The numbers are eye-popping. Last year, the 25 highest paid chief executive officers of U.S. publicly held life insurers earned more than $310 million in compensation. Of these, the top 10 pay packages account for nearly 60 percent of the total.
Salaries and annual bonuses, though still important components of CEO pay, are but a fraction of their eight-digit rewards. Increasingly, long-term pay, much of it distributed as equity, accounts for these king-size figures.
Consider: The five highest paid CEOs in National Underwriter’s top 25 companies for net life premiums written collectively raked in more than $20 million in stock awards and a comparable amount in options, each more than 2.5 times the CEOs’ aggregate annual salaries. In 2012, for example, Wellpoint chief Angela Braly garnered nearly $18 million in stock and option awards — well over her $1.2 million in salary and close to 90 percent of her total pay.
Also to be factored in to the payouts are two other parts of the summary compensation tables (SCT) listed in proxy statements: Non-equity incentive plan compensation and change in pension value/deferred compensation earnings.
For Prudential CEO John Strangfeld, these two items constituted over half of his nearly $30.7 million in SCT pay in 2012, the largest payout among NU’s top 25. The same can be said for Ameriprise CEO James Cracchiolo, who took home $17.8 million in total compensation last year.
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Delving into the stats
The eight-figure awards, as large as they are, are likely to continue rising, say experts. What’s behind the mushrooming numbers? One answer lay in the current bull market.
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“Compensation among life insurers and financial services companies generally is up this year, and I expect the numbers will keep going up,” says Peter Miterko, a managing director at Pearl Meyer & Partners, an executive compensation consulting firm. “The trend has a lot to do with share prices coming up from historic lows.”
The upward trajectory in payouts also has much to do with competition for executive talent, and the awards that companies must offer to attract and keep promising executives. This, in turn, fuels a financial arms race, driving up compensation industry-wide.
“Contrary to what many people think, the marketplace for CEO talent is very competitive and continues to increase,” says Steve Hall, a managing director and founder of Steve Hall & Partners, a New York-based compensation consulting firm. “Base salaries and bonuses are up 3 percent and long-term incentive payouts have risen from 5 to 9 percent. I don’t see executive pay declining.”
Experts also attribute the increases to improved business fundamentals among life insurers, as reflected in healthier company balance sheets, income and cash flow statements. These numbers help drive performance-linked actual (or “realizable”) pay, including equity and cash distributed annually and in long-term awards.
Because of the increasing focus among life insurers and publicly held companies in linking pay to a company’s success — a trend encouraged by the demands of investors and government regulators — between 60 and 90 percent of CEO compensation is now performance-linked. That helps explain the relative constancy in recent years of “target pay,” a benchmark based on the intended level of CEO compensation established at the pay package’s grant date.
“Most boards have kept target pay stable because they would prefer to see any increases in actual pay due to company performance, either on an absolute or relative basis,” says John Gayley, director of the North American Insurance Executive Compensation Practice at Towers Watson.
The rise in realizable pay among life insurers’ chief executives has not, however, followed a straight line. CEO compensation plummeted during the 2008-2009 recession; the performance-based components, including stock options and restricted stock, slid dramatically in tandem with share prices during the downturn’s bear market. Only in the last few years has CEO compensation recovered (or nearly so) to pre-recession levels.
Among life insurers, many chief executives enjoyed significant gains in realizable compensation in 2012. A comparison of actual (as opposed to summary compensation table) payouts received by the CEOs of Prudential Financial and four companies within its peer group — Hartford Financial, Lincoln National, MetLife and Principal Financial — shows pay totals rising across the board.
According to Institutional Shareholder Services Inc. (ISS), a proxy advisory firm, Prudential CEO John Strangfeld took in $29.9 million of realizable pay in 2012, a staggering increase of 31.6 percent from the $20.5 million received in 2011. Ameriprise CEO James Cracchiolo’s realizable pay last year was just shy of $19.3 million, up from nearly $19 million in 2011. And MetLife doled out $12.9 million in realizable pay to CEO Steven Kandarian, a 34.9 percent rise from the $8.4 million he pocketed in 2011. (MetLife notes, however, that Kandarian was CEO for only 8 months in 2011, as compared with a full 12 months in 2012.)
Underpinning the calculations of the actual compensation totals are metrics that company boards and compensation committees use to tie pay to performance. Increasingly, they’re leveraging these benchmarks not only to gauge performance relative to prior years, but also to compare a company’s financial results to that of its peers: Firms that are similar in terms of their business focus and market capitalization.
Changes in the compensation mix
The trend among companies is to lend greater weight to long-term performance, which is becoming an ever greater share of the pay formula.
“The value of the long-term incentives now depends on the achievement of pre-established benchmarks, not only stock price movements,” says Marc Baransky, a managing director at Semler Brossy Consulting Group. “This development dovetails with a related trend — equity becoming a larger part of the compensation package.
“Aligning the CEO’s and the company’s interests with those of shareholders is the number one goal, and aligning them over a longer period of time,” he adds. “If meeting a pay target requires earning from six to ten times your salary in stock and options, then you create that alignment over time.”
One element of CEO comp that companies have de-emphasized in recent years is one-time bonuses. A result of an SEC change in reporting rules, the bonus column in summary compensation tables is currently limited to discretionary bonuses. Companies now record annual, “planned bonuses” in a separate column of the table, which are grants of non-equity awards that are calculated according to a pre-determined formula.
“It’s now a big no-no for boards to exercise positive discretion and give away discretionary bonuses like Santa Claus,” says Miterko. “What is acceptable is to use a formula to calculate the bonus and for boards to exercise negative discretion over the bonus.
“That’s why companies go out of their way to have zeros in the bonus column and make the bonus appear in the grants column,” he adds.
The increased focus on performance-based pay, says Hall, has also resulted in a shift from restricted stock that vests over time to the awarding of shares based on the attainment of financial goals. Paul Dorf, a managing director of Compensation Resources, agrees, adding that performance-based restricted stock is also advantageous for CEOs relative to the receiving of stock options. Whereas options can become worthless if their value at the time exercised is below that of the purchase price, restricted stock retains its underlying value, even if its share price should fall. Upshot: Companies can give away fewer shares of restricted stock than stock options.
“A rule of thumb is that you need three shares of stock options to cover one share of restricted stock,” says Dorf. “In effect, you need more shares for a stock option. So many companies are offering more restricted shares and fewer stock options to better tie pay to performance.”