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.





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