After a 15 per cent collective pay cut in 2007, chief executives of the 500 biggest companies in the US (as measured by a composite ranking of sales, profits, assets and market value) took another reduction in total compensation, 11 per cent, for 2008. The last time the big bosses took a pay hit for two consecutive years was in 2001 and 2002.
In total, these 500 executives earned $5.7 billion in 2008, which averages out to $11.4 million apiece and computes to less than 1 per cent of total revenues and 3 per cent of total profits of their companies.
For the second consecutive year, the top earner on our executive compensation report was Oracle chief Larry J Ellison.
Ellison drew just $1 million in salary, but realized $544 million from the exercise of vested stock options last year.
Ellison also holds the record for total compensation in one year. In fiscal year 2001, he earned a total of $706 million. Second on the all-time list is Walt Disney's Michael Eisner, who realized $570 million from exercised options in 1998, when he was CEO of Disney.
The next four top-paid chief executives also earned most of their pay from exercised stock options: Ray R. Irani of Occidental Petroleum ($223 million total pay); John B. Hess of Hess ($155 million); Michael D Watford of Ultra Petroleum($117 million); and Mark G. Papa of EOG Resources ($90 million).
We count compensation when it turns into cash or marketable stock; we do not include the value of options until the executive exercises them. When calculating a chief executive's total compensation for the fiscal year, we count the following: salary and cash bonuses; other compensation, such as vested stock grants; and stock gains, the value realized by exercised stock options.
In our seventh annual performance-vs.-pay scorecard, we again set out to find the executives who delivered the most to shareholders relative to their total compensation.
This year, we found 179 chief executives whose companies have been publicly trading since April 2003, have been in office at least six years and have at least six years of pay history.
Our grading for that universe of 179 executives uses four factors. One is the company's stock performance (including dividends) relative to that of its industry peers over six years.
We consider annualized stock performance during the leader's tenure and performance relative to the S&P during that time. Finally, we look at total compensation over the past six years.
This year, we have a new name atop our list of the most valuable bosses: Michael L. Bennett of Terra Industries.
Over the past six years, Bennett has been paid an average of $3.5 million (salary plus other compensation) per year, while delivering a 64 per cent annual return to shareholders of Terra, a chemical company specializing in nitrogen compounds.
Since Bennett took office as chief executive in April 2001, he has delivered an annual 29 per cent return to shareholders, which is significantly better than the -3 per cent annual return of the S&P 500 over that period.
At the bottom of our performance/pay ranking is Kenneth D Lewis of Bank of America.
Bank of America's six-year annual return of 16 per cent lagged in comparison with its sector; its 8 per cent annual return since Lewis took over as top executive in April 2001 also trailed the S&P 500.
Over the past six years, Lewis has been collecting a paycheck averaging $30 million annually.
Components of Compensation
Salary: Annual base salary earned during the fiscal year.
Bonus: Annual non-equity incentives earned during the fiscal year, plus discretionary bonuses.
Other: Includes long-term, non-equity incentive payouts, the value realized from vesting of restricted stock and performance shares. Also includes other executive personal benefits, such as premiums for supplemental life insurance, annual medical examinations, tax preparation and financial counseling fees, club memberships, security services and the use of corporate aircraft.
Stock gains: Value realized during the fiscal year by exercising vested options granted in previous years. The gain is the difference between the stock price on the date of exercise and the exercise price of the option.