During a recession in which many Americans have had to live without pay raises -- or even jobs -- we've at least been able to take some comfort in knowing that high-level execs shared our pain.
CEO pay supposedly declined about 11% in 2009, to an average of $7.2 million at Standard & Poor's 500 Index ($INX) companies, according to The Associated Press.
But those numbers hide a little secret about pay in a lot of corner offices: Despite the dismal economy, many CEOs had one of their best years ever.
Some of the biggest winners scored huge amounts, thanks to well-timed stock-option grants that let them buy stock near the prices of the market's March 2009 lows -- and then watch the value of those stocks soar in one of the biggest bull runs in history.
They're sitting on windfalls of $25 million to $48.8 million for a year in which most of them cut jobs, downsized businesses, bragged about their own austerity -- or all three. To be fair, their stocks did rise faster than the market in the rally, but only after setting multiyear lows on their watch.
That prompts a question: If a company's stock falls on a CEO's watch, does he deserve a windfall when it bounces back?
The magic of options
I'll call this group the "CEO-pay Houdinis." They pulled off the neat trick of managing to make huge amounts while most everyone else was taking pay cuts or, at best, scratching out just a little more than before.Four other execs at these same companies deserve honorable mentions because they scored anywhere from $14.5 million to $30.8 million on 2009 stock-option grants (see the table below).
The key to this cool trick? Options, which allow a recipient to buy shares at a so-called exercise price, usually the price at the time an option is granted. If the stock rises, the taker can exercise his option at this "strike price" and pocket the difference. The lower the exercise price, the better the deal for the recipient.
The problem with this is that options cost investors lots of money. Options create shares; more shares in the market means the shares that investors already own become worth less. (For more on this, read "How stock options rob shareholders.")
It's worth noting that all five CEO-pay Houdinis sit on, or chair, the very boards that design their pay packages. I'll assume that makes relations fairly cozy. When the markets were near the lows of 2009, their boards issued large stock-option grants at furious paces, often replacing older options that had been basically worthless because of much-higher exercise prices.
Then, as the market rebounded -- it jumped about 50% from March 2009 through the end of May 2010 -- these CEOs enjoyed a bonanza. Indeed, because of these supersized slugs of options, the reported pay decline in 2009 "is largely an illusion," says Patrick McGurn of proxy adviser RiskMetrics Group.
| Executive | Title | Options grant date | Number of options | Exercise price* | Stock price on 5/28/2010 | Windfall as of 5/28/2010 |
|---|---|---|---|---|---|---|
President and CEO | 3/11/2009 | 5,000,000 | $1.96 | $11.73 | $48,850,000 | |
William Clay Ford Jr., Ford Motor | Chairman | 3/27/2009 | 3,470,000 | $2.84 | $11.73 | $30,848,300 |
Frits Van Paasschen, Starwood Hotels & Resorts (HOT, news, msgs) | President and CEO | 2/27/2009 | 1,097,936 | $11.39 | $46.25 | $38,274,049 |
Simon Turner, Starwood | President of global development | 2/27/2009 | 548,968 | $11.39 | $46.25 | $19,137,024 |
Kenneth Siegel, Starwood | Chief administrative officer and general counsel | 2/27/2009 | 417,216 | $11.39 | $46.25 | $14,544,150 |
Chairman and CEO | 1/29/2009 | 1,196,888 | $16.71 | $39.87 | $27,719,926 | |
Chairman and CEO | 2/25/2009 | 3,000,000 | $9.87 | $19.03 | $27,480,000 | |
Anthony Petrello, Nabors | Deputy chairman, president and chief operating officer | 2/25/2009 | 1,698,427 | $9.87 | $19.03 | $15,557,591 |
President and CEO | 2/26/2009 | 5,500,000 | $1.14 | $5.72 | $25,190,000 |
Source: Equilar. *Per share.
They weren't the only CEOs handed more shares than usual. Overall, S&P 500 companies increased options grants to CEOs by 14.3% last year, to an average of 200,000 each, up from 175,000. Grants of restricted stock shot up 44.5%, to 75,150 per CEO from 51,996.
The companies led by all five of our CEO-pay Houdinis saw their stocks bounce back much better than the market overall. And four of these five CEOS have helped their companies outperform the market since taking the helm.
But as we'll see below, they also benefited directly from outsized grants issued at a dramatic market bottom.
Continued: Cruising for riches at Ford