For the past two years, CEOs have watched as their pay cratered. The bursting of the stock market bubble and the recession that followed slashed execs' pay. The more than 300 corporate chiefs tallied in BusinessWeek's Executive Pay Scoreboard in 2001 saw their take-home pay fall 16% in 2001, followed by a 33% cut in 2002. Those cuts reduced average CEO pay -- which includes salary, bonus, new stock grants, long-term incentives, and option exercises -- to $7.4 million. In 2000, the 20 highest-paid execs in the land averaged $118 million apiece. Two years later? Less than half that.
But all that's about to change, big time. With net income at Standard & Poor's 500-stock index companies up 18% in 2003, pay consultants say many boards have loosened the purse strings, awarding cash bonuses to CEOs -- some deserving, others less so. Sharply higher stocks helped, too: With the S&P 500 up 26% last year while the NASDAQ soared 50%, CEOs with options that long ago plunged underwater were finally able to cash them in. And the move by many companies to replace some options with restricted stock grants has also pumped up pay tallies.
A DIFFERENT WORLD. Add it all up, and it looks like the lean years are fading, at least in the executive suite. Consultants say 2003 compensation for the CEOs in BusinessWeek's Executive Pay Scoreboard will be up 10% to 15% or more, on average, when the final numbers are tallied in April. "Profits are up and growth is up, so they're going to be paying more," says Peter T. Chingos, executive compensation director at Mercer Human Resource Consulting LLC. "This is a whole different world."
Indeed, in 2003, pay and performance may be more closely aligned than ever, analysts say. Poor performers are being punished. Consider Silicon Graphics Inc. (SGI ), which lost $129.7 million in 2003, its fourth straight annual loss. The results cost CEO Robert R. Bishop dearly. His $370,000 bonus? Gone. His 750,000-share option grant? Gone. "Boards are being very careful," says New York compensation consultant Pearl Meyer. "They're exercising excellent judgment."
They are rewarding the deserving, too. At Dell Inc. (DELL ), where 2003 net income increased 70.3%, CEO Michael S. Dell received a $2.5 million bonus, a sevenfold increase over 2002. At Deere & Co. (DE ), where shares surged 33% and net income doubled, CEO Robert W. Lane saw pay triple, to nearly $5 million. His package included a $1.4 million bonus and restricted stock worth $2.6 million. And perennial exec pay winner Walt Disney Co.'s (DIS ) Michael D. Eisner also brought home a whopper of a bonus -- $6.3 million, up from $5 million in 2002. The reasons: a modest 6% rise in sales, to $27 billion; a 2.5% jump in profits, to $1.3 billion; and a 33.22% stock gain that trounced the S&P 500's rise of 22.16%, reversing two years of losses for Disney shareholders.
LOTS OF OPTIONS. Still, some boards seemed to latch on to any good news to justify big rewards. In defending the decision to double Emerson Electric Co. (EMR ) CEO David N. Farr's bonus, to $1 million, despite a 6% decline in income from continuing operations, a spokesman cited share gains, and margin improvements. And the decision by directors at H.J. Heinz & Co. (HNZ ) to quadruple CEO William R. Johnson's bonus, to $1.5 million, after shares tumbled 25%? Heinz Chief Administrative Officer D. Edward I. Smyth says it was warranted by results from continuing operations -- including a 5% surge in profits -- while Johnson's $3.2 million restricted stock grant was designed to give him "more skin in the game."
Another wrinkle: For the first time in several years, many CEOs enjoyed big paydays by cashing in options. Ira Kay, compensation practice director at Watson Wyatt Worldwide, says the median option gain among 60 early proxy filers more than doubled, to $1.2 million. Big options winners included Qualcomm (QCOM ) CEO Irwin Mark Jacobs' gain of $16.2 million, and Oracle (ORCL ) CEO Lawrence J. Ellison's $40.5 million profit.
Will the return of the big payday fuel shareholder antagonism over executive compensation once again? Governance experts say board members who reward undeserving CEOs may feel the heat at annual meetings, as angry shareholders vote against their reelection. Not exactly villagers bearing pitchforks and torches, but an unmistakable message all the same.
By Louis Lavelle in New York, with Michael Arndt in Chicago