Adding It All Up

Using a tool called "tally sheets," boards are discovering how much their CEOs are really making. The numbers are shocking directors -- and changing pay practices.

By Joann S. Lublin
The Wall Street Journal

When board members at Conseco Co. sat down last May to draw up a new contract for William S. Kirsch, their fifth chief executive in almost five years, they wanted to avoid mistakes of the past. Investors had long criticized the Carmel, Ind., insurance-holding concern for specializing in big executive paydays.

"The history of this company was excessive pay not based on performance," says Michael Shannon, chairman of the board's compensation committee.

This time around, Conseco directors may have accomplished their goal. And they did it with help from a simple tool that's increasingly popular among corporate boards concerned about out-of-control executive pay: a tally sheet.

From The Wall Street Journal Online See the complete CEO Compensation Report at The Wall Street Journal Online. •   Podcast: Greater disclosure's impact on pay •   Video: Using tally sheets to track CEO pay

Nicknamed "holy cow" sheets for the way they often expose the immense worth of current and potential payouts, tally sheets can help a board gain a fuller picture of a chief's entire compensation. For years, board pay panels have been faulted for failing to do the math when it comes to grasping the true value -- and possible future cost -- of CEO packages. But tally sheets make it easier to keep score, allowing boards to project payouts under different scenarios for everything from salary and perquisites to equity grants, deferred compensation, severance and supplemental pensions.

The use of tally sheets -- and their impact -- could be significant, especially once the Securities and Exchange Commission adopts sweeping proposed rules to widen what companies must divulge about management compensation. Already, certain boards are sharing portions of their tally sheets with investors by enhancing pay disclosures. Some others are using them to justify curbing certain compensation practices. The hottest targets: pensions, severance, perks and long-term awards without tough performance hurdles.

"Tally sheets have the ability to impact both the form and the level of the CEO's compensation" once directors realize how tiny a portion of the rewards typically depend on corporate performance, says Jannice Koors, a managing director at New York-based Pearl Meyer & Partners, the pay consultancy that helped Conseco put together the Kirsch tally sheet.

Tally, Ha

To be sure, there are plenty of skeptics who say it's wishful thinking to believe that tally-sheet revelations can stem the tide of rising CEO pay. "More disclosure won't drive total CEO pay levels down," says Patrick McGurn, an executive vice president of proxy advisers Institutional Shareholder Services in Rockville, Md. "It will just change the currency used."

Certainly, tally sheets had no measurable impact on the overall numbers in the annual CEO compensation survey by Mercer Human Resource Consulting for The Wall Street Journal. The median salary and bonus for chief executives last year increased 7.1% to $2,408,665, according to a proxy analysis of 350 major U.S. corporations by Mercer. The climb in cash compensation compares with a record 14.5% surge a year earlier to a median of $2,470,600. (The 2004 figures come from a somewhat different sample of 350 companies. While the median dollar figures are based on all companies in the sample for a given year, the percentage changes are based only on companies and CEOs that remained in the sample from one year to the next.)

Median base bay for CEOs in 2005 rose 3.6%, compared with 3.7% in 2004. Raises for the highest bosses matched those granted to their white-collar lieutenants. Paychecks of nonunion salaried employees pulled ahead 3.6% following a year in which they only rose 3.4%, the slowest pace since the 1989 debut of the study by New York-based Mercer. (Overall U.S. wages and benefits increased 3.2% last year, down from 3.5% in 2004.)

In the wake of a 13% improvement in company profits, surveyed chiefs saw their bonuses expand 8.4% to a median of $1,437,150. Bonuses escalated 20% to a median of $1.5 million the previous year.

Total direct compensation for chiefs grew 15.8% to a median of $6,049,504, Mercer found. Besides salaries and bonuses, this figure covers the value of restricted stock at the time it was granted, gains from stock-option exercises and other long-term incentive payouts. In 2004, the median leaped 40.9% to $5,920,388, the biggest increase in the study's history, largely due to huge gains in corporate profits and option exercises.

Total direct compensation for those running the 10 businesses with the highest shareholder returns zoomed 51.3% to $10,229,218 according to Mercer. The heads of the 10 concerns with the poorest returns experienced a harsh 72.5% drop to $1,551,495. The median total shareholder return, which equals the stock-price change plus reinvested dividends, was 6.8% for surveyed companies.

Overall, CEOs reaped a median realized gain of $3,493,440 from option exercises, compared with $3,229,072 in 2004. Capital One Financial Corp. leader Richard D. Fairbank snared an especially sizable sum: $249.3 million from exercising options to buy about 3.6 million shares.

Bigger bucks may lie ahead. Many CEOs remain perched atop piles of unexercised options. Median unrealized gains vested and unvested options of CEOs in the survey totaled $10,202,971 last year, compared with $11.8 million in 2004. The 2.5 million options Oracle Corp. bestowed on Larry Ellison, its billionaire chief and co-founder, pushed his total to 70.1 million options, valued at $474.47 million when Oracle's fiscal year ended last May 31.

Nevertheless, it shouldn't be overlooked that fewer companies awarded options last year. Of the 350 businesses surveyed, leaders of 265 companies got options, down from 273 in 2004. And 192 CEOs cashed in a median of 149,046 options, down from 197 who exercised a median of 140,442 options in 2004.

One reason for the decline: new accounting rules that require employers to count stock options as expenses in their annual financial results.

But in some cases, there was another reason as well: tally sheets. For example, while Aetna Inc. last year awarded options to its then-CEO John W. Rowe, his successor, Ronald Williams, received no options -- thanks in part to the board's use of a tally sheet. According to Aetna's latest proxy, directors of the Hartford, Conn., health-benefits concern based their decision in part on a review of tally sheets and "evolving practices" at other major public corporations.

Similarly, Michel Mayer, chief executive of Freescale Semiconductor Inc., is likely to receive fewer options this year than the 254,295 awarded to him last year, partly because the Austin, Texas, chip maker intends to also give him restricted stock units tied to performance. The shift marks the first time that equity granted to Mr. Mayer will come with strings attached since Freescale's 2004 spinoff from Motorola Inc., and it resulted from a review of detailed tally sheets "for all the top officers," says B. Kenneth West, chairman of the Freescale board pay panel.

Yet Mr. West remains cautious about tally sheets' overall impact. "They give you a better perspective," he says. "But I can't say that pay ratcheting is going to stop as a result."

Whatever skeptics and the overall numbers from this year's survey say about how much CEOs are paid, it's clear that tally sheets have the potential to at least change how they earn their pay.

This much was evident in the latest deal that Conseco's directors negotiated with Mr. Kirsch.

"We all agreed it should not be 'show-up' pay," recalls Mr. Shannon, referring to the way some corporate boards enrich chiefs just for coming to work. Mr. Shannon was part of the board that took over at Conseco after the company emerged in September 2003 from nine months in bankruptcy protection. Except for the CEO, every board member was new.

ADVERTISEMENT The Wall Street Journal Online Get News, Columns, and Tools on the Issues that Affect You and Your Family Sign Up Now!

Back to the CEO Compensation Report 2006