Oracle Corporation (NASDAQ: ORCL) founder and CEO Larry Ellison took home the title of highest paid CEO last year according to Forbes.

Looking at the 500 biggest U.S. companies, Forbes named Ellison the highest paid because though he has a salary of "only" $1 million, he exercised stock options worth $182 million.

For 2007, Oracle's stock price moved up about $5 to $22 from about $17 - adding $25 billion in market capitalization.

The more talked-about story from the report was that last year's #1, Apple Inc. (NASDAQ: AAPL) icon Steve Jobs, dropped to #120 with compensation of $14.6 million. The year before Jobs made nearly $650 million from restricted stock grants.

Consulting firm Mercer released its annual study of CEO pay, the summary of which is below:

"The drive for responsible executive pay continues to gain traction as new proxy rules require companies to disclose the value of compensation, benefits and perquisites.  While the median change in CEO total direct compensation (salary, bonus and long-term incentives) was 8.9%, corporate net income increased by 14.4%, up from 13% in 2005, and total shareholder return was 15.1%, more than double the 6.8% return in 2005. Companies heard the message that pay has to be linked to performance:  Over half of the companies granted performance shares – shares that are earned only if performance goals are met – according to the Mercer Human Resource Consulting 2006 CEO Compensation Survey. The annual survey of the latest proxy filings of 350 large public companies was published today in The Wall Street Journal.


The long-awaited total compensation numbers are in, disclosed for the first time this year: According to the Mercer 350 study, total compensation (total direct compensation plus benefits and perquisites) is not as eye-popping as expected.

 

Mercer reports a median total of $8.2 million.  The new elements totaled less than $1.3 million at the median or approximately 15% of the median CEO package.  Most of the added value came from the annual increase in pension values; the reported median increase was approximately $1.0 million.


CEO base salary increased to a median $995,000 after having been at $975,000 for two years. Constant incumbent CEOs received a median increase of 4.1%, higher than the median increase of 3.6% in 2005. In 2006, about one quarter of the CEOs did not get a pay increase; boards were tougher in 2005, when one third of the sample did not get a pay increase.


Median total cash compensation – salary and annual bonus – rose to $2.6 million, slightly higher than the $2.4 million reported in 2005.  The median increase for constant incumbent CEOs was 7.1%, the same rate as in 2005.  An increase in total cash is not surprising given strong corporate performance.  Median net income rose 14.4%.


The big story this year is that, as predicted, long-term incentives (LTI) are being linked to performance, Mercer's survey found. The number of CEOs receiving option grants declined from 192 in 2005 to 185 in 2006, and the number of CEOs receiving restricted stock grants declined from 181 to 172 in the same period.  However, the number of CEOs receiving performance shares, including performance-contingent restricted stock, jumped from 111 in 2005 to 178 in 2006.  The portion of the CEOs' LTI pay that was made up of performance-based shares and units jumped in the period 2005 to 2006 from 21% of the LTI pay mix to 31%, while restricted stock was stable, rising slightly from 22% to 23%, and stock options dropped from 52% of the LTI pie to just 46%. As recently as 2002, stock options made up 76% of CEO LTI pay.


"We have been predicting the rise of performance-based equity awards for several years," said Diane Doubleday, global leader of Mercer's executive remuneration business. "At the heart of shareholders' expectations for pay aligned with performance is the structure of long-term equity programs, specifically programs that vest or pay out based on performance. As of 2006, the accounting rules that facilitate using performance-based equity were in effect for almost all companies. As a result, we now see a significant increase in performance shares and performance-contingent restricted stock.  In addition, the new disclosure rules include previously unknown information about performance goals and targets."


"Target-setting will be the next area of focus, as companies are forced to define how performance is being measured and rewarded," said Peter Chingos, a senior executive compensation consultant with Mercer. "The increased disclosure and need for analysis is also likely to cause many companies to simplify their programs. The process of preparing the Compensation Discussion and Analysis (CD&A) caused some companies to make changes and will probably prompt more to simplify and clarify the performance criteria in their compensation programs. This could range from tweaking the programs to making major changes to ensure clarity to external audiences."


Did shareholders get what they wanted?  They continue to be unhappy with what they perceive as slow progress on reining in CEO pay. Several institutional investors have focused their efforts on having a greater influence on compensation.  This year there are more than 60 proposals for a "say on pay" – a proposal to put executive compensation to a non-binding vote by shareholders. In addition, shareholders have put forward more specific proposals to limit severance and require pay to be more tightly linked to performance. With majority voting for directors becoming widespread this year, directors who have been at the heart of controversy are more likely to hear shareholders' dissatisfaction loud and clear.


And many believe that the disclosures were so lengthy and confusing that shareholders' objectives have not been achieved.  Mercer's crystal ball anticipates further refinement of the disclosure rules before next year's proxy season."

