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CEO Pay Defies the Laws of Gravity

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Remember that saying "what goes up must come down"? Oddly enough, CEO pay doesn't appear to be subject to the same laws of physics that govern the rest of the rational world.

In fiscal 2010, total realized compensation of CEOs in the S&P 500 rose by a median 36.5%. In addition to some of the usual outrageous factors accompanying high levels of CEO compensation, note that some of the CEOs on the top of the heap in 2010 took the money and ran.

A good year for CEOs
GMI, the leading independent provider of corporate governance and ESG ratings and research, has released its ninth annual CEO Pay Survey for 2011. Beyond the 36.5% increase in the surveyed companies' chief executives' pay, extra perks awarded to S&P 500 leaders rose 11% on a year-over-year basis in 2010.

Here's a worthwhile tidbit for shareholders to ponder: Of the 10 highest-paid CEOs of 2010, four were actually retired or terminated chief executives who received golden exit packages. So much for pay that's commensurate with performance; these executives enjoyed a heck of a lucrative year even though they won't offer these companies or their shareholders anything in the way of future performance.

Who's who, and why?
The health-care providers and services category produced the executives in the top two slots. McKesson (NYSE: MCK  ) CEO John Hammergren and Omnicare (NYSE: OCR  ) CEO Joel Gemunder both banked staggering sums of $145 million and $98 million, respectively.

Hammergren's No. 1 slot should give investors pause. Hammergren's base salary of $1.6 million is not tied to performance; neither are his retirement benefits, which increased by $13.5 million on a year-over-year basis. Should Hammergren's tenure at McKesson come to a close, his severance payout would add up to an eye-popping $469 million, according to the survey.

Health insurer Aetna's (NYSE: AET  ) CEO compensation also made the top 10 list at No. 9, with a payout of nearly $58 million. However, GMI notes that this princely sum was awarded to former CEO Ronald Williams, who retired in April 2010. In the four years that Williams headed up Aetna, the stock price declined by 30%.

It's worthwhile to note that General Growth Properties' (NYSE: GGP  ) Chief Executive Adam Metz's $66.7 million compensation put him at No. 6 on the list; General Growth Properties spent most of 2010 in bankruptcy, but at least somebody did well, right? Metz, who only presided over General Growth Properties for two years, received a $46 million cash bonus in 2010; 48 employees of the real estate investment trust received "bonuses to cover what may have otherwise been awarded if the company was not in bankruptcy."

TRW Automotive Holdings' (NYSE: TRW  ) CEO John Plant received two apparently random bonuses in 2010. A $4.5 million bonus included 50% tied to amorphous "additional factors," and he also received a $2.5 million discretionary retention bonus.

Ralph Lauren's (NYSE: RL  ) Ralph Lauren received the maximum allowable bonus of $19.5 million in 2010, and given the lack of actual metrics to explain what the corporate performance and goals actually are, shareholders might be tempted to assume the bonus is just because he's, you know, Ralph Lauren.

Turning the rising tide in 2012
This increase in CEO pay at least partially relates to the stock market's performance in 2010, but that isn't always particularly sound reasoning. Just because a lot of traders with the attention spans of sand fleas bid up stocks willy-nilly doesn't correlate to true long-term corporate performance at specific companies. The market isn't sometimes called "bipolar" for nothing; it's the very long haul that usually reflects the reality of companies' operational strength through investment returns.

GMI pointed out that the Russell 3000 index did increase by 17% in 2010, in contrast to 2011, which has been a much tougher year for stocks. However, suffice it to say that chief executives always seem to come out way ahead of everybody else (namely, investors and workers) financially; CEO pay among those Russell 3000 companies increased 27% in 2010.

Fortunately for us shareholders, we have tools at our disposal to try to get the message across that CEO pay disconnects are no longer OK. We can use our proxy ballots to vote against companies' CEO pay policies, and also withhold votes from the compensation committees' directors who craft outrageous pay (and pen employment agreements that ensure ample pay for failure through golden parachutes). Increasing moves to ensure proxy access pose the threat of replacing dysfunctional directors, too.

