New government rules and increased scrutiny have forced corporate boards of directors to ponder generous pay packages more carefully before awarding them.
Yet even with the advent of the regulations, an immense gap yawns between the top brass and the rank-and-file at Bay Area public companies.
The best-paid executives in the Bay Area hauled in an average pay package that was 195 times larger than the average salary of the region's workers during 2006.
Put another way, the 100 highest-paid Bay Area executives made more money in two days -- $57,500 -- than the region's average wage earner made in the entire year: $53,800.
In 2006, the average total direct pay package was a little less than $10.5 million. That was down 2.9 percent from the nearly $10.8 million that big public companies in the Bay Area forked over to their top executives in 2005.
These packages, defined as total direct compensation, are composed of an executive's salary, bonus, short-term incentive plans, stock grants, stock option values and all other kinds of compensation such as perks.
East Bay executives also saw a decline in their total pay. In 2006, the average total direct pay for the 50 highest-paid executives of public companies in the Alameda-Contra Costa-Solano counties region was $3.8 million. That was down 19 percent from the $4.7 million in average pay for 2005.
"Companies are trying to rein in excessive pay packages and excessive behavior," said David Broman, a principal executive with Syzygy Consulting Group, a Lafayette-based company that provides consulting services to companies about executive compensation. "Everyone in my field is encouraged that reforms are taking place."
The 2006 list was topped by Terry Semel, the boss at Sunnyvale-based Internet giant Yahoo Inc. Semel landed $71.7 million in total direct pay.
No. 2 on the list was Lawrence Ellison, the chief executive of Redwood City-based software maker Oracle Corp. Ellison captured $55.8 million in total pay.
Among East Bay-based public companies, the highest-paid CEO was David O'Reilly, the leader of San Ramon-based energy titan Chevron Corp. O'Reilly hauled in $13.5 million.
These pay packages are dwarfed by the compensation harvested by some executives with privately owned firms.
For instance, Edward Lampert, a hedge fund manager and CEO of ESL Investments, made $1.02 billion in 2006, according to a yearly survey of hedge fund salaries. James Simons, head of Renaissance Technologies Corp., pulled down $670 million. George Soros, head of Soros Fund, landed $305 million.
Public companies in the Bay Area spread the wealth to a wide array of executives. The 100 largest public companies in the nine-county region reported that 317 of their top executives made at least $1 million in 2006. In 2005, 367 executives with the biggest Bay Area public companies were million-dollar babies.
If executive paychecks have dwindled a bit, new rules could be a key factor.
Under the guidelines, regulators now oblige public companies to reveal more details about how they pay executives and how they reached those decisions.
Plus, shareholders have increased direct pressure on directors and top executives. For instance, responding to investor demands, Home Depot recently allowed investors to speak critically and at length at the annual meeting. Shareholders spoke about a wide range of issues, including executive pay, company operations and how responsive management is to shareholders.
"They have to disclose more perks that fall below certain amounts, more information about stock options and stock grants," said Michelle Leder, who oversees the Web site footnoted.org, which tracks Securities and Exchange Commission public filings.
The new disclosure rules went into effect in December. The practical impact is that public companies, with some exceptions, began filing executive compensation reports using the new guidelines starting in January.
"Some companies are doing a very good job with disclosures, and some are not," Leder said.
Corporations and their boards of directors may be acting differently now that regulators and shareholders can train a more powerful financial microscope on their compensation decisions, said Andrew Williams, co-director of the Elfenworks Center for the Study of Fiduciary Capitalism at St. Mary's College in Moraga.
"When you get that sunshine on a company, it can change behavior," Williams said. "It used to be really easy to overpay executives when you didn't know how much they were being overpaid. It's one thing to pay an executive well when a company does well; it's another thing to pay an executive well when a company does poorly."
James Hawley, the fiduciary center's other co-director, warned that the more-extensive disclosures could also be used by executives and company compensation committees seeking justification for extravagant packages.
"It is possible that this will simply increase the game of leapfrog," said Hawley, referring to a sporadic custom of executives at similarly sized companies to demand more than their peers so they can hop over them in pay. "This could contain a perverse element. It could take a few years to see what all the results are."
Analysts say the new rules also could make it more likely that boards will make sure pay packages are really justified by how the company's finances look.
"We are seeing a shift to more pay-for-performance packages," said Brandon Cherry, a principal executive with Presidio Pay Advisors, a San Francisco-based compensation consultant. "They are trying to align executive pay with the interests of shareholders."
Analysts said the big increase in disclosures means investors may have to cope with information overload.
"Compensation packages have gotten hugely more complex in the last decade, and the new methods will create even more complexity," said Ralph Ward, publisher of Boardroom Insider, an online newsletter about corporate governance. "People will have to figuratively go back to school to figure out what it all adds up to."
Ultimately, analysts say that a company's board of directors will be able to use the increased scrutiny to ward off pressure from top executives to dramatically sweeten their compensation.
"With some of the outrageous requests coming from candidates for executive positions, now the board knows they will not only have to make disclosures but also provide a rationale for their decisions," Syzygy's Broman said. "Now they have a little more ammunition to turn down excessive requests."
Yet it's also possible, despite the modest decline in the average Bay Area pay package, that compensation amounts won't decline in any significant way, said Mae Lon Ding, president of Anaheim-based Personnel Systems Associates. In part, this is because the stock market continues to do well.
"The value of stock option grants will remain in the stratosphere," Ding said. "Some companies that were out of line will be brought more into line. But I don't think there will be any significant drops in pay across the board."
George Avalos covers the job market, insurance, petroleum and banks. Reach him at 925-977-8477 or firstname.lastname@example.org.
Here are a few definitions and things to keep in mind about stock grant packages that companies provide their top executives.
Restricted stock. This is an outright grant of stock to an executive, although the stock is issued with some restrictions. The most common restriction is the executive has to wait a specified amount of time before being able to sell the stock. Another restriction, although uncommon, requires certain performance benchmarks to be reached before the stock can be sold.
Stock option. Options often are issued to executives as a form of compensation in addition to salary. The idea is to provide an incentive to improve the company's business and thus raise the value of its stock. The option is usually offered at a specified price, called the strike price, and the holder hopes the company's stock rises enough in value to make the options valuable.
Accounting issues: Restricted stock has accounting advantages for the company because it usually has to issue an executive fewer shares of restricted stock to achieve the same value as the stock options. Because stock options usually require more shares to be issued to produce the same value, options often dilute, or erode, a company's earnings per share.
Tax implications: Stock options have no tax impact on an executive until the options vest. Restricted shares also are generally not taxable until they are sold.