Several factors determine pay
BY LAURIE WINSLOW World Staff Writer
Sunday, May 31, 2009
5/31/09 at 6:42 AM
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Determining what a CEO should
earn can be complex.
From where individual investors
and employees sit, the size of executives’
compensation can seem exorbitant.
They may question how a company
can justify hundreds of thousands
or millions in executive pay when so
many people seem to be going without
or facing cutbacks.
Chris Crawford has heard the anger.
He’s executive director of Houstonbased
Longnecker & Associates, which
provides executive compensation consulting
services to public and private
“My response is there are only so
many Michael Jordans of the corporate
world. And at the end of the day,
yes, there’s a disparity between what
the lowest-paid employee in the corporation and the highest-paid employee
receives. There is always going to be a
pretty big gap; it’s shrunk somewhat
over the year.
Executives who are growing company
value and creating or maintaining
jobs during the recession are invaluable,
and they are relatively rare,
Companies look at several factors
when determining executive pay, but
the three largest components of compensation
are base salary, annual incentives
and long-term incentives.
Base salary is largely market driven.
Boards primarily look at what the
market is paying for a similar position
at companies of similar size and operations.
For 2009, a majority of companies
have no increases, while some
may apply about a 3 percent base salary
increase, Crawford said.
Sectors in which companies may
see increases this year are health care
and technology. The majority of energy
companies, in contrast, have not
increased the base salaries of their
executives for 2009, Crawford said,
and a few have cut salaries.
Annual incentives, which are another
piece of an executive’s overall
compensation, are based on the last
year’s performance and targeted goals
for the coming year.
From January to October 2008, “life
looked pretty darn good” before the
fourth-quarter crash, Crawford said.
This created a mixed bag of company
often are put in a
tough position because
their formula for deciding executives’
annual incentives says one thing
while the real world has been much
harsher, Crawford said. Committees
generally must stick to the formula as
much as possible, he said.
A targeted payout based on 2009
goals is “one of those sticky situations”
as companies try to set realistic
goals, the consultant said.
Most companies are looking at giving
less incentive pay this year than
last. Boards are trying to provide
meaningful but achievable annual incentives
to their executives, “but it’s
not a gimme, and at the end of the day,
they (CEOs) are having to work to get
it,” he said.
Long-term incentives are the hardest
part of the compensation equation
as companies struggle with how to
award restricted stock to executives
after a stock price has dropped 40
percent to 60 percent in six months,
Many companies provide restricted
stock as a way to retain valuable employees.
When the restricted shares
were granted at the beginning of
2008, they were based on a 52-week
high stock price. Those stocks are
worth much less than what appears
on the proxy.
“It’s not like they’re going
down and buying a car with
that paper statement,”
Laurie Winslow, 581-8466