CEO pay dives in a rough 2008

CEOs had a rough 2008. First, their image sank to new lows as the Wall Street and economic collapse fanned public outrage. Then most, even those far removed from the financial sector, took a blow to their wealth, as well.

That's clear now that U.S. companies are deep into the period in which they tell shareholders how much top executives earned in 2008 — a year when most Americans got a refresher course in financial pain.

Take the apparent 2008 compensation champion for CEOs of Standard & Poor's 500 companies: Chesapeake Energy's CHK Aubrey McClendon. On paper, his compensation totaled $112 million, including a $77 million bonus that was more than three times larger than any other CEO's and came in a year when the natural gas producer's stock fell 58%.

While it might be hard to muster sympathy, 2008 was difficult financially for McClendon, 49. The co-founder of Chesapeake owned 5.5% of the company, a stake worth $2.3 billion when the stock peaked at $74 in July, ranking him 134th among the Forbes 400 richest Americans.

But McClendon gambled on the success of his company and bought Chesapeake stock on margin; when his stock tanked, he was forced to sell almost all his shares for $595 million in October to cover a margin call. That left him about $2 billion poorer. He may never see the Forbes list again.

That was an extreme example of what a subpar year it was for CEOs in almost every compensation category. A USA TODAY analysis of executive compensation data provided by the Associated Press found that the median salary of a CEO running an S&P 500 company rose 3% last year to surpass $1 million. The median bonus and other incentive cash dropped 27% to $1.3 million, and total compensation was down 7% to $7.6 million.

In many cases, it was worse than it looked, because Securities and Exchange Commission rules require companies to value options and other stock grants based on the dates they were granted. According to AP, 90% of the $1.2 billion in CEO options granted last year are under water, which means the current stock price is too low to yield a profit.

Motorola's MOT Sanjay Jha had total compensation of $104.4 million in 2008, second to McClendon. But of that, $103.5 million came in stock options and grants in August to lure him away from Qualcomm, when Motorola stock was about $10 a share. It closed Thursday at $5.53. His 16.5 million options won't turn profitable until the stock gets back above $10, but his stock grants are still worth about $20 million.

The USA TODAY/AP examination was of 387 S&P 500 companies that filed proxies this calendar year through April 20.

Salaries still not shabby

But don't go looking for CEOs in bread lines just yet. The brutal bear market that hurt them so badly in 2008 could actually help them later by creating ripe conditions for huge potential paydays. Because of 13-year lows in stocks in early 2009, most CEOs received additional stock grants and stock options this year at fire-sale prices.

American Express AXP CEO Kenneth Chenault was fifth-highest in total compensation last year, making $43 million. Like other CEOs, his numbers overestimate actual wealth creation. His stock options and stock awards were valued at $34 million when issued, but by early March, American Express stock fell below $10 a share, making Chenault's options going back several years all but worthless. American Express stock declined 64% last year and was down 63% in a three-year period (2006-08).

However, Chenault was issued 1,196,888 stock options in January 2009 at a strike price of $16.71, says company spokeswoman Joanna Lambert. Stock options allow you to buy a stock at a set price during a set period of time. Any gain in the stock from that set price produces a profit when the option is exercised.

For Chenault, that means his paper wealth rises nearly $1.2 million for every $1 the stock price rises above $16.71. With the stock now at $25.22, those options are already in the money by $10.2 million, and if the stock recovers to the $49.13 level of last year, they will be worth nearly $39 million.

That's a good example of the significant gains many CEOs will see when stocks rebound, says Jay Fishman, CEO of Travelers TRV. "Some of these grants could end up being worth substantial sums one day. I hope so, not for my sake, but because it means the economy has gotten better."

CEOs have recovered quickly from bad patches before, says Sarah Anderson of the Institute for Policy Studies, a liberal think tank. In 2001, the average total CEO compensation was $11 million, but the bursting of the dot-com bubble and recession dropped that to an average $7.4 million in 2002 and $8.1 million in 2003. By 2004, it was back to $11.8 million, Anderson says.

