Chief executives at many of the biggest U.S. companies got an average 5 percent raise last year to $10.7 million, and more corporate boards concluded that pay for performance is the way to go in the executive suite.
In a survey of 50 large U.S. companies, restricted stock and other performance-based incentives constituted 41 percent of long-term CEO compensation, up from 18 percent in 2003. The percentage was the highest since 1994.
Stock options, meanwhile, constituted 59 percent of long-term awards, down from 82 percent, according to the survey released Thursday by Pearl Meyer & Partners, a New York-based pay consultant. Long-term awards, which exclude salaries and bonuses, accounted for about 63 percent of total compensation.
According to the survey, the average CEO salary was unchanged at $1.2 million. The average long-term incentive, meanwhile, more than doubled to $2.7 million, and the average option grant fell 23 percent to $4 million.
The survey suggests that companies are heeding investor demands for tying CEO pay more closely to meeting financial goals.
At the same time, it shows that companies are granting fewer stock options, which they must treat as an expense under accounting rules slated to take effect in June. Historically, the current, more lenient rules allowed many companies to give away options without tying them to specific performance goals.
"Companies are adopting plans that focus executives more on improving the financial strength of the underlying business for the long haul, rather than riding the option wave," said Ed Archer, a managing director for Pearl Meyer, in an interview.
A case in point is Stanley O'Neal, Merrill Lynch & Co.'s chief executive, whose 2004 compensation totaled $32 million. Of this amount, $31.3 million was restricted stock that doesn't vest until 2009.
A year earlier, just 40 percent of O'Neal's $28 million of compensation was restricted, and nearly half came as a bonus.
Archer said companies are responding to the "cry among big shareholders to shift away from stock options, which they view as a giveaway, and toward performance-based compensation."
He also said companies have learned from 2001 and 2002, when falling U.S. stocks left many stock options worthless. "That's a problem because it's tougher to motivate executives when their stock options are under water," he said.
The survey group comprised service and industrial companies with average annual revenue of $25 billion. Archer said the sample represented a wide cross-section of industries.
