Scrutiny surrounding executive pay packages is high, especially during uncertain economic times. Many public company CEOs are taking home millions or tens of millions of dollars.
As CEOs know, however, compensation can take many different forms. Stanford’s Graduate School of Business published a paper titled, “What Does It Mean for an Executive to ‘Make’ $1 Million?” in order to distinguish between different kinds of compensation and explain more clearly how CEOs are being paid.
GSB explains three different types of compensation:
- Expected compensation – This represents the total amount of expected value or compensation promised in a given year. This is an estimate because it includes long-term incentives which have to be estimated using probable outcomes. This “includes salary, bonus, and payments under long-term cash bonus plans plus the expectedvalue of restricted stock and stock options on the grant date.”
- Earned compensation – This represents the total amount of compensation that the executive “earns the right to keep” as cash and the compensation from vesting options that are removed from equity-linked elements. This “includes salary, bonus, and payments under long-term cash bonus plans plus the value of vested restricted stock and stock options as of the vesting date.”
- Realized compensation – This is the compensation that the executive converts to cash in a certain year. This “includes salary, bonus, and payments under long-term cash bonus plans plus the value of restricted stock sold and stock options exercised and sold on the sale date.”
The paper uses Citigroup CEO Vikram Pandit’s pay packages as examples of how compensation forms can change the amount of money that a CEO actually makes.
When Pandit sold his hedge fund to Citigroup, he was given over $165 million in proceeds from the sale and $40 million for compensation as Citigroup CEO. But since shares dropped dramatically, the $165 million turned into a fraction of that by the time he liquidated them. And, the $40 million in compensation were worth around $4 million when they finally vested.
Pandit did not take home over $200 million dollars in cash. Below is the breakdown of Pandit’s pay from 2008-2010.
In 2008, Pandit’s reported compensation was $38,237,437. Pandit’s earned compensation was $2,935,776. And his realized compensation was $1,094,026.
In 2009, Pandit’s expected compensation was $128,751 while his earned compensation was $1,261,255 and his realized compensation was $253,990.
In 2010, Pandit’s expected compensation was $1 while his earned compensation was $1,346,904 and his realized compensation was $130,799.
By no means is Pandit hurting for cash, but it’s important to note the different forms that compensation can take.
This information is available for public company CEOs, and now Chief Executive has compiled data for private company CEOs as well. To find out the compensation practices for executives at private companies, check out Chief Executive’s CEO and Executive Compensation in Privately Held Companies Report 2011.