Executive Compensation Rides Stock Market to Growth

While 2013 was a great year for stock-market gains, it brought similar results for the top executives who run the public companies in the greater Valley. On average, the chief executive at the largest public corporations in the area received a pay increase of 26 percent last year. That’s exactly the same as the average rise of stock prices on the Valley 50 index, compiled for the Business Journal by New York bank BNY Mellon. However, the Society for Human Resource Management in New York estimated U.S. salaries rose only 3 percent last year, widening the discrepancy between top leaders and workers. The Valley companies are representative of what’s happening nationwide – namely, that corporate decision-makers generally march in lockstep when it comes to rewarding executives. “When compensation committees get together, they look at industry peers,” said Donna Dabney, executive director of the Governance Center, part of the non-profit Conference Board in New York. “The methodology has become fairly standardized.” At the top of this year’s list stands Robert Iger, chief executive at Walt Disney Co. in Burbank, whose pay goes against the grain. His total 2013 compensation of $34.3 million represents a 15 percent decline from the previous year – despite a whopping 55 percent increase in stock price over the same period and a string of hit pictures, including “The Avengers.” The decline was the result of a new method for calculating Iger’s compensation, which caused his bonus to fall from $16.5 million in 2012 to $13.6 million in 2013. In its proxy statement, Disney said its “compensation committee is sensitive to this issue” of the magnitude of CEO pay, a public debate that has raged since pre-recession days. “Mr. Iger’s cash bonus declined versus his fiscal 2012 bonus as the company’s outperformance relative to financial measures established by the compensation committee did not match the magnitude of outperformance delivered in fiscal 2012,” the company stated in a December filing. Dabney said Disney’s proxy carefully justifies Iger’s pay and follows the best practices for corporations established by the major proxy voter services. “It checks all the boxes for good governance,” she said. “When you look at the things ISS and Glass Lewis advise for good pay practice, Disney follows them fairly closely.” In contrast to Iger, Jeffrey Katzenberg at the smaller film studio Dreamworks Animation SKG Inc. in Glendale, the No. 3 executive on the list, enjoyed a pay raise of 157 percent last year. As recently as 2011, Katzenberg received a base salary of only $1 a year, with stock options and other compensation worth about $4 million. Two years later, his salary had grown to $2.5 million, and his total compensation to nearly $13.5 million. Whether high or low, Katzenberg’s compensation roughly correlates with DreamWorks’ stock performance; last year shares shot up 114 percent. Dabney said research by the Conference Board shows that 70 to 80 percent of most chief executives’ compensation is variable, based on financial performance or share price. However, companies are trending away from traditional stock options to “restrictive stock units.” These are shares that vest over time and usually involve several factors to determine their vesting time and value. Disney, for example, uses earnings per share and total shareholder return in a 50-50 calculation. “There was some criticism from investors that stock options didn’t measure CEO performance, since in a rising economy a high tide floats all boats,” Dabney said. “To isolate what the CEO did to increase stock performance, companies used various measures. You see it at Disney, DreamWorks and Amgen.” Voter approval For those who think chief executives are paid too much, consider the situation of Robert Bradway, the No. 2 executive on the list. The chief executive at drug maker Amgen Inc. in Thousand Oaks received total compensation of $13.7 million last year, a substantial amount but an increase of just 1 percent. At its annual shareholder meeting in March, Amgen held an advisory vote on a “Say on Pay” measure, which gives investors a chance to voice their opinion on the amount paid to a company’s top executives. About 97 percent of shareholders voted in favor of Amgen’s pay policy. Cuyler Mayer, senior manager of media relations at Amgen, said the Dodd-Frank Act of 2010 requires all public companies to hold votes on pay, but it doesn’t specify the frequency. Amgen holds it yearly. “Apparently our shareholders were very much in agreement with our recommendations on compensation,” he said. Dabney at the Governance Center said it’s typical to get high approval rates for Say on Pay measures, despite the public debate about oversized pay. “The people who are complaining may not be the people who are voting,” she said. “I don’t think you’re hearing it from large institutional investors. You might hear it from small pension plans or union pension plans who have a high level of sensitivity to the pay equity issue.” Overall, the list presents a contrast in compensation. After the top three companies, the pay drops below the $10 million line, as Ronald Havner at Public Storage in Glendale suffered a 40 percent drop to $9.2 million to place fourth, and Jay Gellert at Health Net Inc. in Woodland Hills lost 10 percent for fifth place with $9.1 million. In both cases, the decrease came from lower stock awards, based on the calculated value of restrictive stock units. Near the end of the list, David Singelyn at American Homes 4 Rent Inc. in Agoura Hills makes $164,000 – a comfortable living, but not a stratospheric amount for the chief executive of a real estate investment trust with a market capitalization of $3.3 billion. However, Singelyn and the company are a brand new entrant on the list, appearing after the single-family home landlord went public last summer and moved from Malibu to Agoura Hills. He ranks 24th on the list. The company also has struggled a bit amid rising housing acquisition costs, reportedly laying off employees about the time it issued its very first public earnings report. There are four other names that debut on this year’s list. Dean Scarborough, chief executive at Avery Dennison Corp., moved his label technology company from Pasadena to Glendale last year after selling off part of the company and downsizing. Scarborough’s compensation also downsized 28 percent to $8 million last year, ranking him eighth on the list. Other newcomers include John Kerin, chief executive at Marcus & Millichap Real Estate Investment Services, the Calabasas brokerage that went public in November. Kerin took home $6 million to rank 10th on the list. Keith Leonard Jr. is co-founder and chief executive at pharma research company Kythera Biopharmaceuticals Inc. in Agoura Hills, which went public in October 2012. Leonard earned $2.1 million last year to place 19th on the list, despite the fact that Kythera has no products and no revenue. The company is waiting for government approval of its first drug to reduce chin fat. Looking to the future, Dabney believes that eventually the debate about income and wealth inequality will work its way up to the boardroom at major corporations. “Income inequality will have some influence on compensation committees,” she said. “Whether that will temper CEO compensation is an open question, but those committees will look at what the public thinks is fair.”