As the stock market dived in late 2008 and early 2009, chief executives of the biggest American companies received their annual grants of stock and options, and the timing couldn’t have been better.
The subsequent rally has benefited nearly all investors, but for a select group of CEOs who were fortunate enough to get options, it has created a windfall. And while much of the attention has focused on the pay for executives at banks, a sector that enjoyed a back-from-the-dead performance last year, many of the biggest winners were CEOs at nonfinancial companies.
Some executives on the top rungs of corporate America, including Alan Mulally of Ford Motor, Howard Schultz of Starbucks and Andrew Liveris of Dow Chemical, have seen the value of their 2009 options packages double, triple and quadruple and, in Mulally’s case, jump nearly 10 times in value.
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In most cases, they can’t cash in now: Options typically take three to four years to fully vest. But the gains have set off renewed criticism that CEO compensation is out of control, especially in a year plagued by the recession and high unemployment.
“You’re going to see big numbers and people are going to squawk about it, as they should,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
Not so fast, say other pay experts, who argue that the first quarter, and occasionally the fourth quarter, are typically the time when stock and option grants are made.
“They had no way to know the market would begin to recover in March,” said Carol Bowie, head of the governance institute at the RiskMetrics Group, a financial analytics company. “The fact of the matter is that many, many companies grant awards at the beginning of the year. It turned out to be an opportune time, but it’s not necessarily untoward.”
Nevertheless, the outsize gains from stock and options last year are likely to fuel what’s already a fierce debate about executive pay levels.
What’s more, companies like Ford, Starbucks, Dow, Whirlpool and American Express were making deep job cuts even as they showered options on their chief executives.
“It reinforces the view that the rules of the game are rigged and that no matter what these guys do, they always come out ahead,” said Sarah Anderson, who tracks executive pay at the Institute for Policy Studies, a liberal research group in Washington. “In a time of national crisis, it wasn’t appropriate to be giving out boatloads of new stock options.”
For all the criticism of the options windfall, it’s worth noting that some pay experts have argued for years that chief executives should receive more options and stock, rather than cash, in order to link their pay to long-term corporate performance.
But in a twist, the options packages have proved incredibly lucrative in the short term. The gains, Elson said, weren’t based on corporate performance but simply reflect the broad market rebound.
Among 200 CEOs of companies tracked by Equilar, an executive compensation research firm that analyzed data for the New York Times, the biggest beneficiary of an options grant and subsequent stock market rally was Mulally.
March 11, 2009, two days after the Dow Jones industrial average hit a 12-year low of 6,547, Mulally received options to buy 5 million shares of Ford at $1.96, which the company estimated would be worth a little more than $5 million, using a complicated formula to predict their eventual value. The company usually grants options in March.
A year later, the market is up more than 60 percent, but Ford shares are worth nearly 10 times what they were then, making Mulally’s options worth an estimated $53.3 million, according to Equilar. Mulally was eligible to receive the first batch March 27 worth more than $17 million and is set to receive the rest within two years.
