Are CEOs Worth the Big Bucks?
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Hawaii’s Best Paid CEOs
Last year, Hawaii Business published a list of Hawaii’s best-paid CEOs. This year, the Honolulu Star-Advertiser ran a similar, comprehensive list in April. (You can read the list by using this online shortcut, tinyurl.com/o97de2b, though you will hit the Star-Advertiser paywall if you don’t have an account.) Rather than compiling a “me too” list, we focused in depth on one newer way some companies use to calculate their CEOs’ compensation.
Pay for Performance
This graph compares the alignment between Hawaiian Electric Industries CEO Constance Lau’s realizable pay and HEI’s total shareholder return (TSR) relative to HEI’s compensation peer group over the 2009-to-2011 period. The peer group mostly includes similarly sized utilities in the U.S. Companies that fall within the shaded range in the following graph are generally viewed as having pay and performance alignment; the darker the shading, the closer the alignment. Over the 2009-to-2011 period, Lau’s realizable pay ranked in about the 24th percentile, while HEI’s total shareholder return was about in the 19th percentile.
Sources: HEI, Pay Governance LLC
What’s Included in Realizable Pay?
Realizable pay includes the value of full value awards, such as restricted stock and restricted stock units. These types of awards are different from traditional stock options since the shares continue to carry the full value of the stock at the time it is granted, despite future drops in stock prices. The company retains the stock until it vests under certain pre-determined conditions such as employee tenure or employee performance. It is transferred to the employee once it is vested. Since realizable pay includes these elements with direct cash value, it better reflects the pay delivered and more tightly links to corporate performance and total shareholder return.
Realizable pay consists of:
- Average base salary earned over three years;
- Average performance-based cash payments earned over three years;
- performance-based equity awards earned over three years, based on actual payouts for completed periods and proxy statement estimated performance for periods not completed as of Dec. 31 of the third year, valued using the third year’s year-end closing price; and
- time-based equity awards granted over the three years, valued using the third year year-end closing price.
- Perquisites and many other pay, or pay-related elements are not included in Realizable Pay. Realizable Pay is focused on cash or its convertible equivalents. Other pay elements have little or no direct cash value and accounted for in other areas of compensation disclosure.
Compensation based on the summary compensation table is included in all publicly traded companies’ annual reports. It consists of these items:
- base salary;
- annual incentive payouts;
- restricted stock units awarded based on grant date fair value;
- performance-based equity award opportunities based on grant date fair value;
- change in pension value and change in value of executive death benefits; and
- any perquisites.
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