It All Up
Using a tool called
"tally sheets," boards are discovering how much their CEOs
are really making. The numbers are shocking directors --
and changing pay practices.
By Joann S. Lublin
The Wall Street Journal
Monday, April 10, 2006
When board members at
Conseco Co. sat down last May to draw up a new contract
for William S. Kirsch, their fifth chief executive in almost
five years, they wanted to avoid mistakes of the past.
Investors had long criticized the Carmel, Ind.,
insurance-holding concern for specializing in big executive
"The history of this company was excessive pay not based on
performance," says Michael Shannon, chairman of the board's
This time around, Conseco directors may have accomplished
their goal. And they did it with help from a simple tool
that's increasingly popular among corporate boards concerned
about out-of-control executive pay: a tally sheet.
Nicknamed "holy cow" sheets for the way they often expose
the immense worth of current and potential payouts, tally
sheets can help a board gain a fuller picture of a chief's
entire compensation. For years, board pay panels have been
faulted for failing to do the math when it comes to grasping
the true value -- and possible future cost -- of CEO
packages. But tally sheets make it easier to keep score,
allowing boards to project payouts under different scenarios
for everything from salary and perquisites to equity grants,
deferred compensation, severance and supplemental pensions.
The use of tally sheets -- and their impact -- could be
significant, especially once the Securities and Exchange
Commission adopts sweeping proposed rules to widen what
companies must divulge about management compensation.
Already, certain boards are sharing portions of their tally
sheets with investors by enhancing pay disclosures. Some
others are using them to justify curbing certain
compensation practices. The hottest targets: pensions,
severance, perks and long-term awards without tough
"Tally sheets have the ability to impact both the form and
the level of the CEO's compensation" once directors realize
how tiny a portion of the rewards typically depend on
corporate performance, says Jannice Koors, a managing
director at New York-based Pearl Meyer & Partners, the pay
consultancy that helped Conseco put together the Kirsch
To be sure, there are plenty of skeptics who say it's
wishful thinking to believe that tally-sheet revelations can
stem the tide of rising CEO pay. "More disclosure won't
drive total CEO pay levels down," says Patrick McGurn, an
executive vice president of proxy advisers Institutional
Shareholder Services in Rockville, Md. "It will just change
the currency used."
Certainly, tally sheets had no measurable impact on the
overall numbers in the annual CEO compensation survey by
Mercer Human Resource Consulting for The Wall Street
Journal. The median salary and bonus for chief executives
last year increased 7.1% to $2,408,665, according to a proxy
analysis of 350 major U.S. corporations by Mercer. The climb
in cash compensation compares with a record 14.5% surge a
year earlier to a median of $2,470,600. (The 2004 figures
come from a somewhat different sample of 350 companies.
While the median dollar figures are based on all companies
in the sample for a given year, the percentage changes are
based only on companies and CEOs that remained in the sample
from one year to the next.)
Median base bay for CEOs in 2005 rose 3.6%, compared with
3.7% in 2004. Raises for the highest bosses matched those
granted to their white-collar lieutenants. Paychecks of
nonunion salaried employees pulled ahead 3.6% following a
year in which they only rose 3.4%, the slowest pace since
the 1989 debut of the study by New York-based Mercer.
(Overall U.S. wages and benefits increased 3.2% last year,
down from 3.5% in 2004.)
In the wake of a 13% improvement in company profits,
surveyed chiefs saw their bonuses expand 8.4% to a median of
$1,437,150. Bonuses escalated 20% to a median of $1.5
million the previous year.
Total direct compensation for chiefs grew 15.8% to a median
of $6,049,504, Mercer found. Besides salaries and bonuses,
this figure covers the value of restricted stock at the time
it was granted, gains from stock-option exercises and other
long-term incentive payouts. In 2004, the median leaped
40.9% to $5,920,388, the biggest increase in the study's
history, largely due to huge gains in corporate profits and
Total direct compensation for those running the 10
businesses with the highest shareholder returns zoomed 51.3%
to $10,229,218 according to Mercer. The heads of the 10
concerns with the poorest returns experienced a harsh 72.5%
drop to $1,551,495. The median total shareholder return,
which equals the stock-price change plus reinvested
dividends, was 6.8% for surveyed companies.
Overall, CEOs reaped a median realized gain of $3,493,440
from option exercises, compared with $3,229,072 in 2004.
Capital One Financial Corp. leader Richard D. Fairbank
snared an especially sizable sum: $249.3 million from
exercising options to buy about 3.6 million shares.
