THE ANNUAL FORTUNATE 50

With the economy improving, executives see pay increases, bonuses and equity awards again
May 22, 2011 12:00 am

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Mylan chairman and CEO Robert J. Coury was the region's highest-compensated executive last year, receiving pay of $22.9 million.

The generic drug company executive ousted William R. Johnson, H.J. Heinz's chairman, president and CEO and the two-time defending champion of the Post-Gazette's Fortunate 50. Mr. Johnson finished third, with fiscal 2010 pay of $19 million, behind Mr. Coury and Consol Energy CEO J. Brett Harvey, whose compensation totaled $20.2 million.

Average compensation of a Fortunate 50 executive last year was $6.5 million, up 11 percent from the previous year. The lowest-paid Fortunate 50 member -- Consol's P. Jerome Richey ($3.1 million) -- made 28 percent more than last year's No. 50, Stephen A. Van Oss of Wesco International.

Four companies -- H.J. Heinz, Allegheny Technologies, PNC Financial Services Group and U.S. Steel -- accounted for 40 percent of the Fortunate 50. Each placed five executives on the roster. Consol and Mylan each had four executives on the list.


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Three females made the list, led by Mylan President Heather Bresch (No. 22, $5.3 million). She was joined by another repeat performer, U.S. Steel chief financial officer Gretchen R. Haggerty (No. 30, $4 million) and a newcomer, DynaVox president and chief operating officer Michelle L. Heying (No. 29, $4.1 million).

Higher pay for Pittsburgh-area executives mirrors national trends. Median pay among CEOs of more than 300 S&P 500 companies increased 28 percent last year to $9 million, according to Equilar, a Redwood City, Calif., firm that compiles compensation data.

"It's not a surprise that pay is up," said Aaron Boyd, Equilar's head of research. "With the economy improving, we're starting to see a lot of companies pay out bonuses again, give out equity awards again."

Net income rose 44 percent at the companies Equilar examined, while their market capitalization, which reflects movement in their stock price, rose almost 21 percent.

The Fortunate 50 received average bonus and cash incentive payments of $1.4 million last year, 9 percent higher than the previous year's class. Their equity-based incentives rose 15 percent to an average of $3.2 million. Compensation experts say the increase reflects two things: higher stock prices and the trend to tie more compensation to stock and option awards.


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Stock options -- which allow executives to capture the gain in stock prices -- were awarded by 71 percent of the companies Equilar analyzed. While they remain a popular incentive tool, compensation consultants said more companies were using restricted stock, which vests over a prescribed period of time, and performance shares, where the number of shares an executive ultimately receives is based on performance targets.

"Lots of companies are tying more of their pay-into-performance shares," Mr. Boyd said.

While the link targets the pay-for-performance companies and shareholders are seeking, there is a flaw in equity-based pay, according to Mel Fugate of Southern Methodist University's Cox School of Business.

Mr. Fugate said that while shareholders have to put their own money at risk by buying stock in order to profit from rising stock prices, executives do not. Nothing comes out of their pockets, and even when shares of their company do not do well, the shares are still worth something to executives, he said.

"Where we have downside risk, they don't. I think that is a fundamental and often overlooked fact," Mr. Fugate said.

Among the 20 companies represented on the Fortunate 50: two (Consol and Matthews International) generated negative returns, including dividends, for shareholders last year. Over the longer haul, 11 produced negative returns over three fiscal years and three (Matthews, Black Box and Federated Investors) generated negative returns over the last five fiscal years.

One trend that remains intact is the gap between what the average executive is paid and the average worker's wages. Compare Equilar's 28 percent executive pay increase with the 2 percent increase in average weekly earnings reported by the U.S. Department of Labor.

"The disparity between CEO and workers' pay has continued to grow to levels that are simply stunning," AFL-CIO president Richard Trumka said last month in unveiling the labor organization's Executive PayWatch report.

The average pay of the 299 S&P 500 CEOs the group examined rose 23 percent last year to an average of $11.4 million. Collectively, the CEOs received $3.4 billion, or enough to hire 102,325 workers at the median annual U.S. worker wage of $33,190, the AFL-CIO said.

Applying the same median wage to the Fortunate 50, it would take 196 workers earning the median wage for a year to make as much as the average Fortunate 50 executive was paid in 2010.

Under the Dodd-Frank financial reform legislation enacted last year, publicly held companies will eventually have to provide a comparison between what they pay their executives and what they pay their average worker. But first, the Securities and Exchange Commission must develop rules for how those calculations are made.

Some companies argue that is a more costly and complex proposition than its advocates realize. Others argue the comparison will not be that helpful because it does not take into account the differences in education, skills and experience required of top executives and the average worker, or the greater responsibilities of executives.

"I don't think it's going to be very useful for many people other than as a headline," said Michael S. Sirkin, who heads the executive compensation practice of New York law firm Proskauer Rose.

Charles M. Elson, a corporate governance expert at the University of Delaware, said the pay comparison "was politically inspired, and you shouldn't combine politics and investor rights."

"It's a meaningless number that's expected to inflame passion rather than something that investors need," he said.

There is evidence that so-called say-on-pay votes will influence how and how much executives are paid. The nonbinding shareholder referendums on a company's pay practices were used on a limited basis prior to the collapse of financial markets in 2008. They were then applied to financial institutions and became law with the passage of Dodd-Frank last summer.

Compensation experts said it was too early to tell just how much influence the shareholder votes will have, but expect that there will be an impact.

"People will pay attention to negative votes," Mr. Sirkin said.

One big unknown is how mutual funds and other large institutional investors will cast their votes. Last week, the American Federation of State, County and Municipal Employees said mutual funds too often vote for management pay plans and against shareholder pay proposals. They also frequently do not use their influence by voting against directors responsible for a company's pay plan, the union group said.

AFSCME labeled Vanguard, BlackRock, ING and Lord Abbett as the biggest "pay enablers" in the mutual fund industry.

Mr. Elson said say-on-pay did not address the real flaw in pay plans, which is that companies inappropriately base compensation on flawed comparisons to peer companies. That's why executive pay keeps rising, he said.

When it comes to shareholder referendums on pay, "no one wants to get a negative vote," Mr. Elson said.

"That doesn't mean compensation rates are going to go down. It just means there's more concern," he said.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.
First Published 2012-02-13 03:00:57
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