New executive-pay disclosure rules, triggered nationally in response to shareholder outrage over big CEO payouts and unclear disclosure, are shedding fresh light on the components of executive compensation, but also are making it more difficult to show just how much pay is rising.
Whats clear, however, is that executives at Inland Northwest publicly traded companies are continuing to cash in on the improving fortunes of the businesses they lead, the Journal of Business annual analysis of executive pay shows.
New proxy disclosure rules approved by the U.S. Securities and Exchange Commission last year require companies to divulge more information about the compensation packages provided to their top executives. Among those new disclosures is the annual cost companies incur when granting stock options and restricted shares, as well as more information about gains on executives retirement plans. Theres also more information on perquisites and on what an executive would receive in parting gifts if he or she were to leave a company.
Because of the big changes in disclosure, however, the total compensation an executive received in 2006, the fiscal year covered by the annual proxies filed this spring, cant be compared easily with that of the previous year. An exception to that is an executives combined salary and bonus, which many consider to be the base pay for an executive. For the 85 executives included in the Journals analysis this year, which included 18 publicly traded companies, combined salary and bonus rose about 12 percent on average in 2006, compared with the previous fiscal year.
A similar study done by Mercer Human Resources Consulting for the Wall Street Journal found that the salaries and bonuses of CEOs of some 350 U.S. corporations rose about 7 percent last year, the Wall Street Journal reported.
In the Journal of Business analysis, executives of Inland Northwest companies received total direct compensation of about $821,000 a year on average. Total direct pay includes salary, bonuses and other annual cash incentive pay, the annual cost of long-term incentives such as stock options and restricted share grants, other long-term pay, pension-plan changes, and perquisites.
When calculating total direct pay, the Journal of Business in most cases no longer includes the full amount of gains from exercising stock options or newly vested restricted shares, because by adhering to the new rules, companies now often include a portion of those gains in other categories in a new way, so adding them in again would be duplicative. Still, those gains, which typically are from stock granted in years past, often are far larger than what is currently disclosed in the direct-pay total, so for at least this year, the Journal has included those amounts separately on its executive pay chart (this page). For the executives of companies that didnt disclose under the new rules in their most recent proxies, such gains are included in their direct-pay totals.
Stock option gains can be significant. For instance, three executives at Sandpoint-based Coldwater Creek Inc. cashed in stock options last year for gains of more than $5 million each, and seven other execs in this years analysis had 2006 stock-option gains exceeding $1 million.
Topping this years executive-pay list is Coldwater Creek co-founder and CEO Dennis Pence, who had total direct compensation last year of about $3.8 million, including the highest base salary found in this years analysis, at $1 million. Pence ranked 11th in total compensation in the 2006 analysis.
The Sandpoint-based retail giants earnings jumped by a third last year, to $55.4 million, amid a continuing aggressive store expansion program.
Just behind Pence was list newcomer Michael J. Covey, CEO of Spokane-based Potlatch Corp., whose direct pay totaled about $3.6 million. Covey succeeded Penn Siegel, who retired last year but earned enough during the year to keep him on the list in 14th place, at $1.3 million. Potlatch, a timberland real estate investment trust and wood-products concern, posted 2006 earnings of $139.1 million, up 322 percent from 2005.
Rounding out the top five were Gary Ely, CEO of Spokane-based Avista Corp., at $3.3 million; Harold Gilkey, CEO of Spokane-based Sterling Financial Corp., at $3.2 million; and Jeff Thomas, CEO of Spokanes Ambassadors Group Inc., at $2.5 million.
Other notable executives in the top 10 were Gold Reserve Corp.s Rockne Timm at sixth, Sterling Savings Banks William Zuppe at seventh, Gold Reserves Doug Belanger at eighth, Coeur dAlene Mines Corp.s Dennis Wheeler at ninth, and Itron Inc.s LeRoy Nosbaum at 10th. Hecla Mining Co. CEO Phil Baker was just outside the top 10, as was Coldwater President Georgia Shonk-Simmons, who has ranked first on the list twice in the past, including last year.
Shonk-Simmons is one of only four women on the top-40 list and was among only seven women among the 85 executives named in the proxies of the 18 Inland Northwest companies used in this years analysis.
The 12 percent average increase in salary and bonus for executives in 2006 is one of the smaller increases the Journal has seen during the 14 years it has done the annual analysis. Last years proxies revealed a 2005 increase of 18 percent. Though comparisons in overall direct compensation between 2006 and 2005 are difficult to make given the change in disclosure rules, next years batch of proxies once again will provide that comparison.
In last years analysis, overall compensation jumped a whopping 42 percent for fiscal 2005, as executives were rewarded based on their companies performance. Many companies now base long-term pay on three-year cycles, in which a companys performance is measured against that of its peers, and reward executives based on that performance.
The three most typical ways to pay for long-term performance are through stock options, restricted stock, and what are called performance shares.
