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 companies.

“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, Crawford said.

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 performance.

Compensation committees 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, Crawford said.

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,” Crawford said.

Laurie Winslow, 581-8466
laurie.winslow@tulsaworld.com

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