CEO pay can be perplexing, no indicator of talents [San Jose Mercury News :: ]
(San Jose Mercury News (CA) Via Acquire Media NewsEdge) July 19--Pay for performance.
It's typically what companies say about how they decide to pay their top executives. It sounds simple in theory, but it gets hard to understand when you look at the numbers.
Take, for example, San Francisco game-developer Zynga, with relatively modest sales of $873 million. Last year it awarded its new chief executive, Don Mattrick, nearly $58 million in compensation, making him the second-highest paid executive in the Bay Area.
But Santa Clara-based Intel -- which racked up sales of nearly $53 billion -- gave its new boss, Brian Krzanich, just $9.5 million. Meanwhile, John Watson of Chevron in San Ramon, which had sales of $220 billion, was awarded $20 million. Larry Page of moneymaking machine Google in Mountain View received only $1 and Robert Duggan, who runs Sunnyvale drug company Pharmacyclics -- which made a respectable $67 million profit on sales of $260 million last year -- got nothing.
Those are just a few of the puzzlers from What the Boss Makes, the annual Equilar Silicon Valley CEO Pay Study conducted for the Bay Area News Group. Some bewilderment is understandable. Executive paychecks are not only far bigger than the average wage-earner's, they're also a lot more complicated, usually including not only salary but also stock, bonuses, perks like home security and other types of compensation, all of which are included in the survey.
"It's not as easy as just looking at what the total pay number is," said Aaron Boyd of Equilar, which provided the survey's data on 177 local CEOs. He explained that executive paychecks have "a lot more nuance" and are hard to compare because of their complexity.
Compounding the challenge, "There are many different definitions of pay, different ways to pay executives, and different time horizons that executives are being paid for," said John Roe of ISS Corporate Services, which studies how businesses are governed.
But he and other experts agreed that none of that provides a clear indication of which CEOs are the best or the worst.
Every company has its own peculiar needs, they said, whether it's halting hemorrhaging expenses, making the firm grow faster, radically reshuffling its product line, taking it public or other priorities. As a result, their CEOs often have unique skill sets.
Moreover, they noted, the severity of the challenges CEOs face vary greatly from year to year. So one boss may have warranted an especially big pay package for solving a huge crisis, while their peers dealt with far less critical issues.
Consequently, anyone hoping to understand why an executive got what he or she did often has to read the detailed rationale provided in the company's regulatory filings. Consider Zynga's Mattrick, who was hired from Microsoft on July 1 last year to replace Mark Pincus.
Although Zynga officials declined comment on Mattrick's pay, which was second only to the $78.4 million given Oracle CEO Larry Ellison, they clearly have high regard for their new chief executive. In a news release last year, board member Jeffrey Katzenberg, who heads DreamWorks Animation, said of Mattrick, "There is not another executive in the world who could bring as much experience, knowledge and success in the gaming space."
Zynga's filings noted that Mattrick -- former president of Microsoft's interactive entertainment business -- was given "make-whole" stock grants valued at $25 million to reimburse him for the loss of compensation from Microsoft. He also got other stock as "a meaningful incentive to reward future success in increasing shareholder value," the company said, noting that his 2014 pay will be "substantially lower."
Intel took a decidedly different incentive approach with Krzanich, who in May 2013 was promoted from chief operating officer to became the storied chipmaker's sixth CEO. Besides getting far less than what Mattrick received, Krzanich's pay was half what his predecessor, Paul Otellini, earned in 2012.
"This action," the company said in a regulatory filing, "reflects the committee's view that Mr. Krzanich is new to his role and creates an incentive to drive value in the future."
Still, experts cautioned that none of this means Mattrick is more talented than Krzanich, who still got more than most CEOs in the survey, including some of the Bay Area's biggest luminaries.
Besides Page, Mark Zuckerberg of Facebook in Menlo Park received just $653,165, while Elon Musk, CEO of Palo Alto carmaker Tesla, got a mere $69,989. And then there was Pharmacyclics' Duggan, who hasn't received a dime in pay since becoming CEO in 2008.
Like Zuckerberg, Page and Musk, Duggan owns a big chunk of his company's stock, which provides plenty of reward if the shares increase in price. In an interview, Duggan said that also assures his shareholders he's working to boost the value of their investment. Moreover, it minimizes ill feelings among his employees if he's not getting huge pay, he said, adding, "I just don't want any attention on that at all."
Many workers have a hard time comprehending what their CEOs make and why they make so much. With their complex assortment of stock, bonuses and other compensation, "the way executives are paid is dramatically different from the way the average employee is paid," said Charles Tharp, CEO of the Center on Executive Compensation in Washington, which promotes "principled pay and governance practices."
Moreover, pay for top executives has increased far faster than for the typical worker. In 1965, CEOs at the top 350 U.S. firms made 20 times as much as their typical employee, but that has increased to nearly 296 times as much in 2013, according to the Economic Policy Institute. Comparative data isn't available for the Bay Area. But from 2007 to 2013, the median pay of CEOs at the top 100 local companies increased from $3,395,611 in 2007 to $8,174,592, though a few higher-paying firms were added to the sample in 2011, according to Equilar.
Companies need to be careful about lavishing their leaders with pay that's far out of whack with what their other employees get, said Charles Elson of the Weinberg Center for Corporate Governance at the University of Delaware. Otherwise, he said, it "causes huge dissension in the ranks."
Contact Steve Johnson at email@example.com or 408-920-5043. Follow him at Twitter.com/steveatmercnews
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