In this piece, Felix Salmon of Portfolio.com discusses his rather unique perspective on how to curb CEO pay. Though it doesn't seem particularily inspired, it adds to the discussion:

In the spirit of Monday's post, here is Canada's Globe and Mail offering its take on executive compensation. In its "Report On Business," Bill Dimma writes:

"Except for those absent from our planet for the past couple of decades, infamous examples of the wildly excessive senior executive compensation that has become commonplace in the United States, though not limited to there, are so widely known that they've become urban legends. But unlike most urban legends, they're not myths but unfortunate reality.

But most of you have heard this sort of thing before. So what? It's like that famous line of Mark Twain's about the weather: "Everyone talks about it but no-one does anything about it." Should anything be done about these massive changes in senior executive compensation levels, or not? And if so, what? At the broadest level, there are only three approaches worth considering.

The first is for government to step in and impose some arbitrary limits or at least some quasi-voluntary guidelines. Not recommended. Even in war-time, this worked erratically and badly. The elemental forces of supply and demand can be ignored or played down for only so long.

The second approach is to do nothing, to believe and accept that the wild earnings numbers are simply a reflection of a market at work. This approach ignores the growing rumbles of discontent from society at large, including employees further down an organization, investors and shareholders, along with the media and opinion leaders.

The third approach also believes in letting the market work but takes it as a given that the current market isn't working well. So approach No. 3 focuses on ways to help ensure that the market for chief executive officers is truly a market, not one where too many CEOs win big, even when their shareholders win small or, worse, lose big.

Here are eight ways I believe the market can be improved:

1 - Go independent

The compensation committees of widely held public companies must be comprised entirely of independent directors.

2 - Understand pay structures

Every member of the compensation committee should be compensation-literate and, ideally, one should be an expert.

3 - When hiring Independent consultants ...

Any external compensation consultant should earn no revenue from a corporate client beyond fees paid for executive compensation work.

4 - Clear reporting structures

Any external compensation consultant should report functionally, though not administratively, to the independent chair of the board compensation committee.

5 - Screen your peer group

Choose wisely and fairly when you peg your company's compensation against others. This means being as close as is possible in measuring product-market offerings, size, and profitability.

6 - Align your goals

Internal quantitative measures of corporate performance should be aligned with longer-run shareholder goals.

7 - Disclosure, disclosure, disclosure

Public disclosure of senior executive compensation must be "full, fair, clear, and unambiguous," to quote from the recent report of the Blue Ribbon Commission of the Institute of Corporate Directors.

8 - Shareholder Say for Pay

Say for Pay is the current effort to convince companies to allow non-binding shareholder votes on senior executive compensation. This is an idea whose time has not yet come in the Canadian setting, but I predict that within two or three years it will become common here, as it already is in several other advanced countries."

This Dallas Morning News column was adapted from an item he posted on BlogMaverick.com and is also available at DallasNews.com.

"There is a game played by CEOs with the corporate issuance of lottery tickets, otherwise known as stock. Stock can be issued as warrants, options, restricted or unrestricted stock. No matter what you call it, every CEO asks for equity, knowing that the only goal is to hit the jackpot.

Every CEO hired looks to grab as much equity equivalents as he can and do everything he can to get that stock price up while periodically liquidating the stock and stuffing the cash in his bank account.

There is absolutely nothing wrong with doing so. Any CEO who doesn't take advantage of this golden ticket is an idiot. I would guess that more than 95 percent of CEOs hired to run companies with a market capitalization of a billion dollars or more amass more than $10 million in equity very quickly.

Those who manage to hold on to their jobs a while can get past the $25 million in equity mark pretty quickly and reach $50 million in 10 years. It's actually pretty tough to screw up and not get there.

Why? Because you have the entire mutual fund, hedge fund and brokerage industry doing all they can to help you.

Think about it. You can't turn on CNBC or Fox Business without seeing cheerleading for the market to go up. Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher. They don't really care how you run the company as long as the stock price goes up.

Heck, even if they did care, shareholders don't really own anything and have zero say in the company. It's the ultimate in social networking. Everyone who owns the stock belongs to the fan page for the stock, and they are telling everyone they can how wonderful the company is and why the stock will go up, all the while praying that it does.

With all of that social networking power, how can CEOs not get rich?

The problem is that there is a huge disconnect between the CEO and shareholders doing well and those who work for the company doing well.

Yes, it's true that stocks can hit 52-week, or even multiyear, lows. Yes, it's true that CEOs see the value of their holdings shrink. But unlike lottery tickets, whose value goes to zero when you don't hit the numbers, CEO equity positions retain their upside. History has shown that if they go far enough underwater, they will get repriced and/or reissued – all in the name of keeping the CEO happy.

