Making Sense of CEO Pay

Two contrary developments reveal decidedly mixed developments in CEO compensation. In order to justify its pay to its top executives, Citibank is forever fiddling with the rivals it compares itself with. Conversely, in a clear sign that it is unhappy with the direction of the company the board of J.C. Penney cut the pay of its CEO Ron Johnson by almost 97 percent.

According to its annual proxy statement, reports Crain’s Aaron Elstein, Citibank no longer compares itself in its list of peers to American Express, Capital One and U.S. Bancorp. Instead the peer list does include stumbling firms like Bank of American, Barclays, HSBC and JPMorgan Chase. It is easy to see why. Last year American Express generated a 23.5 percent return on equity. Citi’s ROE was 4.1 percent. AmEx’s share price has risen 66 percent over the last three years., compared with Citi’s 12 percent increase over the same period. “No wonder Citi would rather keep company with the likes of BofA,” reports Crain’s “(1.3 percent ROE, 25 percent stock decline) or Barclays (negative ROE, an 11 percent stock drop). AMeX AND Capital One disappeared from Citi’s self-selected peer group after only a year in it.”

Citi awarded $12.4 million to CEO Michael Corbat and $15.1 million to Global Consumer Banking CEO Manuel Medina-Mora, supposedly because this was the market price for such talent. This isn’t the first time companies moved the goal posts to score remuneration points for the top officers, but it must surely be among the most brazen.

By contrast the board of J.C.Penney is sending a signal that it is running out of patience. According to The New York Times, analysts indicate that CEO Ron Johnson has n o more than a several more quarters to revive the giant retailer. In addition, not a single top executive at Penney received a cash bonus for the year. Since coming from Apple in late 2011, Johnson has wrestled with one problem after another. He eliminated discount sales, but was forced to revive them when it turned out customers liked sales. “He proposed a three-tiered pricing strategy that he abandoned when customers were confused. He revamped the company’s advertising strategy to focus on lifestyle, not prices, but backtracked when it turned out customers wanted the ads to tell them how much items cost, according to Times reports.

J. C. Penney lost more than $4 billion in sales in 2012 and its share price dropped to $14.55, less than half of its price when Mr. Johnson’s appointment was announced in June 2011. It had $13 billion in sales for fiscal 2012, well below its competitors Macy’s and Kohl’s.

In 2011, he earned $53.3 million in total compensation, most of which was in shares to replace the stock he left behind at Apple. In 2012, his total compensation was reduced to a $1.5 million salary, with no stock awards and no bonus. Most retail CEOs get higher pay.

According to the Times, Kohl’s, which had a tough year, paid its CEO Kevin Mansell $7.8 million in compensation in 2012, “about 80 percent of what he’d received the previous year, when Kohl’s posted better results. And Mr. Johnson’s predecessor at Penney, Myron E. Ullman III, received $13.1 million in compensation in 2010, his last full year as chief executive.”

Many observers point to more and more CEO pay cuts as examples of boards less willing to move the goal posts. For example, Air Product and Chemicals CEO John E. McGlade, saw his pay cut 20 percent, including a whopping 65% decline in his annual bonus for the year, according to proxy statements. The reason was that earnings of the industrial products firm fell short of the company’s goal.

Critics, however, observe that not all pay cuts are a big as they may appear at first. Some compensation experts say what really matters is total direct compensation ––the amount roughly in cash and stock: salary, bonus, stock options and restricted shares—or what the CEO gets to take home soon after the end of the year. By this measure, McGlade was given a rebuke. His bonus was slashed to just shy of $900,000 from $2.55 million the prior year, and his stock awards dropped by more than $500,000. But his pension rose by $2.7 million last year. Nonetheless, one might argue than any downward push on pay that is performance related is a sign that moving the goal posts is becoming less common—sometimes.

Read: https://www.bain.com/bainweb/PDFs/cms/Marketing/Making_sense_executive_pay.pdf

Read: https://www.bain.com/bainweb/PDFs/cms/Marketing/Making_sense_executive_pay.pdf

Read: https://finance.yahoo.com/news/20-executive-pay-cut-isn-140017712.html


MORE LIKE THIS

  • Get the CEO Briefing

    Sign up today to get weekly access to the latest issues affecting CEOs in every industry
  • upcoming events

    Roundtable

    Strategic Planning Workshop

    1:00 - 5:00 pm

    Over 70% of Executives Surveyed Agree: Many Strategic Planning Efforts Lack Systematic Approach Tips for Enhancing Your Strategic Planning Process

    Executives expressed frustration with their current strategic planning process. Issues include:

    1. Lack of systematic approach (70%)
    2. Laundry lists without prioritization (68%)
    3. Decisions based on personalities rather than facts and information (65%)

     

    Steve Rutan and Denise Harrison have put together an afternoon workshop that will provide the tools you need to address these concerns.  They have worked with hundreds of executives to develop a systematic approach that will enable your team to make better decisions during strategic planning.  Steve and Denise will walk you through exercises for prioritizing your lists and steps that will reset and reinvigorate your process.  This will be a hands-on workshop that will enable you to think about your business as you use the tools that are being presented.  If you are ready for a Strategic Planning tune-up, select this workshop in your registration form.  The additional fee of $695 will be added to your total.

    To sign up, select this option in your registration form. Additional fee of $695 will be added to your total.

    New York, NY: ​​​Chief Executive's Corporate Citizenship Awards 2017

    Women in Leadership Seminar and Peer Discussion

    2:00 - 5:00 pm

    Female leaders face the same issues all leaders do, but they often face additional challenges too. In this peer session, we will facilitate a discussion of best practices and how to overcome common barriers to help women leaders be more effective within and outside their organizations. 

    Limited space available.

    To sign up, select this option in your registration form. Additional fee of $495 will be added to your total.

    Golf Outing

    10:30 - 5:00 pm
    General’s Retreat at Hermitage Golf Course
    Sponsored by UBS

    General’s Retreat, built in 1986 with architect Gary Roger Baird, has been voted the “Best Golf Course in Nashville” and is a “must play” when visiting the Nashville, Tennessee area. With the beautiful setting along the Cumberland River, golfers of all capabilities will thoroughly enjoy the golf, scenery and hospitality.

    The golf outing fee includes transportation to and from the hotel, greens/cart fees, use of practice facilities, and boxed lunch. The bus will leave the hotel at 10:30 am for a noon shotgun start and return to the hotel after the cocktail reception following the completion of the round.

    To sign up, select this option in your registration form. Additional fee of $295 will be added to your total.