Bigger bucks may lie ahead. Many CEOs remain perched atop
piles of unexercised options. Median unrealized gains vested
and unvested options of CEOs in the survey totaled
$10,202,971 last year, compared with $11.8 million in 2004.
The 2.5 million options Oracle Corp. bestowed on Larry
Ellison, its billionaire chief and co-founder, pushed his
total to 70.1 million options, valued at $474.47 million
when Oracle's fiscal year ended last May 31.
Nevertheless, it shouldn't be overlooked that fewer
companies awarded options last year. Of the 350 businesses
surveyed, leaders of 265 companies got options, down from
273 in 2004. And 192 CEOs cashed in a median of 149,046
options, down from 197 who exercised a median of 140,442
options in 2004.
One reason for the decline: new accounting rules that
require employers to count stock options as expenses in
their annual financial results.
But in some cases, there was another reason as well: tally
sheets. For example, while
Aetna Inc. last year awarded options to its then-CEO
John W. Rowe, his successor, Ronald Williams, received no
options -- thanks in part to the board's use of a tally
sheet. According to Aetna's latest proxy, directors of the
Hartford, Conn., health-benefits concern based their
decision in part on a review of tally sheets and "evolving
practices" at other major public corporations.
Similarly, Michel Mayer, chief executive of Freescale
Semiconductor Inc., is likely to receive fewer options this
year than the 254,295 awarded to him last year, partly
because the Austin, Texas, chip maker intends to also give
him restricted stock units tied to performance. The shift
marks the first time that equity granted to Mr. Mayer will
come with strings attached since Freescale's 2004 spinoff
from Motorola Inc., and it resulted from a review of
detailed tally sheets "for all the top officers," says B.
Kenneth West, chairman of the Freescale board pay panel.
Yet Mr. West remains cautious about tally sheets' overall
impact. "They give you a better perspective," he says. "But
I can't say that pay ratcheting is going to stop as a
Whatever skeptics and the overall numbers from this year's
survey say about how much CEOs are paid, it's clear that
tally sheets have the potential to at least change
how they earn
This much was evident in the latest deal that Conseco's
directors negotiated with Mr. Kirsch.
"We all agreed it should not be 'show-up' pay," recalls Mr.
Shannon, referring to the way some corporate boards enrich
chiefs just for coming to work. Mr. Shannon was part of the
board that took over at Conseco after the company emerged in
September 2003 from nine months in bankruptcy protection.
Except for the CEO, every board member was new.
Mr. Kirsch, who declined to comment for this article, took
the helm in August 2004 when the chief at that time suddenly
retired. The former Conseco general counsel and executive
vice president had been negotiating for the job of
president, and he went to work as CEO under those pay terms
-- with an agreement that his pay package would be brought
up to CEO levels in 2005.
Last summer, the board gave Mr. Kirsch a nearly 22% raise in
salary, to $975,000 from $800,000. His maximum potential
bonus jumped to about $2.4 million from $1.6 million a year,
though his actual bonus last year was $1.47 million.
But directors rejected Mr. Kirsch's request for a
supplemental executive retirement pension, or SERP. Such
pensions usually are based on a CEO's compensation in the
last few years of his or her career, and so can be hugely
expensive -- a point that Conseco board members recognized
thanks to the tally sheet. The sheet suggested that a
typical SERP could cost the company more than $17 million
over Mr. Kirsch's lifetime.
Something else the tally sheet showed, however, was that
SERPs were widely used by Conseco's rivals -- and that
without a supplemental pension, Mr. Kirsch's proposed
overall package was modest compared with those of other
insurance industry chiefs. So, the board instead agreed to
consider a deferred-compensation plan this year that would
be tied to performance measures, such as return on equity.
Pfizer Adds It Up
Fifty of the 350 corporations tracked by Mercer disclosed
tally-sheet usage in their latest proxy statements, with
several spelling out the CEO's hefty accumulated wealth and
likely future riches for the first time.
Pfizer Inc., the world's biggest drug maker, supplied
among the fullest disclosures. Its proxy says that CEO Henry
A. McKinnell could have pocketed a lump sum of $83 million
if he retired last Dec. 31 -- and will receive $6.5 million
a year for life when he does. (The 63-year-old executive
will retire in 2008.)
The annual figure represents the biggest pension benefit for
a chief executive of any company in Standard & Poor's
500-stock index, reports Corporate Library, a research firm
in Portland, Maine. Last fall, Pfizer withdrew earnings
projections for 2006 and 2007. Its share price hit an
eight-year low in December.
