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.

See also: Pru’s Strangfeld: Is the CEO’s pay too high?

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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.

See also: CEO pay on the rise across industries

“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.

sAmong 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.”

Factors unique to life insurers

Relative to their peers in the financial services sector, says Gayley, CEO compensation at life insurers is “solidly positioned in the middle of the pack,” a result mirrored in the insurers’ performance relative to that of other financial services companies.

Experts note, however, that life insurers use a broader array of financial metrics than do businesses in other sectors to help determine pay. One reason: The insurers have more audiences to satisfy — among them government overseers — because of their exposure to potentially significant losses that can undercut their ability to make good on obligations to policyholders. Hence the heightened need to control, manage and recognize risk in their executive comp programs.

Among the publicly held companies, the stakeholders include not only shareholders and federal regulators, but also state regulators. The companies therefore report financial results using generally accepted accounting principles for the SEC and statutory accounting principles for the National Association of Insurance Commissioners.

Doing well using one set of accounting standards doesn’t necessarily translate to positive financial results for the other. The benchmarks are employed to guide pay, Gayley notes, and thus have to carefully balance the results of both reporting methods.

“In the life insurance business, the name of the game is fundamentally trying to prove your financial viability to both policy owners and other stakeholders,” he says. “So the financial scorecard for the life companies tends to be more varied than in other industries.”

In addition to metrics commonly used by publicly held companies — total shareholder return, return on equity, earnings per share, revenue and net income, among others — the life companies also tap some metrics that are unique to its industry. Example: the risk-based capital (RBC) ratio of total adjusted capital to total risk-based capital, a measure used to indicate whether a company’s capital reserve is adequate given the degree of risk a company has assumed.

When reviewing year-over-year revenue growth, the life companies also don’t necessarily attach equal weight to the sources of income. An extra dollar in premium for products that meet an insurer’s targeted mix of profitability, capital allocation, return on investment and risk may be of greater value than premium from solutions viewed as less strategically significant.

Financial metrics for the industry also continue to evolve. One that’s likely to be more widely adopted in coming years, says Gayley, is economic or risk-adjusted capital.

“Life insurers and other financial services institutions use this measure to adjust the capital base and capital allocated to the different divisions of their business to reflect the variable risks these divisions present,” he says. “Companies also use the metric to effectuate returns from each of the units relative to the risk-adjusted capital base.”

Other metrics have fallen out of favor. Case-in-point: Economic value added (EVA), or a measure of a company’s economic performance based on residual wealth calculated by deducting the cost of capital from its operating profit (adjusted for taxes on a cash basis). 

“Almost every large company previously went to an EVA reporting system,” says Dorf. “The problem is there are 106 variables that go into calculating the metric. Few people could understand it.

“EVA died a horrible death,” he adds. “The reality is this performance measure is fraught with problems and doesn’t work. But people are always looking for a better mousetrap.”

The diversity of metrics used by life insurers — ISS counts 20-plus long-term benchmarks and nearly 40 short-term ones — points to an ongoing issue: The difficulty in comparing awards across businesses because each company has a unique formula for calculating realizable pay. The one existing standard, SCT pay, is a combination of actual pay (salary and annual incentives) and target pay for long-term awards.

This disadvantage aside, some observers believe that companies should favor SCT over realizable numbers because of the former’s relative simplicity.

“We prefer to stick with the SEC-mandated disclosures found in summary compensation tables in keeping with our KISS philosophy — keep it simple, stupid!” says Kevin McManus, editor and president of ProxyTell LLC, a proxy advisory firm. “We use these numbers because they’re easy, simple and accurate.

“[Realizable pay] is something compensation advisors push…not that there are not advantages to the realizable pay metric,” he adds. Among the benefits, McManus notes, is the ability to lower compensation relative to that reported using other metrics and thus more easily “sell” CEO pay to outside stakeholders.

Yet another complication in evaluating pay is the anomalies, such as when a company pays above target to a newly hired CEO to turn the business around. In the early going, the executive’s compensation may not seem justified given the company’s revenue or profit margin. Hence the need to ensure an apples-to-apples comparison among firms of relatively equal financial strength, business prospects and objectives when evaluating CEO rewards.

The value of transparency

Given the heightened scrutiny of CEO compensation in recent years, companies are now also disclosing financial metrics and objectives (including the relative weight assigned to each) in advance of payouts to ensure that subsequent awards don’t raise alarm bells with investors, regulators or the public. This contrasts with years past, when companies would review performance metrics at the close of the year and only then make a determination on pay.

“Companies are adding structure to compensation formulas to provide shareholders and other stakeholders with more information about how the company’s executive pay program will work,” says Semler Brossy’s Baransky. “These structures provide greater clarity about how pay is determined.”

The advance planning around metrics dovetails with a best practice that Gayley promotes among his insurer clients: The need to exercise discipline in goal-setting, both relative to past performance and to the financial results of competitors, and to maintain discipline when business conditions are unstable. Conducted in tandem with this goal-setting is a discussion of long-term awards for CEOs within the context of the company’s risk tolerance and expected return.

“The internal dialogue around risk and returns, in particular, and how they relate to goal-setting, continues to improve, not only because management is very focused on it, but also because the regulators are focused on it,” says Galey. “The dialogue with regulators around risk-related issues has been richer and more explicit over the past several years than during the 2008-2009 period.”

Future guardrails around pay

That’s to be commended. Yet, questions persist as to whether companies need more internal or external checks to ensure that CEO comp is aligned with stakeholder interests. In the absence of industry-wide standards for calculating realizable pay, for example, might there still exist opportunities for company boards to manipulate goals and metrics for, say, political reasons, to keep their CEOs and fellow execs financially happy?

Market-watchers inquire, too, whether some financial services companies might be tempted to take unwarranted risks (e.g., with their hedging and trading strategies) to meet unreasonably high performance measures.

“If you have to improve earnings by 10 percent to secure a target payout, then you could end up with traders taking bigger risks to hit that number,” says Hall. “The possibility that companies may take greater financial risk to boost executive comp is a concern the federal government has raised.”

And there is this question: In a business and economic environment characterized by cut-throat competition, rapid-fire advances in technology, shorter product life cycles, rising investor expectations and a limited executive talent pool to manage it all, might company boards feel compelled to boost CEO pay so high as to negatively impact (among other things) their ability to recruit, reward and retain others lower down the pay scale?

Alas, only time will tell.