So while CEOs may get "less rich" for a while, the game is stacked to get them happy really fast when the upturn comes.

The pressure from Wall Street is to grow earnings forever, no matter what it takes. This isn't a problem when a company is doing well. But when the economy hits a bump, everyone wants to know what the CEO will do to get the price back up. This, as they say, "is where the CEO earns his pay."

Everyone who works for that company is at risk – of losing their jobs, benefits, raises, you name it. Employees live in the corporate cash zone, while CEOs and the top few in management live in the equity/lottery ticket zone.

Those in the cash zone always take the first hit. People, places and things that consume cash are the first things to go because cash expenses immediately reduce earnings. If you or anyone like you consumes cash, unless someone upstairs thinks you generate a straight-to-the-bottom-line return, you are about to become a corporate ghost. You'll be memorialized as a cut to increase earnings and mentioned in a press release that Wall Street will cheer and use to push up the stock price.

What makes me sad is that I think if given a choice, most of us would choose to hold on to our shares and accept an expanded price-earnings ratio for some period in exchange for people keeping their jobs.

I would love to receive an e-mail from a company saying something to the effect of:

Dear Shareholder,

We are facing a difficult decision that we would like your feedback on. Our earnings per share last quarter were 20 cents and, for the entire last year, 80 cents. Because of a downturn in business caused by XYZ factors, we face the choice of making 10 percent less or cutting headcount and related expenses in order to maintain our earnings and possibly even grow our earnings a couple cents this year.

As a shareholder, we would like to ask you whether you would consider allowing us to retain these valued employees. We recognize that it would require you to accept a PE multiple 10 percent higher than the current market. We hope you would be willing to make this concession. We think the jobs this will save will return far greater value to shareholders over the long run. We look forward to your vote.

Unfortunately, this is a fantasy that can't happen in this country. Which brings us back to CEO pay.

The only way to change this is to put CEOs in the cash zone. Make companies generate 100 percent of their compensation in cash that will be 100 percent expensable in the quarter paid.

That's not to say the CEOs can't own stock. Hell, yes, they can own stock. But make them buy it on the open market or as part of a program that's available to every company employee on the same terms. They are getting paid enough, and if they believe in their ability to run the company, they can put their money where their mouth is.

Shareholders tend to ignore how much stock goes to management, but they don't ignore cash. CEO cash compensation will go up, but total compensation will come down.

More importantly, CEOs getting paid huge sums in cash will stand out like a sore thumb when things aren't going well. They will be treated like everyone in the cash zone and held more accountable for their work.

The rich can still get richer, but everyone shares in the risk."

From writer Paul Murdoch of Forbes:

"Forbes' latest look at the compensation of top executives at the 500 largest companies in America shows that 120 of the 500 chief executives took pay cuts last year, in terms of base salary and bonus. The average reduction in salary plus bonus for those 120 executives: 29%. It is worth noting that some of these executives still managed to deliver handsome returns to shareholders.

Example: David N. Weidman, chief executive of Celanese. Sales of the chemical company were up 12% in 2007, the first double-digit increase since Weidman took the reigns three years ago. Profits, on the other hand, have increased at a slower rate, up 5% in 2007 and just 2% for the past 12 months. In fiscal 2007, the value of Weidman's salary plus bonus slipped 11% to $2.9 million. Yet, Celanese shareholders have enjoyed a 64% total return in 2007 and 36% over the latest 12 months. During those stretches, the S&P500 returned 4% and a loss of 7%, respectively.

The following table lists chief executives who have had their core compensation (defined as base salary plus bonus) cut by the greatest percentage in the last year despite outperforming the S&P 500 over the same time period. Some of these executives still brought home millions in total compensation, thanks to stock grants that vested during the year. Stock grants usually vest after a pre-determined time period or when a company's stock meets a specific price target.

Smith International's chief executive, Douglas L. Rock, is one such executive who cashed in on vested stock grants, while taking an 8.7% cut in base pay last year. His salary plus bonus in 2007 came to $3 million vs. $3.3 million the prior year, but Rock more than made up the difference, earning an additional $8.5 million in vested stock grants linked to performance. While Rock's total compensation in 2007 was a robust $12.1 million, only $700,000 below the average compensation of all 500 executives tracked by Forbes, shareholders of the oil services concern enjoyed a total return of 81% during the year.

For the list below, we excluded executives from our list of the 500 largest companies in America who exercised stock options last year or where the proxy statement did not provide a breakdown of annual vs. long-term bonuses."