With a stock option, a company grants an executive the right to buy a certain number of common shares within a set period at a specified frozen price. The exercise price is set at the market price for the stock on the day the option is granted. If the stock price then climbs, the executive can exercise the option to buy those shares at the lower exercise price, and reap a gain. With restricted stock awards, the executive receives the shares outright, but they come with restrictions on when they vest and the executive can sell them.
To explain performance shares, its easiest to look at a specific example. Avista awards them to executives with the proviso that the shares mature after a three-year period, during which the company must meet certain performance measures. For an executive to receive any of the shares, Avistas shareholder return must be greater than the 45th percentile of the companys peer group, which is the S&P 400 Utilities Index. If its return reaches the 55th percentile, the executives get all of the shares they had been granted three years earlier, and they can receive up to 150 percent of those shares if the return is above the 85th percentile.
For the three-year period ended Dec. 31, 2006, Avista finished in the 68th percentile, so executives received 122 percent of the grants made to them at the start of that cycle. In CEO Gary Elys case, that amounted to about 78,000 shares, with a value of about $2.1 million.
Though Avista discloses such information clearly in its proxy statement, that $2.1 million gain doesnt show up in the main compensation summary of proxies. Thats what makes reading the new proxy statements tricky. Rather than what the executive really earned or will earn from a stock or option grant, the main compensation table now lists the current-year expense from grants the company has made to that executive. In Elys case, that current-year amount totaled about $1.4 million.
As Hecla points out in its proxy, the stock and option amounts listed in the main compensation summary dont reflect the actual value that an executive might ultimately reap from the awards, which depends on the stocks performance in the market in the future. In fact, its possible for the numbers in those grant columns to be negative, due to accounting rules, though none was negative in the group of proxies studied for this years analysis.
Some companies, including Avista, no longer offer stock options to executives, but many still do, and there are a lot of unexercised shares sitting out there that still could allow executives to cash. In this years analysis, executives had accumulated options to buy an average of 144,000 shares of his or her companys common stock. Also, counting restricted stock and performance shares, executives here on average have accumulated future payouts today worth about $416,000 each.
Potlatchs Covey, for instance, is sitting on unvested stock and performance-share units estimated today to be worth about $7.2 million, though actual payment on those shares will depend on the companys future performance.
Another new item that companies must disclose in their main compensation tables is the change in value in each executives retirement plan. In most cases, those increases are relatively modest, usually less than $75,000, but sometimes they can be far more. Take, for instance, Sterlings Harold Gilkey, whose deferred and supplemental retirement accounts gained about $2.4 million in 2006.
One of the categories of executive pay that seems to raise the ire of shareholders nationally is that of perquisites, or perks for short, though examples of extravagance are hard to find among the proxies of the Inland Northwest companies studied in this analysis. Typically, such perks include matching contributions to 401(k)s, medical and life-insurance premiums, moving expenses for new hires, and sometimes club memberships and auto allowances.
Public companies also now provide much more disclosure on how much compensation an executive would receive if he or she left the company due to a change in control.
For instance, in the event there is a change of control at Itron and CEO LeRoy Nosbaum loses his job, he could receive as much as $6.7 million in severance and about another $5 million in accelerated incentive and performance awards.
Paying for performance
Because much of an executives pay these days is dependent on the financial performance of his or her employer, it should come as no surprise that some companiesand some industriespaid their execs more last year than others did.
Coldwater Creeks top five executive officers, for instance, received average total compensation of about $1.6 million in fiscal 2006, roughly twice as much as the average for all companies included in the analysis. Keep in mind, though, that Coldwater Creeks five-year annual average return on equity is a heady 16.35 percent. Also of note is that the combination of salary and bonuses at the specialty retailer fell nearly 30 percent on average in 2006, reflecting a common shift among companies these days to put a higher emphasis on pay for long-term performance.
Meanwhile, at Coeur dAlene-based Idaho Independent Bank, salaries and bonuses shot up 89 percent on average, fueled mostly by big jumps for CEO Jack Gustavel and COO Kurt Gustavel, his son. Average overall direct pay at that bank, however, remained well below average, at about $660,000.
The lowest paying company in the survey was Spokanes Northwest Bancorp., whose top five executives had an average overall direct pay of less than $200,000. CEO Randy Fewell had total direct pay of about $263,000, the lowest among CEOs here, but Northwest Bancorp. also is much smaller than some of the other publicly traded banks here.
As for industries that include more than one company in the analysis, natural resources, which includes five mining companies and one wood-products concern, had the highest average total pay, at about $823,000. High technology companies had the highest average salary and bonus, at about $531,000, but also was the only multi-company industry in which salary and bonuses declined in 2006, in this case by 2 percent. The biggest increase in salary and bonus came in the travel industry, with an average jump of 37 percent. Red Lion Hotels Corp. and Ambassadors Group Inc. are the only two publicly traded players in that industry here.
The lowest average overall compensation was in the finance industry, at about $620,000.
Lest someone might think theres no real money in the Inland Northwest, note that the combined total direct compensation for all 85 employees included in this years study was nearly $70 million.
Contact Paul Read at (509) 344-1262 or via e-mail at firstname.lastname@example.org.
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