The Activist Investor Blog
The Activist Investor Blog
The WSJ Still Thinks Exec Comp Works Well
As it did last year, the Wall Street Journal analyzes CEO comp, and again the headline and the reporting don’t quite match the underlying data. As we observed last time, we’d expect better from them.
Last week, it ran a page one story with this headline and lead paragraphs:
CEO Pay More Closely Matches Firms’ Results
Efforts to Tie Compensation to Company Performance Appear to Be Working, Study Says
The push to more closely align chief executive pay with company performance is showing signs of working, according to a Wall Street Journal analysis
When companies exceed expectations or outpace rivals, CEOs are reaping bigger-than-projected rewards. But when financial results or stock-market returns fall short, executives lose much of their potential pay.
In support of these findings, the WSJ used CEO stock grant data from exec comp consultant Equilar. Equilar compiled this data for 133 US corporations that granted stock to CEOs in 2008-2010. That data compares the target grant amount and estimated value of the grant with the actual number of shares granted and actual value based on realized share price. A close analysis of the data, which WSJ included in the article, shows that these CEOs’ pay at best bears only some resemblance to company results, or better, investor returns.
What the WSJ Says They Found
The article reports:
On average, the CEOs received roughly 4% more shares than projected in annual proxy statements. The four-year bull market further boosted the price of those shares, so the value of the typical payout was 22% higher than projected.
In all, 133 CEOs received stock valued at a combined $567 million more than had been projected in the proxy statements.
We did find the 4% more shares and $567 million more value figures in the WSJ data. But, we couldn’t replicate anything else.
What the Data Really Shows
Using the same method for calculating the 4%, the value of the actual grants is 47% greater than the projected value of the grants, not 22%. In other words, the companies used then-current share prices to estimate the value of the stock at the time of the grant. By the time that the grant vested completely, the value was 47% greater than the estimate.
Whether it was 22% or 47% higher, why would the final value exceed the estimated value? In part because CEOs received more shares, but they only received 4% more shares relative to the initial number granted. The predominant factor was an increase in share price, which should be good news.
CEO Pay Doesn’t Quite Match Investor Returns
We couldn’t estimate results for each of the 133 companies in the Equilar database, although the WSJ and Equilar could easily do that. Instead, we used the share price performance of the S&P 500 index as a proxy.
A simple analysis of the Equilar data shows that CEO pay outperformed investor returns:
❖For shares granted during 2009, the Equilar data shows that CEOs received 8% fewer shares, yet the value was 100% greater than the original estimate; from 2009-2013, the S&P index appreciated 58%.
❖For shares granted from 2009-2011, the data shows that CEOs received 21% more shares, with the value 96% greater than estimated; again, the S&P index appreciated 58%.
❖For shares granted during 2010, CEOs received 18% more shares, with 41% greater value than estimated; since 2010 the S&P index increased 28%.
❖For shares granted from 2010-2012, CEOs received 21% more shares, with 57% greater value than estimated, compared to the 28% gain in the S&P index.
Grants in 2008 and from 2008-2010 of course did much worse than grants in later years, with value falling below estimates by 43% and 5%, respectively. And, from 2008-2013 the S&P fell 3%, so investors also suffered.
Note that the S&P index does not include dividends, so investors did a couple of percent better in a given year than the S&P index would suggest. Also, we define company “results” as equity value, although the WSJ may have something different in mind with its headline and lead paragraphs.
Why the Difference?
At first glance it would appear that CEOs and investors should see the same results. In this analysis, both depend on share price. Yet, the two differ in critical ways:
❖CEO comp depends also on the number of shares granted, which increased dramatically after 2008. The Equilar data does not indicate why the 2010 grants (for example) would be 18% greater than planned. Presumably CEOs exceeded whatever goals the BoD set for them, which may or may not bear any relationship to investor returns.
❖The final value of CEO equity depends on when, exactly, the BoD granted it. So, CEOs may have received significant grants during 2009, when share prices were much lower.
Both ways afford BoDs and CEOs the opportunity to structure equity grants that disconnect exec comp from investor comp.
Alternate Realities
We can’t help but think that the WSJ continues to spin, at least a little, in favor of CEOs. Honest readings of the data might lead to different headlines:
CEO Pay Can Vary With Share Prices
CEO Pay Exceeds Estimates by 47%
CEO Pay Depends on Meeting Easy Goals
But, alas, that’s not what the WSJ wrote.
Monday, September 16, 2013