Top bosses at the Bay Area's largest companies reaped pay increases during fiscal 2012 that far outpaced wage increases for average workers in the region -- as well as the returns that shareholders enjoyed from the performance of the executives' companies.
Chief executive officers with 177 large publicly held companies in the Bay Area captured total pay packages that averaged $6.75 million, which was up 18.4 percent from fiscal 2011, according to this newspaper's analysis of a survey conducted by Equilar, a Redwood City-based company that tracks executive compensation.
The 18 percent average increase for CEO pay in the Bay Area compared with a 7.4 percent average increase in total shareholder return for the same group of companies.
"There seems to be a disconnect between pay and the performance of the company in some cases," said Brandon Cherry, San Francisco-based West Coast practice leader for executive compensation with the Hay Group, a consulting firm.
Ideally, he said, compensation would move in the same direction and to the same extent as total shareholder return.
"You would want the executives to be in the same shoes as the shareholders as much as possible," said Mae Lon Ding, president of Personnel Systems Associates, an Anaheim Hills-based firm that tracks executive pay. "But the total pay packages seem to be inappropriate."
The gains in total pay for CEOs also are far ahead of the 1 percent increase in average wages for workers in the nine-county region that was reported in a separate survey by state labor officials.
"A lot of workers are getting foreclosed on and filing for bankruptcy," said Mike Henneberry, a spokesman for the United Food and Commercial Workers Union.
The increase in CEO pay is being driven by the portions of the total pay package that are based on stock options and direct grants of stock. Equity-based compensation has much more of an impact on a CEOs pay than does salary, bonuses and other cash-based incentive programs, the Equilar survey shows.
"The true wealth in these pay packages comes from equity awards, so that gives the CEO a real stake in the performance of the company," said Aaron Boyd, director of governance research with Equilar. "The company has to perform well and have growth for the executives to realize the value from their stock packages. They have to produce consistent and strong performance."
The average salary for the CEOs in the companies surveyed by Equilar fell 0.1 percent, and the average bonus and cash incentive programs declined 15 percent. In contrast, stock option packages rose in value by an average of 27.5 percent and direct grants of stock rose an average of 31.2 percent.
"Options are a very popular device for rewarding executives, and that's especially true for Silicon Valley companies and tech companies in general," said Michelle Leder, editor of Footnoted.com, an online site that tracks corporate governance issues. "That has really become part of the high-tech culture."
Yet stock options might not be an effective tool to rein in executive pay during years when a company's stock performance is lousy. Experts point out that executives can delay cashing in their options during a poor year for the stock price, and wait for better timing.
"Executives often get rewarded on the upside, but they don't seem to get punished on the downside," said Loren Rodgers, executive director with the Oakland-based National Center for Employee Ownership.
CEOs also tend to vary the blend of bonuses and salary compared with stock packages, said David Broman, chief executive and partner with Lafayette-based Syzygy Consulting Group, an executive pay consulting company. "The CEOs always seem to be able to work the path up, and never seem to ride the path down."
The highest paid CEO in the Bay Area during fiscal 2012 was Larry Ellison, the top boss at Redwood City-based Oracle (ORCL). Ellison was rewarded with a total pay package of $96.2 million, which was up 24 percent from fiscal 2011. Yet Equilar found that Oracle's total returns to shareholders fell 21.9 percent over that period.
Despite such disparities, experts say compensation reform efforts continue to try to better link pay with performance.
"Everyone is trying harder, and there is a big effort to make compensation be appropriate," Broman said. "There is a lot of work to make the system better, but it's been in place so long, that change takes time to occur."
Contact George Avalos at 408-859-5167 or 408-373-3556. twitter.com/georgeavalos