Acknowledging the recent decline in shareholder value,
Pfizer directors told investors they're tightening links
between pay and performance. Among the moves cited in the
proxy: For benefits accrued since Jan. 1, 2006, they will
seek stockholder approval before paying an annual pension
that exceeds the executive's average salary and bonus in the
five years in which they were the highest.
Thanks in part to their tally sheet, Pfizer directors also
decided to limit severance in the event of a takeover,
according to Margaret Foran, senior vice president for
corporate governance. But even with those modest changes,
Mr. McKinnell would walk away with nearly $46.6 million if
Pfizer were acquired, the proxy says.
Controlling astronomical exit payments can be a key concern
for companies under financial pressure. Take
Symbol Technologies Inc., a Holtsville, N.Y., producer
of bar-code readers and handheld computers that has
struggled to recover from alleged accounting fraud and
several years of restated earnings. Eight former company
officials have been indicted on charges of accounting fraud.
The board turned to a tally sheet last year to help it
replace supplemental pensions with a deferred-compensation
program in which corporate contributions depend on the
"I wouldn't accept a SERP," says Salvatore Iannuzzi, a
former outside director who became Symbol's permanent chief
executive in January 2006. The discarded pension plan
"wasn't predicated on performance," Mr. Iannuzzi says. "If
you were here and fogged the mirror, you were entitled to
At certain companies, tally sheets are helping merely to
chip away at once-hidden executive perks with relatively
Exxon Mobil Corp.'s proxy, to be issued later this
month, will show the company has stopped paying club dues
for the top brass, people close to the situation report.
Directors scrutinized tally sheets from shareholders'
perspective and concluded it looked stupid to pay such costs
when senior executives make enough money to foot those bills
themselves, one such individual says.
Exxon Mobil covered $46,223 of club memberships in 2004 for
Lee Raymond, who led the Irving, Texas, oil giant until he
retired last Dec. 31. The 2005 proxy didn't describe dues
paid for his successor, Rex Tillerson. An Exxon Mobil
spokesman declines to comment.
Becton, Dickinson & Co. is shedding financial-planning
services for its chief executive, Edward J. Ludwig. But the
Franklin Lakes, N.J., medical technology concern partly made
up the $9,000 canceled benefit by raising Mr. Ludwig's
salary $4,000 to $994,000.
"Paying any money for CEO perks not related to specific job
performance is crazy," says Mark M. Reilly, a partner at 3C
Compensation Consulting Consortium in Chicago.
"No good deed goes unpunished," retorts John R. Considine,
chief financial officer at Becton Dickinson.
The use of tally sheets to enhance transparency for
investors has failed to appease shareholder activists,
"No one is getting a pass for disclosing bad behavior
voluntarily," says Brandon Rees, assistant director of the
AFL-CIO's Office of Investment. The Washington-based labor
federation submitted a Pfizer shareholder resolution seeking
additional pension curbs. The SEC accepted Pfizer
management's request to exclude the ballot measure from the
Nevertheless, union members plan to attend the drug maker's
April 27 annual meeting, where they will demand "that Mr.
McKinnell give back half his pension benefit," Mr. Rees
says. Performance "has been horrible under his tenure."
Pfizer directors awarded their CEO retirement benefits "on
the basis of many years of service to the company, including
years in which the company significantly outperformed the
market and its peers," replies Dana Mead, chairman of the
compensation committee, in a statement.
Investors have submitted 143 executive-pay measures so far
this year, says Carol Bowie, director of ISS's governance
research service. Increasingly, disgruntled holders also
target directors responsible for excessive rewards. ISS
recommended that clients withhold support for the
re-election of pay panel members at 77 companies last year,
up from 24 in 2004.
The pending SEC overhaul of pay disclosure, expected to take
effect in 2007, would force businesses to provide a total
compensation figure for top executives along with extensive
details about their perks, projected retirement payments,
severance and deferred compensation.
The new rules will turn up the heat over stratospheric pay.
"It will be easier for shareholders to ask chief executives,
'Why do you need so much?' " says Cornish Hitchcock, outside
counsel for Amalgamated Bank's activist Long View Collective
Investment Fund in New York.
On the other hand, heightened disclosure of king-size
packages could intensify corporate kings' clamor for the
same sweet deals. When CEOs discover the bigger numbers,
they "may then say, 'Me, too,' " frets Jesse Brill, chairman
CompensationStandards.com, a board advisory Web site. He
favors requiring directors to inform investors about steps
they take to fix excessive pay elements. Otherwise, he says,
"we may well have more ratcheting and further loss of public
--Ms. Lublin, the
management news editor for The Wall Street Journal in New
York, served as contributing editor for this report.
Write to Joann
S. Lublin at