Executive Non Equity Compensation Linked To Profits Final
Top Performing Fortune 100 Companies Are Linking Executive Non-Equity
Compensation to Growth in Profitability and Don’t Need Say on Pay Rules To Do the
Jennifer Green, Green Global Resources, CEO and Principal Consultant, www.greenglobalresources.com; GGR Consultant and
Researcher: Vivian Pendergrass; GGR Associate Consultant and Editor: Michael Bresnahan
While the outcry over outrageously high executive compensation levels in the face of declining company
performance is perhaps justified, a closer look at the best performing publicly traded companies shows a strong
link between executive cash bonuses and growth in profits for the last full fiscal year, 2008. Although trends in
2008 total executive compensation in the press have been shown to be unrelated to company performance
growth or decline, these reports have not drilled down deep enough, and they have not represented how
executive compensation is structured at high performing companies in the fortune 100. Although the public
outcry over some indiscrete executive compensation practices of a few companies that asked for government
bailout funds while giving executives their cash bonuses is justified, the news reports on research on non-equity
compensation is misleading. We now are facing a bipartisan, pile on effect of “Say on Pay” initiatives. No
Legislator wants to be viewed on the side of executives who make a lot of money in this economy. Shareholder’s
votes in may not be binding on the BOD’s decision to award the CEO bonuses, but the Shareholder’s views will be
taken seriously by the BOD, for obvious reasons.
It is essential to point out two concerns with the direction things are going in executive compensation: 1. By
default seven (7) companies who received bailouts and paid bonuses are causing a new set of rules that may be
unnecessary for companies who are doing the right things, and; 2. If Shareholders will have a say on executive
pay, then It is important that they have information on the way compensation is structured at successful
companies to see what is working. Superficial coverage of executive compensation research in the press sways
opinion but sheds little light on what drives executive compensation, and it is has been misleading to
Shareholders who are not well versed in executive compensation.
On the 23rd of October, the Special Master for TARP received a mandate from the House of Representatives to
limit the compensation of the top 5 officers and an additional 20 employees. Here is an excerpt from the article,
which in its entirety can be found at the following link http://www.ustreas.gov/press/releases/tg329.htm
The Special Master for TARP Executive Compensation Issues First Rulings
Today, the Special Master for TARP Executive Compensation Kenneth R. Feinberg released determinations on the compensation
packages for the top executives at firms that received exceptional TARP assistance. Under the Emergency Economic Stabilization Act
(EESA) as amended in 2009, the Special Master has a mandate to review all forms of compensation for five most senior executive
officers and the next 20 most highly compensated employees at the seven firms that received exceptional TARP assistance (AIG,
Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial).
In addition, Marjorie Glover writes in Law.com:
The leading "say on pay" proposal, the Corporate and Financial Institution Compensation Fairness Act of 2009 (HR 3269), was
introduced by Rep. Barney Frank and passed by the House of Representatives in late July HR 3269 is based upon the Treasury
Department's "say on pay" proposal that was introduced earlier in July. The Treasury Department's proposal largely mirrors "say on
pay" rules that were passed in the United Kingdom in 2002. The Senate is expected to consider HR 3269 this month and some form of
"say on pay" legislation is expected to be passed this fall.
WHAT HR 3269 WOULD REQUIRE
The House bill, HR 3269, would require that shareholders of public companies have an annual advisory nonbinding vote on executive
compensation. HR 3269 would apply only to a public company's named executive officers, which under the SEC's rules generally
consist of the CEO, the CFO and the three other most highly paid executive officers. The proposal would require that shareholders be
provided a separate vote to approve the NEO compensation disclosed in the detailed information on NEO compensation included in
the company's proxy.
HR 3269 would also require that shareholders have a separate advisory nonbinding vote on golden parachutes in connection with
shareholders approval of certain mergers, acquisitions and other corporate transactions.
HR 3269 also calls for independent board of directors' compensation committees and independent compensation consultants, legal
advisors and other consultants. Compensation committees would have the right to obtain advice from independent compensation
consultants. Companies would be required to disclose whether their compensation committees obtained advice from independent
compensation consultants or, if they did not, whether it was not in the shareholders' interests to obtain such advice.
