Pensions, restricted stock, nonequity incentives are higher pay percentage

Source: SHRM, Society for Human Resource Management
By Stephen Miller, November 2008

The average total compensation of the highest paid executives at U.S. publicly traded companies fell by 4 percent in the year preceding November 2008, according to a report by ERI Economic Research Institute. Decreases were reported in base salaries, stock options, long-term incentive plans (LTIPs) and other compensation components.

But while overall total executive compensation fell, three executive pay vehicles notched increases:

• Pensions: up 45.5 percent in 2008.

• Restricted stock awards (RSAs): up 24.5.

• Nonequity incentives: up 17.8 percent.

The ultimate value of the restricted stock awards, however, as well as stock options, will likely be affected by the sharp drop in share prices during the fourth quarter of 2008.

Trends Highlighted

"With the recent drop in the value of the stock market, it appears pensions and nonequity based compensation components are accounting for a greater share of total compensation,” says David Thomsen, director of ERI Economic Research Institute. “More corporate boards are tying compensation packages to performance through incentive plans," he adds, and "there has been a noticeable shift away from stock options to restricted stock awards.

Among other significant findings, Thomsen notes that pension amounts are currently 8 percent of executive compensation.

He also finds it noteworthy that despite much talk about U.S. executives being overcompensated, since 1997 revenues of the U.S. companies ERI studied have increased nearly seven times faster than the dollar amounts paid to the companies’ highest paid executives, with total revenues increasing by 118 percent—compared to an 18 percent increase for executive compensation.

Changes Since November 2007

During the past 12 months, however, overall total compensation of the highest-paid executive decreased by 4 percent, while company revenues increased nearly 7 percent, with the average top executive receiving overall total compensation of $17,760,518.

The changes in the components of compensation for the highest-paid executive are as follows:

	November 2007	November 2008	Percent Change
Salary	$1,260,201	$1,260,001	-0.02%
Bonus & nonequity incentives	$3,478,973	$4,079,745	17.8%
Total RSAs/options	$9,162,516	$9,558,747	4.3%
-- Restricted stock	$4,109,675	$5,115,352	24.5%
-- Stock options only	$5,052,841	$4,443,395	-12.1%
Pensions	$1,163,269	$1,692,908	45.5%
LTIPs	$590,297	n/a	n/a
All other	$ 2,842,521	$1,151,114	-59.5
Total overall compensation	$18,497,780	$17,760,515	-4.0%
Company revenues (millions)	$58,194	$62,021	6.6%
Source: ERI Economic Research Institute. The new SEC 2007 summary compensation table format has redefined component dollar categories, accounting for some of the variance shown above.

Changes Since 1997

The highest paid executives of U.S. companies saw an increase in overall total compensation of nearly 18 percent during the past 11 years, but the compensation components reported have changed significantly during this time period because of Securities and Exchange Commission (SEC) reporting requirements.

Comparing revenue growth to total compensation growth during this same period shows the average dollar amount of company revenues increased by nearly 118 percent, compared to 18 percent for total compensation, according to ERI. This means the dollar revenues increased nearly seven times faster than the average dollar amount of the executive total compensation package.

	1997 Average Dollar Amount	2008 November Dollar Amount	Percent Change
Salary	$930,640	$1,260,001	35.4%
Bonus & nonequity incentives	$1,579,871	$4,097,745	159.4%
Total RSAs/options	$11,798,521	$9,558,747	-19.0%
-- Restricted stock	$1,310,575	$5,115,352	290.3%
-- Stock options	$10,487,946	$4,443,395	57.6%
Pensions	n/a	$1,692,908	n/a
LTIPs	$441,749	n/a	n/a
All other compensation	$335,769	$1,151,114	242.8%
Total overall compensation	$15,086,550	$17,760,518	17.7%
Company revenues (millions)	$28,547	$62,021	118.0%
Source: ERI Economic Research Institute.

The components of total compensation for the highest paid executive have changed in relative importance during the past 11 years, as shown below:

	1997	2008
Salaries	16.5%	8.9%
Bonus & nonequity incentives	21.7%	4.5%
Incentives (nonequity)*	n/a	16.3%
Total RSAs/options	52.7%	56.1%
-- Restricted stock	10.2%	31.4%
-- Stock options	42.5%	24.7%
Pensions*	n/a	8.0%
LTIPs	3.6%	n/a
All other compensation	5.4%	6.2%
Source: ERI Economic Research Institute. * Nonequity incentives and pensions were not part of the format of the 1997 summary compensation tables.

ERI's compensation indices reflect data from a representative group of 45 U.S. companies randomly selected from approximately 6,500 companies that report compensation data to the SEC. The November 2008 index has been adjusted to reflect merger activity that has occurred since the inception of the index.

Stephen Miller is an online editor/manager for SHRM.