While there were many household-name CEOs in the Equilar/New York Times pay study of the top 200 most highly paid CEOs, there was also a selection of less well-known companies and CEOs – so much so that the Times didn't even have photographs of them for its interactive display.
(Total pay data and increases below are taken from the Equilar survey, the details and analysis are my own.)
The most highly paid of these was W. Nicholas Howley of the TransDigm Group (NYSE: TDG ) . Howley earned $64.2 million in 2013, an increase of 1,842% over his 2012 pay of $3.3 million. Some of this was due to a hefty stock option award (the stock price is over $130 per share, so a mere 350,000 options was estimated to have a value of almost $16 million). But the massive increase was largely driven by the award of dividend equivalents on vested stock options.
Recorded in the catch-all "all other compensation" column, dividend equivalent payments for Howley include $3.4 million relating to a dividend declared in October 2009, $17.6 million on a $12.85 dividend declared in October 2012 and $24.9 million on a $22.00 dividend declared in July 2013.
What are dividend equivalents? All shareholders of record on the dates in question received the above dividends on their investments ... except for stock option holders. Since options are an offer to buy shares at a specified price, rather than actual ownership, you might be forgiven for thinking that not paying dividends to option holders is just fine.
Most companies, however, do not agree. This is generally because large dividend payments have the effect of diluting stock in a company, thus devaluing to a certain extent the shares held under option. I do not know why the dividend equivalents for 2009 and 2012 were only paid out last year, perhaps in an effort to get the news out there all at once.
Performance-restricted stock ... sort of
The second most highly paid, least well-known CEO was Ronald Clarke at FleetCor Technologies (NYSE: FLT ) , who earned $32.9 million in 2013, an increase of 212% over 2012's pay of $10.5 million. The pay that drove this increase is simpler ... sort of. The increase derives from the award of $30.5 million shares of performance restricted stock, which will vest if the company's stock price hits $92, or 4 times the IPO price of $23 in 2010.
Since the company doubled its market cap last year, this performance requirement does not sound impossible. But here's the "sort of." If the performance hurdle is not met, the shares will vest anyway according to a time schedule that is designed to ensure Clarke's long-term commitment to the company. However, since one of those vesting dates was only three months after the award date, this would appear to be stretching the definition of long-term. In any case, the vesting of the shares is guaranteed, regardless of company performance.
Performance-based stock options ... really
Our third example of highly paid, least well-known CEOs is Tony Aquila, head of Solera (NYSE: SLH ) , who earned $29.9 in 2013, an increase of 390% over 2012's $6.1 million. This increase was due to the award of two sets of stock options: around 320,000 and 1.3 million on two separate dates in the company's last fiscal year, valued at $26.5 million in total. Some of the stock options were awarded because Aquila's long-term equity compensation was deemed "slightly below" the 75th percentile of the company's peers.
Most companies tie compensation levels to the median of their peers – the 50th percentile – which is in itself inflationary. There is very little justification for paying at the upper quartile, unless the company is performing at that level among its peers; no evidence of such outperformance is provided in the compensation committee report.
The majority of the stock options, on the other hand, some 900,000 of them will only vest if certain performance targets are met. These stock options will only vest (and this is not an either/or hurdle, so if it's missed, they lapse) if adjusted EBITDA (earnings before interest, tax, depreciation and amortization) targets and certain TSR goals are met.
These three examples clearly show that fame is not a prerequisite of high pay, and one, at least, shows that neither is performance.
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