In addition, HR 3269 would require larger institutional investors to disclose how they voted on executive compensation matters on an
GGR staff researched data from 100 disclosures on CEO pay among Fortune 100 companies who had the same
CEO in place in 2007 and 2008 and a very different picture formed than what the press has reported in articles
recently. A review of the amount of non-equity bonus and/or incentive compensation and company profit and
revenue for 2007 and 2008 showed a correlation between changes in executive non-equity bonus and changes in
profits and revenue growth year over year. The data from the upper quartile of the (publicly traded) top
performing Fortune 100 companies with public disclosure information showed a correlation between growth or
decline in executive non-equity bonus and/or incentive compensation and their company’s increase or decrease
The CEO’s of the Companies that were in the top quartile of the fortune 100 in terms of company performance in
the last full fiscal year reported, 2008, are listed below.
Revenue Revenue Profit Profit % Bonus/Non-Equity Bonus/Non-Equity
CEO Company Change % Change Change Change Change % Change
R.W. Tillerson Exxon Mobil $ 70,027,000,000 18.78% $ 4,610,000,000 11.35% $ 640,000 19.05%
D.J. O'Reilly Chevron $ 52,376,000,000 24.85% $ 5,243,000,000 28.06% $ (380,000) -10.56%
Steven A. Ballmer Microsoft $ 9,298,000,000 18.19% $ 3,616,000,000 25.71% $ (2,158,030) -75.51%
Jeffrey R. Immelt General Electric $ 6,551,000,000 3.71% $ (4,798,000,000) -21.60% $ (5,800,000) -100.00%
H. Lee Scott, Jr. Wal-Mart Stores $ 26,808,000,000 7.08% $ 669,000,000 5.25% $ (2,576,000) -30.67%
William C. Weldon Johnson & Johnson $ 2,652,000,000 4.34% $ 2,373,000,000 22.44% $ 200,000 5.71%
S. J. Pallmisano International Business Machines $ 4,844,000,000 4.90% $ 1,916,000,000 18.39% $ (300,000) -5.17%
A. G. Lafley Procter & Gamble $ 7,027,000,000 9.19% $ 1,735,000,000 16.78% $ (1,534,900) -25.16%
Mark V. Hurd Hewlett-Packard $ 14,078,000,000 13.50% $ 1,065,000,000 14.66% $ (225,900) -4.05%
J. Kindler Pfizer $ (122,000,000) -0.25% $ (40,000,000) -0.49% $ (100,000) -3.23%
John T. Chambers Cisco Systems $ 4,618,000,000 13.22% $ 719,000,000 9.80% $ (497,198) -14.21%
Ray R. Irani Occidental Petroleum $ 4,274,000,000 21.15% $ 1,457,000,000 26.98% $ (660,000) -15.38%
Ivan G. Seidenberg Verizon Communications $ 3,579,000,000 3.82% $ 907,000,000 16.43% $ (459,375) -10.94%
James Dimon J.P. Morgan Chase & Co. $ (14,862,000,000) -12.77% $ (9,760,000,000) -63.52% $ (14,500,000) -100.00%
K. Rupert Murdoch News Corp. $ 4,341,000,000 15.15% $ 1,961,000,000 57.24% $ 1,705,000 10.79%
Paul S. Otellini Intel $ (748,000,000) -1.95% $ (1,684,000,000) -24.14% $ (90,900) -2.29%
Indra K. Nooyi PepsiCo $ 3,777,000,000 9.57% $ (516,000,000) -9.12% $ (600,000) -18.75%
Miles D. White Abbott Laboratories $ 3,613,400,000 13.94% $ 1,274,400,000 35.34% $ 150,000 3.70%
Robert A. Iger Walt Disney $ 1,961,000,000 5.47% $ (260,000,000) -5.55% $ 274,807 2.01%
Overall $ 204,092,400,000 9.0% $ 10,487,400,000 5.14% $ (26,912,496) -20%
The correlation between profit change and bonus/non-equity incentive payouts was remarkable.
There was no correlation between the growth or decline of non-equity executive compensation and revenue
growth or decline year over year comparing 2007 and 2008.
