyondellBasell spokesperson says. Gallogly was executive v.p./exploration and production at ConocoPhillips before joining LyondellBasell, and had previously served as CEO of Chevron Phillips Chemical.

Other named executive officers (NEOs), typically the highest five paid officers in a public company, also fared well. Median total compensation for all NEOs was $1.9 million in 2010, up 27% from 2009 levels. Data in CW’s survey was taken from U.S. SEC filings for companies with fiscal years that ended between April 1, 2010 and March 31, 2011.

Senior executive pay packages place much greater emphasis on long-term performance-based awards and equity awards than on salary and cash bonuses. The big increase in CEO pay often stems from the rebound in the stock market. The CW 75 stock index rose 17.3% during 2010, while the S&P500 rose 15% in the same period. The CW 75 does not include dividends; the S&P500 does.

CEOs benefited from this as restricted stock units (RSUs) and other performance-based equity tends to have a three-year vesting period, meaning shares that vested in 2010 increased in value as the stock market bounced back from the recession, says Jim Aslaksen, senior client partners with executive recruiting firm Korn Ferry (Chicago).

Angel: $15.3 million for Praxair CEO.

Kullman: $14.8 million for DuPont CEO.

Grant: $13.2 million for Monsanto CEO.

Ghasemi: $13.2 million for Rockwood CEO.

Those kinds of awards are part of a trend toward long-term performance-based compensation that began several years ago and shows no sign of abating, Aslaksen says. “Options are still used by some,” he adds. “But they are becoming less and less prevalent.” Options dominated from the early 1990s until around 2006. Since then, the trend has been toward long-term performance-based incentives. Such payouts typically constitute about 50%-70% of executive compensation at chemical firms, says Andrew Talkington, senior client partner at Korn Ferry.

At Dow Chemical, more than 80% of NEO compensation “is variable ‘at risk’ compensation and is payable only if specified financial goals are achieved and/or Dow stock price appreciates,” the company says. Dow’s NEO compensation packages include a base salary, cash-based short-term incentives, and equity-based long-term incentives, which are made up of performance shares, stock options and deferred stock. The company, like most, benchmarks executive pay against a “peer group” of similar companies. Dow’s peer group includes DuPont, 3M, PPG, and a number of large industrial companies.

Smaller, venture-backed companies are more likely to use options, Talkington says. Chief executives of companies that have gone public in the past year generally had a higher portion of their compensation made up of options and cash bonuses, rather than other awards (table, p. 58).

The prevalence of equity-based rewards, even over the long-term, means that events outside the control of senior executives still have a major impact on compensation, both positively and negatively. “In 2009, just because your stock price was low, that didn’t mean you did a bad job,” says Aaron Boyd, head of research at Equilar (Redwood City, CA), an executive compensation data firm. “At the same time, to say that your stock price went up in 2010 doesn’t mean that you did a great job. A lot of companies had nowhere to go but up.” Most companies will use combinations of different metrics and rewards payouts to tie pay to performance. “There is no one size fits all for pay design,” Boyd says.

A variety of performance metrics are used to determine pay. Ebitda growth, return on capital employed, cash flow and earnings per share (EPS) continue to be the most popular metrics in the U.S., Aslaksen says. However, companies may also base compensation on metrics related to particular strategic goals, especially for senior executives below the CEO level. For example, a company focused on driving innovation may look at acceleration of new product development or what percentage of sales is derived from new products, Talkington says. These metrics are typically considered with standard financial metrics like return on capital or Ebitda.

Bunch: $12.4 million for PPG CEO.

Brondeau: $9.8 million for FMC CEO.

Huntsman: $9.6 million for Huntsman CEO.

Baker: $9.5 million for Ecolab CEO.

Some compensation methods that drew criticism in the last recession have disappeared. In the early 2000s, many companies repriced stock options to give executives a favorable strike price in a down market. There was significant shareholder revolt on option repricing and this time around companies didn’t do it,” says Talkington. That has not happened this time around. “I can’t think of one instance where options were repriced.” Some boards offered additional RSUs when the market was down, but that was the extent of it, Aslaksen says.

Boards also continue to be under pressure to diminish perks, Talkington says. Many executives will be given a ‘perk account’ that is capped at a certain figure, along with a menu of options for use of the account, he adds. The menu will typically will include things like country club memberships and company cars.

If you want to take advantage of those perks, now might be a good time to try. “Qualified senior executives have the advantage right now” over boards in the market for high-level executive talent, Aslaksen says. “The bench is pretty thin” for leadership positions at many companies, Talkington says, leading companies to look outside to fill senior positions. Many CEOs are at an age where retirement is nearing, which will lead to a rise in turnover in the coming years, Talkington adds.

Globalization is also increasing demand for senior executives. Asian companies looking to raise their global profile may look at Western corporate leaders who have experience running global businesses, says Peter Everaert, regional market leader, Europe, Mideast and Africa at Korn Ferry. M&A plays a role, too, in a way. Private equity firms, who have recently been active in M&A again, frequently install new CEOs and CFOs, Aslaksen says.

If companies continue to perform well, those leaders will continue to experience rising pay, Talkington says. “All companies are focusing on metrics and longer-term performance.”