Minnesota CEO pay: Lots of options

  • Article by: PATRICK KENNEDY and JOHN J. OSLUND , Star Tribune
  • Updated: July 29, 2013 - 9:46 AM

Chief executives across Minnesota rushed to convert their stock options into cash and stock last year, riding a bull market that jumped more than 16 percent in 2012.

Among the findings within the Star Tribune’s 2013 Executive Compensation Report, CEOs at the state’s largest public companies exercised more than $151 million in stock options last year compared with $60 million in 2011.

Stock options represented the single biggest slice of CEO compensation in 2012, accounting for 37 cents of every $1 of CEO pay.

“Options have been scrutinized but are still a basic component of the pay structure. These large companies are doing well, they are doing better than the rest of the economy,’’ said V. John Ella, a Minneapolis attorney who specializes in executive compensation. “So good old-fashioned stock options come roaring back.’’

A staple of the 1990s bull market, stock options came under scrutiny amid high-profile corporate scandals such as those at Tyco and Enron a decade ago. Critics argued that options gave CEOs too much incentive to boost the company’s stock price in the short term, possibly putting long-term performance at risk.

But the 2002 Sarbanes-Oxley Act, subsequent accounting changes that make stock options more expensive, and new “say-on-pay’’ shareholder votes, have tempered — to varying degrees — the use of stock options.

In many cases, options cashed in 2012 typically were granted between two and 10 years ago, said Don Lindner, executive compensation practice leader at WorldatWork, a nonprofit salary and benefits tracking organization based in Arizona.

“They are a bigger part of the pay right now,’’ Lindner said, “but it’s about company decisions made several years ago.’’

During the Great Recession, hobbled corporate profits and suppressed stock prices pushed down CEO compensation from 2008 through 2010. Median total pay for Minnesota CEOs fell below the $1 million mark before recovering in 2011 and 2012.

Cash compensation drops

Despite the huge boost in cash from stock last year, the average CEO pay in Minnesota rose modestly in 2012 to $1.221 million, cooling after a torrid 26 percent jump in 2011. Median total pay — where half the paydays are higher and half are lower — crept up 2.6 percent, driven in part by old-fashioned stock options.

Cash compensation (that’s salary plus bonus) fell 9.9 percent from a year ago after rising 8.5 percent in 2011 and 18.5 percent in 2010.

Meanwhile, shares of CEOs’ restricted stock vested last year accounted for 26 cents of the pay pie, down from 31 cents in 2011. Unlike stock options — which can become worthless if shares don’t hit a trigger price by a certain date — restricted shares are a straightforward transfer of company stock. The executive becomes vested in the shares after meeting time and/or performance-based restrictions.

Retention tool

Restricted shares also offer other advantages, Linder said, as they usually serve as a retention incentive for CEOs.

“It keeps the glue in the [CEO’s] seat.’’

Seventy-one of the top 100 CEOs got a salary bump in 2012, the same as last year. But fewer got bonuses (78 in 2012 vs. 82 in 2011) and 51 saw their bonus shrink in 2012. Another 11 CEOs got no bonus in 2012 after getting one the year before.

The slow economic recovery has made it difficult for top managers to meet sales and profit goals that would trigger a bonus.

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