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Top U.S. CEOs reaped billions from stock gains in recentyears, Reuters analysis showsBOSTON | BY TIM MCLAUGHLIN AND ROSS KERBER
Dr. John Martin, C.E.O. of Gilead, speaks at the Reuters Health Summit in New York, November 19, 2008.REUTERS/BRENDAN MCDERMID
(Reuters) CEOs at large U.S. companies collectively realized at least $6 billion more incompensation than initially estimated in annual disclosures in the five years after thefinancial crisis first hit, according to a Reuters analysis. The reason for the windfall: thesoaring value of their stock awards.
About 300 CEOs who served throughout the 20092013 period at S&P 500 companiestogether realized about $22 billion in compensation in the form of pay, bonuses and shareand option grants, or an average of $73 million each, figures provided by executivecompensation data firm Equilar show.
That compares to about $16 billion initially reported in annual company summarycompensation tables, which include estimates for the value of stock grants based on theprice of shares at the time of awards.
The comparison does not include pensions and perks such as country club memberships
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and use of corporate jets for private use. The study also excludes rewards reaped by othertop executives, such as chief financial officers and chief operating officers, andcompensation for CEOs who did not serve the full five years.
Further gains in share prices in 2014 and so far this year will only have increased the gapbetween the annual disclosures and the amount actually derived from the awards, with thefull picture for last year only becoming clear over the next couple of months. The S&P500’s total return, including dividends, was 166 percent from the end of 2008 throughMonday of this week, according to S&P Dow Jones Indices.
The impact of the stock market gains on executive pay illustrated in the study willstrengthen concerns about how much of an impact the U.S. Federal Reserve’s easymoney policies have had on income inequality. Critics say that by raising the value ofassets, such as stocks, the Fed's stimulus has helped those who are already wealthy evenas median household income declined 4 percent between 20092013.
The bull market also has some investors reevaluating how they judge compensationplans. In some cases, they say CEOs may be benefiting greatly from a rising tide evenwhen their performance might be weak.
”You’re seeing overpayment, or outsized payments, for what is market performance ormediocre performance,” said Aeisha Mastagni, an investment officer for the $191 billionCalifornia State Teachers’ Retirement System, who helps oversee its votes on executivepay proposals at company annual meetings. “Directors can’t ignore the issue of payinequality or rising executive pay.”
However, more companies are disclosing their realized pay figures and some are eager todefend the supercharged rewards if shareholders have also benefited. Some of the highestpaid executives also often appear in top CEO lists compiled by investors and othersbecause they have run companies so successfully that their share prices have gonethrough the roof.
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An example is John Martin, the CEO of drug maker Gilead Sciences Inc, who has becomethe best compensated executive of a major U.S. company since the crisis, when factoringin stock and options.
He realized $400.6 million in total compensation from 2009 to 2013, according to theReuters analysis of the nearly 300 CEOs tracked by Equilar. That is poised to top $600million by this summer, mostly because of additional exercises of stock options. Theirvalue has surged well beyond the estimates in annual disclosures.
Gilead had estimated Martin's compensation totaled only $75 million over the five yearsfrom 2009 to 2013. But Gilead's shares have climbed nearly 300 percent since the end of2008 while net income almost quadrupled to $12.1 billion in 2014, fueled by sales of itshepatitis C drug Sovaldi. The company declined to comment for this story.
The second highestpaid CEO over the period was Starbucks Corp's Howard Schultz whorealized $366 million, or more than three times the $97 million reported in summarycompensation tables. That upside is largely the result of the cafe chain’s shares climbing931 percent since the end of 2008 as earnings surged.
“When the company performs well and the stock price increases, our executives, partners
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(employees) and shareholders are all rewarded,” a Starbucks spokeswoman said.
The equityoriented pay structure is good for CEOs of highgrowth companies, but alsobites those who don’t show big growth.
Larry Ellison, CEO of Oracle Corp, realized $282 million during the fiveyear periodanalyzed by Reuters. That was $100 million below the value reported in Oracle's summarycompensation tables.
The software giant's total stock return since 2008 has been several percentage pointsbetter than the S&P 500 Index, according to FactSet. But off a large base, profit growthhas been relatively slow. Operating income has increased by 8 percent to $14.8 billionover its past three fiscal years. Oracle declined comment.
GE CEO LAGS
Another CEO who realized less pay than originally estimated was Jeff Immelt of GeneralElectric Co. His $52 million in realized pay was less than the $69.2 million reported insummary compensation tables for 20092013. With a total return of about 96 percent sincethe end of 2008, GE shares badly lag the S&P 500 index. GE declined to comment.
Companies began introducing bigger stock and options awards in executive pay packagesin the 1990s as a means of reducing tax liability on cash bonuses and as part of a push toencourage CEOs to act in the interests of shareholders. But with stock markets breakingrecords, some worry the awards will only underscore the widening gulf between thecompensation of top executives and average workers.
"The numbers can be obscene, particularly when you look at the general challenges weface as an economy and society," said Matthew Benkendorf, a portfolio manager atVontobel Asset Management, which oversees about $50 billion.
In 2013, CEOs made 331 times the average worker's income, the largest such gulf inAmerican history and a gap that is set to rise further, according to a study by the AFLCIO,the largest U.S. federation of unions. "The executive has received a windfall based on thebull market, which isn’t always attributable to their own performance, and that’s wrong,"said Brandon Rees, deputy director of the AFLCIO’s Office of Investment, which advisesunionsponsored pension plans managing $560 billion.
Big investors can influence the size of company pay plans but have mostly backedmanagement, largely because the value of their shares has also been climbing. In eachyear since 2011 when most Russell 3000 companies began holding advisory votes onexecutive compensation, more than 90 percent of companies have gotten more than 70percent approval for their executive compensation plans, according to pay consultant firmSemler Brossy.
For example, Michael Cuggino, president and portfolio manager of the $5.3 billionPermanent Portfolio Family of Funds in San Francisco, supported the pay of Gilead CEOMartin. His funds own Gilead shares and Cuggino said Martin deserves credit formanaging the company in a risky industry, where failed drug trials are common and canwreck a company’s share price.
"As long as we're happy with the company, and it's making investors money, we don'tbegrudge the executives getting their money," he said.
(Editing by Richard Valdmanis and Martin Howell)
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