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Following the Money to Unexpected Places

Things have been returning to the old "business as usual" in CEO compensation: corporate bigwigs banking big bucks. The AFL-CIO recently released findings that the average S&P 500 chief executive took home 380 times the pay of the average worker in 2011, but it's not the only organization keeping track.

This week, GMI Ratings released its preliminary pay report (link opens PDF file) on last year's CEO compensation trends, reiterating the idea that regardless of how the rest of the American economy is doing, chief executives have been doing pretty darn well. For the second year in a row, Russell 3000 CEOs have experienced a double-digit-percentage pay increase.

The data also reveals a fascinating trend: Last year, small- and mid-cap CEOs booked the largest increases, a different trend than the previous year.

A statistical surprise
In 2011, total CEO annual compensation (which includes base salary, bonuses, and perquisites) for the 817 companies GMI Ratings surveyed increased by just over 10% on average. However, total realized compensation, which also includes equity profits and deferred compensation, increased by more than 44% on average.

Pay increases vary, though, by the size of the company. The average realized pay for S&P 500 CEOs increased by 12% in 2011 versus 2010. However, GMI Ratings found that the average realized compensation for S&P mid-cap CEOs has risen by 17%, and S&P small-cap CEOs' average realized compensation grew by 28%.

The previous year, the annual pay boosts were most pronounced at the biggest S&P companies. This year's results seem to reverse that disparity.

Are these under-the-radar CEOs overpaid?
When one thinks of an uber-well-compensated CEO, one might think of Oracle's (Nasdaq: ORCL  ) Larry Ellison, who ranked No. 1 on The Wall Street Journal's list of highest-paid CEOs of the decade last year. Oracle's market cap was $98 billion at that time, and shareholders had seen the value of their shares triple, so surely there wasn't too much to complain about performance-wise in that particular case.

Oracle is without a doubt a large-cap company, with a current market cap of $142 billion. Investors surely could argue back and forth about Ellison's reputation for high pay and whether he's worth what he's made. His good friend, Apple's Steve Jobs, told Ellison he didn't need any more money at one point, according to one anecdote in Walter Isaacson's biography of Jobs.

However, GMI's findings that small- and mid-cap CEOs clocked larger average pay increases last year than large-cap CEOs is fascinating. The recipient of the largest annual pay increase GMI Ratings has found to date is Kenneth Peak, CEO of the small-cap Contango Oil & Gas (NYSE: MCF  ) . He received a $6 million cash bonus after meeting three out of four financial metrics last year. As of right now, Contango's market cap is a mere $837 million.

Interestingly, the top-paid CEO according to GMI Ratings' preliminary findings is Herbalife CEO Michael Johnson, who raked in total realized compensation of $84.4 million, beating out tech giant IBM's (NYSE: IBM  ) now-retired Sam Palmisano, whose total realized compensation came in at $63.3 million.

Most of Johnson's 2011 windfall resulted from his exercise of options he received in 2003 through 2005, when Herbalife shares had tumbled below $10. He's an interesting individual to top the list, not only because most of that compensation is tied to a remarkable recovery over the years (total shareholder return is up 292% over the last five years) but also because well-known hedge fund manager David Einhorn recently criticized the company's disclosures.

The top 10 most highly paid CEOs gained about 77% of their realized compensation through option exercises and vested equity. However, a few CEOs were simply showered with cash in 2011. For example, the CEOs of Marathon Oil (NYSE: MRO  ) and Honeywell (NYSE: HON  ) received bonuses of $21.8 million and $23.3 million, respectively.

Guess who always seems to get ahead
Whether these particular CEOs' job performances have been worth the big bucks they've stacked up is worthy of some spirited discussion, so chime in using the comments box below. However, one thing's for sure: The overall trend to increasing CEO pay belies a lot of common sense in the remainder of the marketplace.

After all, the economic recovery is far more lackluster than many had previously believed. Regular Americans haven't seen a parallel increase in income; in fact, average Americans have been falling behind for decades now. The Economic Policy Institute recently released data stating that from 1978 through 2011, CEO pay increased by 725%, compared to a 5.7% increase in worker compensation over that same time frame.

Small- and mid-cap companies' CEOs may be making out like bandits and reversing the previous trend, but when it comes to regular Americans' wages for their work, there's no such statistical surprise bulking up the bank accounts.

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. The Motley Fool owns shares of Oracle, IBM, and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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

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 May 04, 2012, at 5:00 PM, XMFGortok wrote:

    As long as the money the CEOs are being paid is not coerced, I'm not sure why we're harping on it. If a company makes a bad business decision by paying a CEO more than he's worth to them, then they'll lose out. If they pay him less than he's worth to them, they'll lose because he'll leave.

    We can harrumph and think it's "unfair", but ultimately, it's not our money to spend -- it's that company's.

    (Bailouts are a perversion of capitalism, and they should never have happened).

  • Report this Comment On May 04, 2012, at 5:19 PM, TMFMorgan wrote:

    <<We can harrumph and think it's "unfair", but ultimately, it's not our money to spend -- it's that company's.>>

    It's the shareholders' money.

  • Report this Comment On May 04, 2012, at 6:12 PM, TMFLomax wrote:

    Thanks Morgan -- yes, it IS indeed the shareholders money, which is why this issue does matter.


  • Report this Comment On May 05, 2012, at 11:34 AM, djvardell wrote:

    What is The Problem? The CEOs don't dig a hole and bury the money in their back yard--they spend it and invest it, so it spreads throughout the economy, enriching many.

    Is The Problem "unfairness"? I.e., they could pay their employees higher wages, and pay shareholders higher dividends? Wages are guided by the market to attract the necessary talent, and dividends are guided by the market to attract the necessary investors. If you want these companies and CEOs to give their money away as an act of charity, they already do. For example, Oracle's Larry Ellison has publicly stated his commitment to give away 95% of his wealth. In 2004, he donated over $151 million to charity.

  • Report this Comment On May 05, 2012, at 2:47 PM, TMFDarwood11 wrote:

    I don't necessarily have a problem with CEO pay. I do have a problem with short term solutions which generate outsize paychecks for many years.

    I promote 'claw-back' provisions for CEOs AND public officials.

    However, the public sector seems to get below the radar. So called "public servants" get outsize pensions. For example, in the nearby city of Chicago it was revealed that "hizzonor" former mayor Daley of Chicago had gamed the system to get $millions in extra retirement perks. As stated in the Chicago Tribune: "His own public pension, meanwhile, will end up costing taxpayers all over the state. Records show that his contributions to the statewide General Assembly pension fund weren't nearly enough to cover the benefits he receives."

  • Report this Comment On May 05, 2012, at 5:46 PM, malia3 wrote:

    CEO pay is determined by a Board of Directors, usually consisting of 10-12 OTHER CEOs, big time names and/or military figures. It is this group who determine what compensation the upper management receives and usually it is not tied to any specific metric other than greed.

    How much it TOO much?

  • Report this Comment On May 05, 2012, at 6:23 PM, JaneBond wrote:

    Well, the way around this, if "we" think it is obsene is not to invest in public companies. Shareholders who think it is not obsene can pay it. Shareholders who think it is obsene don't have to pay it. However, since the largest shareholders and board have a cozy little relationship going on, they probably won't. So, don't invest in public companies, if you don't like the arrangement.

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