Five CEOs had increases in pay of more than 1,000% this past year, according to the Equilar/New York Times pay study of the 200 highest-paid CEOs. I've already written about the TransDigm Group's Nicholas Howley, who received an increase of 1,842%, here. Howley was ranked third. The other CEOs, in order, were Darrell Cavens of zulily (UNKNOWN:ZU.DL), Jeffrey Weiner of LinkedIn (NYSE:LNKD.DL), Godfrey Sullivan of Splunk (NASDAQ:SPLK), and Daniel Och of Och-Ziff Capital Management (NYSE:OZM). Data is taken from the Equilar survey, the analysis is my own.
CEO pay does not behave like pay for you and me. It is often volatile, with large increases and decreases, because so much of it -- typically 80% to 90% -- is dependent on performance and stock price. And we all know how volatile stock prices can be.
In addition, while most CEOs receive a standard pay package every year -- salary, cash bonus, equity in some form, benefits -- some do not. Some CEOs do not get a stock award every year, or are not always eligible for a bonus, while others decide to take $1 in salary, instead of $1 million. Taking into account that potentially 90% of your pay will disappear one year only to reappear the next, extreme volatility is practically built in to executive pay. So perhaps it's not so surprising that CEOs experience increases of up to 9,000%. Next year, it will go down 9,000% and a new crop of CEOs will receive this year's round of 1,000% increases. The four examples below demonstrate this phenomenon clearly.
Quarter of a billion in option profits
First is online retailer Zulily. Co-founder Cavens' increase -- of 9,318% -- is a simple tale of stock option awards. In 2012, he was paid a salary of $250,000 and a modest bonus of $40,000. In 2013, this was supplemented with a stock option award valued at almost $27 million. It consisted of almost 4 million stock options awarded at a strike price of $10.28.
When the company floated in November last year, the IPO price was $22, so these options had an immediate notional profit of around $47 million. When the stock price hit a high of $72.75, the options were worth almost a quarter of a billion dollars. Prices have since dropped back to the immediate post-IPO price of around $37, meaning the option is still worth over $100 million. Of course, being a co-founder, Cavens already owns 21,000 shares of the supervoting B class shares (worth 10 votes per share), or roughly a fifth of the company, so the purpose of the options in aligning his interests with shareholders might be questioned. We will see next year, if such an award is repeated.
First equity awards since IPO
LinkedIn's first equity awards since its IPO led to the 4,075% increase for Weiner. A combined $47.4 million in stock and options raised his pay from $1.2 million in 2012 to just over $49 million in 2013. While the IPO options with a strike price of $2.32 are still in-the-money (the strike price is lower than the market price), the options awarded last year were priced at $170.46. LinkedIn hasn't seen that kind of stock value since the middle of April, and the stock is well down from its $253 high in September last year. So these options are currently out-of-the money, or underwater, and therefore worthless.
The restricted stock, on the other hand, is still worth almost $18 million, despite the decline in stock price; not the most effective of performance-related pay vehicles.
Another IPO increase
Software company Splunk saw CEO Godfrey Sullivan's pay go up 1,818%. Again, following an IPO, Sullivan's pay went from less than $1 million to over $17 million as a result of a $16 million restricted stock unit award. The increase would never have happened, however, had Splunk not delayed its 2013 RSU award until the 2014 fiscal year (the fiscal year runs from Feb. 1 to Jan. 31). Thus 2013 pay had no RSUs and 2014 had two awards.
In either case, a preliminary surge in stock price from an IPO of $36 to a 12-month high of $92.75 failed to be maintained and the stock is now at $45.75. But, of course, the RSUs are still worth $12.8 million, despite the decline in stock price since they were awarded.
Partnership units at Och-Ziff
Asset management firm Och-Ziff's founder CEO Daniel Och saw his pay rise by 1,637%. In the most unusual case so far, basically these "stock awards," with an estimated value of $21 million, represent partnership units that were redistributed among the managing directors of the firm after a departing MD forfeited their ownership. This seems to happen relatively regularly, since Och received $10.5 million of them in 2011 also. On the other hand, the ownership of partnership units does not appear to be reduced when new partners are taken on.
Och's pay was dwarfed, however, by that of James Levin, head of global credit at the firm, who received almost $119 million in "stock awards." These were made up partly of redistributed partnership units, partly some RSUs based on his performance in 2012, and mostly on the conversion of 12 million D units into A units based on the firm's performance.
Timing is everything
As can be seen by the analysis of these extreme pay movements, timing is everything. Did an MD leave the firm this year? Was a stock award delayed? Were the stock options awarded pre-IPO or post? In addition, however, form is very influential. Stock options can lose their value completely, as in the case at LinkedIn, where the current market price has fallen below the stock price. Restricted stock -- as long as the company remains solvent -- always has value, whether the stock price goes up or down. As a shareholder, it might seem that restricted stock is more akin to your experience ... except that you actually paid for your stock.