Cisco Systems' CSCO John Chambers had stock options worth $1 billion in 2000, but they were driven underwater when Cisco's stock price fell from $77 a share in March 2000 to about $11 a share by September 2002. Chambers was granted 14 million more options between 2001 and 2003. By 2004, they were valued at $224 million, Anderson says.

Some take no salary at all

With the economy weighing heavily, six CEOs took either no salary or $1 in 2008, including Apple's AAPL Steve Jobs, Google's GOOG Eric Schmidt and Whole Foods' WFMI John Mackey. And companies overall were less generous with bonuses. Seventy-nine CEOs, including Ford Motor's F Alan Mulally, General Electric's GE Jeffrey Immelt and Aflac's AFL Dan Amos, received no bonus. Among those with the same CEO in 2008 and 2007, 56% received a smaller bonus in 2008 than in 2007.

"Less earnings, less compensation. It just makes all the sense in the world to me," Fishman says. CEO compensation watchdog Graef Crystal points out that given the financial toll waged on their investors in 2008, even more CEOs should have "been sent to bed" without bonuses.

Among CEOs who did get them, the seventh-highest bonus, at $11.7 million, went to Martin Orlowsky of cigarette maker Lorillard LO. It was more than 10 times what he received in 2007 because his contract was about to expire, and a bonus was paid to retain him, Lorillard spokeswoman Hannah Sloane says.

Lorillard was spun off from Loews in June 2008. By the end of the year, its stock had fallen 26.6% from its first-day close, vs. a 33.5% drop for the S&P for the same period.

Ronald Havner, CEO of Public Storage PSA, a real estate investment trust, received $16 million in bonus and incentive cash in 2008, vs. less than $1 million in 2007. Clem Teng, vice president of investor relations for Public Storage, said Havner received a one-time bonus of $6.3 million for engineering a 51% sale of subsidiary Shurgard Europe that gave the company a $350 million gain in times when such deals were extremely difficult.

The board dangled the big bonus in front of Havner for the express purpose of completing such a deal, which gave Public Storage a $500 million cash war chest when other companies were struggling to get a loan, Teng said. The stock rose 12% in 2008, while the S&P 500 fell 38.5%.

Raises set before downturn

Of companies in the USA TODAY/AP analysis, the biggest salary in 2008 was $3.3 million paid to GE's Immelt, followed by $3.25 million to Steve Wynn of Wynn Resorts WYNN, and $2.8 million paid to Brian Roberts of Comcast CMCSA.

Compensation consultant Irv Becker of the Hay Group, whose job it is to help boards align executive compensation to performance, says salaries for 2008 were up from 2007 because raises were set in late 2007 and early 2008 before companies knew they were entering a recession and before the public outcry. However, decisions on bonuses were more likely made at year's end, which is why they fell 27% from a year earlier.

Due to the weak economy and the bailout money that went to the financial sector, "there's a whole level of conservatism," Becker says. He says 2009 salaries will be flat to down, and bonuses will be conservative.

About time, says Kazuo Inamori, the 77-year-old founder of Japanese conglomerate Kyocera. He says U.S. CEOs need to quit being paid as if they were solely responsible for company successes without regard to other employees and managers.

Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt, says companies in general have taken note of the public outrage, and as of March, 55% had frozen executive salaries for 2009 — and 10% had reduced them. Back in December, just 21% had frozen salaries. But Goldstein says this was done mostly for image, because the savings are inconsequential to large companies.

Myrna Hellerman of Sibson Consulting says there have been some deep cuts to executive compensation in 2009, but there is already concern about talent retention, especially if the economy rebounds in 2010.

Goldstein says the dollar amount of stock options and grants is decreasing, but assuming a company's stock is down 50% and the dollar amount falls 20%, the number of shares granted in 2009 is much greater than in 2008. "Could there be a windfall? It's possible if stock prices recover … but it will only restore some of the value that evaporated," he says.

However, the brightest executives, who used to gravitate to Wall Street because of the high compensation, are now in abundant supply and are willing to work for what traditional companies can afford to pay, Goldstein says. "These are brilliant people. Where are they going to go? They will go into other areas of the economy. It's good for business."