CEOs hit the jackpot

May 10, 2010 at 12:00a.m.

Associated Press

NEW YORK

America’s top CEOs are set for a once-in-a-lifetime pay bonanza.

Most of them got their annual stock compensation early last year when the stock market was at a 12-year low. And companies doled out more stock and options than usual because grants from the previous year had fallen so much in value that many people thought they’d never be worth anything.

But stock prices have generally surged ever since. Even with last week’s sharp declines, CEOs still have enormous gains on paper.

“The dirty secret of 2009 is that CEOs were sitting on more wealth by the end of the year than they had accumulated in a long time,” says David Wise, who advises boards on executive compensation for the Hay Group, a management consulting firm.

An Associated Press analysis of companies in the Standard & Poor’s 500 index shows that 85 percent of the stock options given to CEOs last year are now worth more than they were on the day they were granted. For some the value jumped by a factor of 10 or more. A year ago, after the stock market had collapsed, 90 percent of the options granted in 2008 were worth less than the original estimate, or were considered “underwater,” according to the AP’s analysis.

Ford Motor Co. CEO Alan Mulally’s pay package illustrates this point. In March 2009, Ford granted 5 million stock options to Mulally. Using a complex formula, Ford assigned the options an estimated value of $5 million. At the time, Ford’s shares were trading at $1.96. Since then, the stock has jumped nearly sixfold, and Mulally’s options have a value on paper of about $48 million.

Mulally is also ahead on his 2008 options, which were valued at $9 million when they were granted two years ago. Now, they’re worth close to $21 million.

Mulally’s gains still exist only on paper, of course. The ultimate size of his payday will fall if Ford’s stock falters. But his gains could just as easily march even higher if Ford’s stock continues to rise. And they take the sting out of a 30 percent salary cut and the lack of a bonus. A Ford spokesman said the structure of Mulally’s compensation means most of it is aligned with the interests of shareholders.

Overall, the AP analysis found that the median 2009 pay package for chief executives at companies in the Standard & Poor’s 500 index fell by about 11 percent to $7.2 million. That followed a 7 percent decline in 2008 in median pay. The median value is the midpoint in the AP sample, meaning half of the CEOs made more and half made less.