CEO Pay Increasingly Tied to Company Performance

Jonathan Safran Foer could feel the frustration mounting within him.

Sitting alone at a Chipotle Mexican Grill, the “Eating Animals” author became increasingly cranky as he noshed on a burrito (vegetarian, no doubt) with nary a book or periodical in sight. Lacking suitable reading material—tangible or electronic—Foer was forced to dine alone with his thoughts.

“I really just wanted to die with frustration,” Foer recently told Vanity Fair Daily.

To avoid such a farcical fate, Foer turned his frustration into creative expression: He e-mailed Chipotle CEO Steve Ells with an idea to incorporate thought-provoking prose on the eatery’s cups and paper bags. “Wouldn’t it be cool to just put some interesting stuff on it?” he asked the chief executive. “Get really high-quality writers of different kinds, creating texts of different kinds that you give to your customers as a service.”

Ells liked the idea, and with Foer’s help, unveiled a line of cups and bags two months ago inscribed with sizable chunks of Malcolm Gladwell, Toni Morrison, George Saunders, Michael Lewis, Sheri Fink and, of course, Foer himself. The resulting works are tailor-written for fast-food diners, with none taking more than two minutes to digest. They range in tone from irreverent and critical to provocative (“Is there anything you would die for if no one would ever know you died for it?” Foer asks in his “Two-Minute Personality Test.”).

In a stroke of luck or perhaps clever intent, Chipotle debuted the disposable literature the same day its shareholders overwhelmingly rejected the company’s executive compensation plan, a generous package that in 2013 bestowed nearly $50 million total to Ells and co-CEO Montgomery Moran.

Unimpressed, roughly 77 percent of Chipotle investors renounced the pair’s salary deal that day, a significant spike from the 27 percent who rebuffed the firm’s 2013 remuneration package. The plan’s opponents, financial experts claim, captured the largest ratio of any such vote on executive pay this year within the Russell 3000 list of largest U.S. companies.

Though shareholder scorn over exorbitant executive salaries is becoming more common, the Chipotle vote—required under the “say on pay” provision of the 2010 Dodd-Frank Act—nevertheless was rare. Investors historically have supported their boards by comically wide margins. Case in point: 76 percent of companies reporting votes through June 18 received 90 percent or more shareholder approval for their pay packages, up from 72 percent in 2013 and 69 percent in both 2011 and 2012, industry data show.

“The ‘say on pay’ experiment is a bust,” ProPublica senior reporter Jesse Eisinger proclaimed last year. “The Dodd-Frank financial overhaul law gave shareholders the ability to vote on the pay packages of top executives, and it turns out that they fall over themselves to approve. [Say on pay] is yet another example of Dodd-Frank’s ineptitude and impoverishment… The vote is nonbinding. It’s as if the government wanted to allow shareholders to conduct a primal scream. Instead, they whisper sweet nothings.”

And those nothings continue to get even sweeter.

CEO pay rose for the fourth consecutive year in 2013, expanding 8.8 percent to $10.5 million, an Associated Press (AP)/Equilar study concluded. Much of the surge came from stocks, which jumped 17 percent in value, giving S&P 500 chieftains an average $4.5 million in company capital. The gain further enlarged the chasm between American CEOs and their employees: The pay ratio between both groups now stands at more than 257:1, AP’s data indicate.

“Over the last several years, companies’ boards of directors have tweaked executive compensation to answer critics’ calls for CEO pay to be more attuned to performance,” the AP/Equilar study’s introductory article reads. “They’ve cut back on stock options and cash bonuses, which were criticized for rewarding executives even when a company did poorly. Boards of directors have placed more emphasis on paying CEOs in stock instead of cash and stock options. The change became a boon for CEOs last year.”

The boon was particularly evident in the medtech industry, where stock awards increased significantly among OEMs, contributing to sizable salary hikes. GE CEO/Board Chairman Jeffrey R. Immelt, for instance, received $7.7 million in stock last year, more than double his 2011 take of $3.5 million. Johnson & Johnson increased Chairman/CEO Alex Gorsky’s stake in the company by 114.3 percent ($5.9 million in stock), and boosted his overall salary by 54.1 percent to $16.9 million, according to U.S. Securities and Exchange Commission (SEC) filings. Other beneficiaries included Baxter International Chairman/CEO Robert L. Parkinson Jr., who received $491,779 in additional shares; Covidien plc Chairman/President/CEO Jose E. Almeida, given an 8.7 percent pay raise ($11.1 million) including $553,986 in additional stock; Boston Scientific Inc. President/CEO Michael F. Mahoney, who added $780,297 in BSX capital to his cache; and St. Jude Medical Inc. Chairman/President/CEO Daniel J. Starks, rewarded with $887,384 in new stock and a 44 percent salary bump ($9.6 million).    

“The stock market’s rebound has created a massive wealth effect,” noted longtime corporate compensation analyst Paul Hodgson, “and the speed with which people can amass hundreds of millions of dollars is accelerating.”

The road to riches, however, is littered with speed bumps. For CEOs, those snares can take many forms, from stock option cuts and cash bonus phase-outs to fewer perks. Immelt is a prime example. Despite doubling his stake in GE last year and receiving a $166,000 boost in base pay, the 58-year-old’s salary fell 23 percent to $19.7 million, SEC records show. Contributing to the loss was a drop in “non-equity incentive plan compensation,” down to $2.4 million from $12.1 million in 2012 (GE’s non-equity incentive plan compensation category includes its Long-Term Performance Award Program grants to executives, which generally are established once every three or more years).

Pension value and non-qualified deferred compensation earnings also fell markedly, to about $729,000 from nearly $5.4 million in 2012. Likewise, “other” compensation (life insurance policies, matching corporate contributions and perks like leased cars, use of company aircraft and financial/estate/tax preparation) plummeted 80.5 percent to $1.1 million.

Meanwhile, GE generated $13.1 billion in profit from $146 billion in revenues in 2013, down slightly from $13.6 billion in profit off $146.6 billion in revenue the previous year. GE Healthcare revenues were slightly lower in 2013 on lower prices and the effects of a stronger U.S. dollar.

Abbott Laboratories Chairman/CEO/Director Miles D. White suffered a similar fate, earning 17 percent less last year than in 2012 ($20.8 million vs. $25.1 million). White’s lower salary can be traced to a $2.1 million loss in stock and a $5.6 million cut in “other” compensation.

Zimmer Holdings Inc. earned $761 million off $4.62 billion in 2013 sales, up slightly from the $755 million in profits it generated off $4.47 billion in 2012 revenue. Yet President/CEO David C. Dvorak’s salary fell nearly 11 percent last year to $7.6 million, SEC filings indicate. Dvorak received a 2.4 percent boost in base salary (to $904,023), but his overall compensation package dropped due to a decline in pension value and non-qualified deferred compensation earnings. That income was $111,975, down from $1.1 million in 2012.

“For a lot of companies, the pensions being amassed are enormous; there’s a huge amount of money on top of all the stock and options profits CEOs have made during their tenure,’’ noted Hodgson.

Though they would likely argue otherwise, Immelt, White and Dvorak got off lucky last year. None experienced as deep a pay cut as Medtronic Inc. Chairman/CEO Omar Ishrak, who received only a third of his 2012 earnings last year. The $16 million salary reduction resulted from the elimination of his bonus ($1.5 million in 2012) and a $16.2 million decrease in awarded stock.