How Executive Compensation is Structured
Executive compensation is comprised of short term (non-equity annual bonuses or incentives) and long term
compensation such as restricted stock, stock options, performance shares that reflect the market value of, and
incentive for, long term executive impact. Non-equity bonus and cash incentives/bonuses reflect “what did you
do for me this year”. A critical concern of shareholders is the price of the shares and how much the price of the
shares goes up - which is influenced a lot by how Wall Street perceives the results of the Company compared to
the guidance they received prior to the fiscal year or quarter. Investors think in terms of “say what you are going
to do, do what you say”. The results in a given quarter or year may or may not meet the longer term goals for the
Company for sustainable and responsible growth - the responsibility of the BOD and the CEO. CEO’s are
responsible both to the Shareholders and the BOD for long term and short term results. Shareholders are
typically very concerned about last quarter’s stock growth. The compensation of the top 5 officers of the
Company are in proxies for the shareholders to view and comment on, at shareholder meetings.
Successful companies make the distinction between short term cash incentives and non-equity bonus tied to
profits, and longer-term results, which are tied to equity. Restrictions on executive compensation required to
manage a few companies that have been the recipients of government bailout monies (and gave their executives
cash bonuses and incentive payouts), are appropriate. But shareholder restrictions and the next step –rules
imposed on companies that are linking executive cash incentives to company profitability, are counterproductive
and unnecessary. Although these rules will result in more work for consultants and auditors, this is not the kind
of work that contributes to productivity or the GNP.
To determine whether or not executives are properly paid – both external market comparisons and internal value
relative to their impact and contributions over the long and short term must be analyzed. One can argue that the
total amount of executive compensation has reached an astronomical absolute amount in the current economic
context, but the executive’s total compensation is determined by primarily market forces and the value the
Company places on the position and the individual. For the shareholders to have a say on what executives can
earn will require educating shareholders on basic principles of executive compensation and a better
understanding of the correlation between executive pay and profits, short and longer term incentive pay design
principles, and the appropriate upside and downside payouts associated with exceeding or not meeting targets.
Are Shareholders eager to take the time to learn the intricacies of executive compensation? Or will Shareholders
reading superficial accounts of total compensation reported in newspapers vote no on all executive pay proposals
presented to them? It is likely that they will.
1. The 2008 (FY2007) and 2009 (FY2008) Fortune 100 lists were used to identify companies, revenues, and profits.
2. Summary Compensation Tables from proxies and annual reports were used to identify CEO bonus and non-equity incentive plan compensation
for fiscal years 2007 and 2008. Data was not available for some companies which are not required to file SEC reports; therefore, those companies
were excluded from the analysis.
3. Companies were excluded from the analysis if their CEO’s were not in place for the entirety of both fiscal years.
4. CEO Bonus and Non-Equity Incentive Plan Compensation amounts were totaled for each company for both FY2007 and FY2008.
5. Companies were excluded from the analysis if they had no CEO bonus/non-equity incentive plan compensation for both FY2007 and FY2008.
6. The resulting spreadsheet, after the above exclusions, included 73 companies with their FY2007 and FY2008 revenues, profits, and the totaled
CEO bonus/non-equity incentive plan compensation for the corresponding fiscal years.
7. The spreadsheet was sorted by FY2008 profits to identify the 75th profit percentile of 19 companies.
8. The 19 companies with all accumulated revenue, profit, and compensation data were transferred to another spreadsheet for additional analysis.
9. Notes to the Summary Compensation Tables were reviewed to confirm that each CEO bonus/non-equity incentive plan compensation as
reported in the Summary Compensation Tables was related to FY2007/FY2008 performance. Some amounts were adjusted as indicated in the
10. Changes in revenues and changes in CEO bonus/non-equity incentive plan compensation from FY2007 to FY2008 for each company were
11. Changes in profits and changes in CEO bonus/non-equity incentive plan compensation from FY2007 to FY2008 for each company were
12. A correlation coefficient of 0.31 was calculated using the revenue changes and compensation changes arrays.
13. A correlation coefficient of 0.82 was calculated using the profit changes and compensation changes arrays.
14. Line charts were developed for the revenue changes associated with each company, profit changes associated with each company, and for
compensation changes associated with each company. (Companies are identified as numbers 1 through 19.)