In many cases, the ever-rising tide of CEO pay disconnected from true performance should result in rising shareholder ire. The 2012 proxy season will be here before we know it; let's get the message across that CEO pay that's disconnected from performance (or reason) is no longer business as usual.  

Check back at every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2011, at 12:18 PM, XMFAlaska wrote:

    Great job Alyce.

  • Report this Comment On December 16, 2011, at 5:41 PM, lesailes wrote:

    In Australia things are bad with CEO pay but are being slightly restrained because legislation forcing a board spill if there is a 25% vote against the remuneration report 2 years runnig has been enacted.

    This has created boardroom fury and shareholder delight (see - they really are our representatives)

    Additionally a strong Shareholders Association has been publicly and privately lobbying and collecting proxies.

    I know Americans hate collectivism but if you are to fight the modern robber barons you have to organise.

  • Report this Comment On December 16, 2011, at 9:20 PM, GETRICHSLOW2 wrote:

    Despite this insane increase in pay, most shareholders vote to approve the pay packages of CEO's. I was sure that many of the outrageous pay packages would get slammed in the shareholder advisory votes earlier this year but most were approved overwhelmingly. Are people nuts or what?

    No human being is capable of working long enough or hard enough to be worth more than a million bucks in one year. Even that is somewhat ridiculous. These incomes have to be relative to the incomes of other jobs in the workforce.

    I am tired of the same old crap about paying for talent. When does it ever stop? Do CEOs just keep getting more talented while the rest of just get dumber?

    We also need to start looking closer at board of directors pay. Many of which are CEOs of other companies. If they are so busy earning mega-millions from there own company, how do they have time to serve on other boards? I never vote for any director who is a CEO of another company. There are millions of talented people out there that could be filling these roles.

    The madness will never end until shareholders start paying attention and demanding to be heard.

  • Report this Comment On December 16, 2011, at 10:15 PM, texashusker wrote:

    I worked for McKesson at one time and chose to walk away without a new job lined up. The place was Chaos. A conglomeration of ill-fitting acquisition and people who did not want to be there. Mr. Hammergren is not worth that money.

    Where is the hue and cry to throw the bums out of the Executive Suite? Congress maybe be conniving bunglers, but the the CEOs of this country are the true thieves. The are pillaging corporate profits and some how hiding behind "my pay is set by the board" or by the "compensation committee" which of course, they appointed.

  • Report this Comment On December 16, 2011, at 11:02 PM, CaptainWidget wrote:

    CEO pay is a another speculative market based on cheap money and huge government guarantees.

  • Report this Comment On December 17, 2011, at 6:25 AM, skypilot2005 wrote:

    Alyce wrote

    December 16, 2011:

    "The 2012 proxy season will be here before we know it; let's get the message across that CEO pay that's disconnected from performance (or reason) is no longer business as usual."

    This is very important. These companies are stealing our stockholder equity..

    On December 16, 2011, at 9:20 PM, GETRICHSLOW2 wrote:

    "No human being is capable of working long enough or hard enough to be worth more than a million bucks in one year. Even that is somewhat ridiculous. These incomes have to be relative to the incomes of other jobs in the workforce."

    Right on......

    Sky Pilot

  • Report this Comment On December 19, 2011, at 2:51 PM, DJDynamicNC wrote:

    @Getrichslow - "I never vote for any director who is a CEO of another company"

    That's a good policy. I'll keep that one in mind for my proxy votes, I hadn't considered it before.

    You also said "No human being is capable of working long enough or hard enough to be worth more than a million bucks in one year. Even that is somewhat ridiculous. These incomes have to be relative to the incomes of other jobs in the workforce."

    Exactly right again. And that is something I consider every day. I'd be more than ok with a maximum wage to complement our minimum wage.

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Alyce Lomax

Alyce Lomax is a columnist for and an analyst for Motley Fool One. She specializes in environmental, social, and governance investing topics, and from November 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis.

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