If there was some confusion yesterday why in the first quarter, seemingly having no better capital allocation option S&P500 corporate CEOs spent a record $160 billion on stock buybacks, then the following report should explain it: According to a new study by the AP, the median pay package for a CEO rose above eight figures for the first time last year. The head of a typical large public company earned a record $10.5 million, an increase of 8.8 percent from $9.6 million in 2012, according to an Associated Press/Equilar pay study.
The study details:
Last year was the fourth straight that CEO compensation rose following a decline during the Great Recession. The median CEO pay package climbed more than 50 percent over that stretch. A chief executive now makes about 257 times the average worker's salary, up sharply from 181 times in 2009.
In case anyone missed it, here are the key points from the above extract:
- CEO comp has risen 50% over the past five years, and was up 8.8% in 2013. By comparison, the income of the US middle class has declined over this time period [8].
- The average CEO now make 257 times the average worker's salary, up 41% since 2009.
Got all that? Ok, let's continue. Some other findings:
- Female CEOs had a median pay package worth more than their male counterparts, $11.7 million versus $10.5 million for males. However, there were only 12 female CEOs in the AP/Equilar study compared with 325 male CEOs that were polled.
- The CEO who got the biggest bump in compensation from 2012 to 2013 was Rodney Sacks, the CEO of Monster Beverage. Sacks earned $6.22 million last year, an increase of 679 percent. Monster's board of directors awarded Sacks $5.3 million in stock options to supplement his $550,000 salary and $300,000 cash bonus.
Which industry made the most buck?
- The industry with the biggest pay bump was banking. The median pay of a Wall Street CEO rose by 22 percent last year, on top of a 22 percent increase the year before. BlackRock chief Larry Fink made the most, $22.9 million. Kenneth Chenault of American Express ranked second with earnings of $21.7 million.
- Media industry CEOs were, once again, paid handsomely. Viacom's Philippe Dauman made $37.2 million while Walt Disney's Robert Iger made $34.3 million. Time Warner CEO Jeffrey Bewkes earned $32.5 million.
Who is at the top:
- The best paid CEO last year led an oilfield-services company. The highest paid female CEO was Carol Meyrowitz of discount retail giant TJX, owner of TJ Maxx and Marshall's. And the head of Monster Beverage got a monster of a raise.
- The highest paid CEO was Anthony Petrello of oilfield-services company Nabors Industries, who made $68.3 million in 2013. Petrello's pay ballooned as a result of a $60 million lump sum that the company paid him to buy out his old contract. Petrello was one of a handful of chief executives who received a one-time boost in pay because boards of directors decided to re-negotiate CEO contracts under pressure from shareholders. Freeport-McMoRan Copper & Gold CEO Richard Adkerson also received a one-time payment of $36.7 million to renegotiate his contract. His total pay, $55.3 million, made him the third-highest paid CEO last year.
- The second-highest paid CEO among companies in the S&P 500 was Leslie Moonves of CBS. Moonves' total compensation rose 9 percent to $65.6 million in 2013, a year when the company's stock rose nearly 70 percent. "CBS's share appreciation was not only the highest among major media companies, it was near the top of the entire S&P 500," CBS said in a statement. "Mr. Moonves' compensation is reflective of his continued strong leadership."
But the punchline: what, according to AP, was the reason for this compensation surge to all time highs? "A soaring stock market."
Over the last several years, companies' boards of directors have tweaked executive compensation to answer critics' calls for CEO pay to be more attuned to performance. They've cut back on stock options and cash bonuses, which were criticized for rewarding executives even when a company did poorly. Boards of directors have placed more emphasis on paying CEOs in stock instead of cash and stock options.
Which brings us to the crux of the issue.
As we showed yesterday [9], in Q1 companies in the S&P 500 spent a record amount of cash not on growth (or maintenance) capex, not on employee salaries, but on stock repurchases - that one most direct way to boost a company's stock price and to "beat" Wall Street expectations by reducing the number of shares outstanding.
[10]
And now we also learn of the other "unintended" benefit of record stock buybacks, if only to CEOs: as a result of cost-indiscriminate buying back of their stock, as in using corporate cash, Corporate CEOs, whose pay is now more closely tied to stock performance than ever, were also paid the most. Ever.
Or to simply further: out of the corporate cash pocket and into the personal cash pocket. Rinse. Repeat.
And since the S&P 500 ends up at record highs, everyone is happy, except for the employees of said company, who, long after the CEO is retired on their own private island, are virtually assured of wholesale layoffs as the next management team scramble to figure out how to keep the business going under a record debt load.
But yes - it was all under duress, and none would have done it had it not been for those evil activist hedge fund investors twisting their hand to buyback their shares. Not a single one.
Finally, here is the distribution of CEO pay relative to stock performance in 2013, with the distribution coming in perfectly as expected.
[11]