American workers get killed on the job, or badly injured, with a frightening frequency. CEOs have little reason to worry. So why are corporations rewarding CEOs so lavishly for ‘taking risks’?
By Sam Pizzigati
Who takes more of a risk when they wake up in the morning and go in to work? Laborers at construction sites? Or CEOs? Statistically, the answer could hardly be any plainer. Just over 1,200 Americans, notes a new report [1] that surfaced last week, died on the job in construction in 2007. The risk of getting killed or injured in an executive suite, by contrast, remains infinitesimally tiny.
Yet CEOs don’t just make much more than laborers — or miners or truck drivers or emergency room nurses or any other Americans who regularly face real workplace danger. CEOs actually cite the “risk” they face as a justification for their ample rewards.
Top execs, throughout Corporate America, love to think of themselves as risk takers. Ordinary mortals crave the security that comes with regular paychecks. Not executives. The regular salary checks they get make up only a minor share of their total compensation. Most executive pay comes, as executives and their cheerleaders like to note, “at risk” — in the form of stock option awards and other incentives.
And that “risk” keeps rising. Back in 1992, notes a new study [2] by Stephen O’Byrne, a pay analyst with Shareholder Value Advisors Inc., the five top execs at major U.S. companies had 48 percent of their pay “at risk.” Last year, these execs faced “risk” on nearly two-thirds — 65 percent — of their pay.
For tolerating this increasing “risk,” observes O’Byrne, top executives have been “richly rewarded.” These rewards, to be sure, do seem to be shrinking of late. Last week, the Associated Press [3] and USA Today [4] both released new surveys that showed 2008 CEO pay down 7 percent from 2007.
Even so, cautions USA Today, “don’t go looking for CEOs in bread lines just yet.” The reason: Corporate boards have been busy “creating ripe conditions for huge potential paydays.” Boardroom decision makers, agrees AP, are “setting CEOs up for a potential windfall.”
“Potential”? Guaranteed might be the more appropriate word. Corporate boards and their CEOs have co-created an approach to “risk” that makes top-dollar executive earnings a virtual lock no matter how well or poorly companies actually “perform” in the marketplace.
According to boardroom theory, of course, stock options and other executive incentives aren’t supposed to guarantee executives anything. Options, the corporate line goes, only reward executives who deliver for shareholders.
And this boardroom theory, at first glance, certainly appears reasonable enough. An executive gets an option to buy company stock a few years down the road at the stock’s current price. If the stock’s share price rises, the executive can down the road exercise that option, buy the stock at the old low price, and then immediately turn around and sell it at the new — and higher — market price.
Executive and shareholder, under this scenario, both win. The executive has “performed” and been “rewarded.”
But this theory only truly aligns “reward” with “performance” — notes Stephen O’Byrne of Shareholder Value Advisors — if companies limit “their incentive compensation to an annual stock grant of a fixed number of shares.”
Here’s why. Imagine yourself a newly hired CEO granted an option to buy a million company shares at $50 each. A year goes by. Your company’s share price has dropped to $25. Your options have gone “underwater.” They hold no value. But you’re not fretting — because your board of directors has just granted you a new option to buy 2 million shares at the now current $25 price.
Another year passes. Your share price has bumped up to $30. Your first batch of options remains worthless. But your second batch — the options granted at $25 — can now deliver you a $4 million personal profit. Not bad for an executive whose company share price has sunk from $50 to $30.
How often do corporate boards engage in this sort of behavior? Boards regularly bestow on their execs annual option awards, Stephen O’Byrne’s new study shows, and rarely keep the options to a fixed number.
O’Byrne examined executive pay records for 2,618 companies from 1992 through 2008. In all, he parsed out 95,476 “executive-years” of compensation data — and found 55,002 cases where companies had granted executives option grants in three consecutive years. Corporate boards kept these grants to a “fixed number of shares” less than 5 percent of the time.
And this option gamesmanship is roaring along in 2009. One beneficiary: James Wells, the CEO of SunTrust Banks. Back in February 2008, SunTrust granted Wells an option to buy [5] 250,000 shares at $65. By February 2009, SunTrust shares had swooned to about $9 a share. The SunTrust board’s reaction? Directors gave Wells an option to buy another 1.1 million shares at the $9.
That decision, not surprisingly, caused a little ruckus among shareholders. Wells agreed to accept “only” half the 1.1 million-share option grant. SunTrust shares are currently selling at about $15. The bottom line for Wells? He’s now sitting on a personal $3 million option profit [3] for managing SunTrust through a period of time when the bank’s shares lost 77 percent of their value.
Or take American Express CEO Kenneth Chenault. In January 2009, American Express granted Chenault 1.2 million options at just under $17 a share. The company’s shares, at one point in 2008, had been trading at over $49.
Since January, American Express shares have nudged up to $25. The gain for Chenault’s personal portfolio: $10.2 million. Chenault, notes [4] USA Today, will continue to gain $1.2 million for every $1 that American Express shares rise. If the shares get back to last year’s $49, he’ll clear $39 million on the stock options American Express dropped on him in January.
Most of America’s CEOs love to play golf. Corporate boards, for their part, love to hand out “mulligans,” executive suite do-overs. A company’s share price down? If you’re the CEO, no need to worry. Your thoughtful board will give you a new batch of options, all exercisable at the current low share price.
And if share prices sink even lower next year, your board will give you still another batch of option incentives, all exercisable at an even lower price. Your board, in effect, will keep lowering the performance bar until it finds a height you can jump over — and win the windfall that is your due.
So where’s the “risk” in all this? Corporate boards and corporate execs do, in fact, have one reason to worry. The rest of us, after all, may one day wise up to the “risk” racket they’ve all been running.
Sam Pizzigati edits Too Much [6], the online weekly on excess and inequality.