Lower Salary Plus Bonus But Big Stock Returns

Chief Executive	Company	Salary & Bonus ($thou)	Change In Salary & Bonus (%)	Total Comp ($thou)	52-Week Total Return (FYE)*	Total Return Latest 12 Months**
Douglas L Rock	Smith International	$3,012	-9%	$12,056	81%	45%
David N Weidman	Celanese	2,908	-11	2,971	64	36
Charles R Schwab	Charles Schwab	4,586	-11	4,663	40	19
J Wayne Leonard	Entergy	3,032	-11	12,873	33	1
Andrea Jung	Avon Products	4,311	-8	12,012	22	4

Earlier this week, AFLAC Incorporated (NYSE: AFL) became the first publicly traded U.S. company to have a vote on its executive compensation.

In an outcome that speaks volumes about the company and its leadership, 93% of shareholders approved of CEO Daniel Amos' $11.96 million compensation package - with only 3% voting against it.

Such results are not surprising given that in Amos' 18 years at the helm AFLAC shares have risen more than 3,000%.

However, even if shareholders had overwhelmingly disapproved, such "say on pay" votes are only a barometer of sentiment. The company's compensation committee still has final decision power over pay.

Even though the vote only cheered the status quo, it is an important symbolical step for a U.S. company - and the results of such votes in the future at companies that don't have stellar share performance might be less than glowing.

"Washington Mutual Inc., the nation’s largest savings and loan institution, was so badly burnt by the mortgage meltdown that it needed a $7 billion infusion of capital from the private equity firm TPG Capital and other investors to stay independent.

Although the Seattle-based thrift may ultimately still not survive, Kerry Killinger, its chief executive officer, will do just fine, thanks to the largesse of the board, which approved a compensation structure shielding senior management from the impact of the mortgage crisis.

Killinger received more than $14 million in compensation in 2006. Although he refused a bonus in 2007 because of the company’s poor performance, the 2008 proxy reveals that Washington Mutual more than made up for that by giving Killinger a hefty grant of stock and options awards valued at close to $13 million. This was on top of a base salary of $1 million, proving that the alignment between pay and performance is completely broken.

Washington Mutual also is protecting the compensation of its senior managers in the current year from any hits from the mortgage crisis. The thrift changed the performance measures of its 2008 bonus plan to exclude the effects of loan loss provisions, expenses related to business resizing or restructuring and expenses related to foreclosed real estate assets.

This at a time when Washington Mutual reported that it would lose $1.1 billion in the first quarter of 2008 and set aside a provision for loan losses of $3.5 billion. The thrift also said it would slash its quarterly dividend from 15 cents to a penny and give pink slips to 3,000 employees.

CreditSights Inc. warned on March 27 that the company could lose $4.2 billion this year due to increasing losses on mortgages and may have to raise at least $3 billion in capital to meet federal regulatory requirements.

The dilution from the infusion of capital by TPG and other investors is further punishment for Washington Mutual’s shareholders who had already lost 70 percent of their investment in 2007 and seen their dividend slashed by 73 percent.

The company’s biggest stumble “was a late entry into the subprime market as a way to juice the once fast-growing company’s sluggish earnings,” The Wall Street Journal noted. Despite a series of missteps by Killinger, the board approved an executive compensation structure to protect his pay package and that of other senior managers from the impact of the mortgage crisis.

Killinger’s 2008 equity award will be approximately 15 percent greater than his 2007 award and consist solely of performance-vesting stock options. Stock option grants provide senior executives with incentives to enhance the stock’s short-term performance to the detriment of long-term shareholders. Stock option grants promise executives all the benefit of share price increases with none of the risk of share price declines.

In an April 4 report, RiskMetrics Group’s ISS Governance Services recommended that shareholders support a campaign by the AFSCME Pension Plan and the CtW Investment Group to vote at the April 15 annual meeting to throw out all the directors on the board finance committee. The proxy voting service also called for shareholders to support the installation of an independent chairman and for the requirement that directors get a majority of the vote for election to the board.

The RiskMetrics report also questioned Killinger’s continued leadership. “Given the magnitude of the company’s losses and recent changes in the executive suites at Citigroup and Merrill Lynch, we question why the board did not replace Mr. Killinger as CEO, particularly given the critical strategic decisions that the company still faces.” Washington Mutual decided in 2006 to focus its mortgage business increasingly on higher-margin products, despite the recognition by analysts of the risk “inherent in the mortgage franchise.” These higher-margin products include option payment adjustable rate mortgages, alt-A loans and below prime loans. These higher-margin loans also are riskier. Among the largest U.S. mortgage lenders that year, Washington Mutual also made the highest proportion of loans to real estate investors and second-home buyers. Such loans are considered especially risky.

Not only did Washington Mutual increase lending to risky borrowers, it may have done so in questionable ways. Last November, New York Attorney General Andrew Cuomo filed a lawsuit against eAppraiseIT, the appraisal arm of First American Corp., alleging that it inflated the value of homes nationwide in response to pressure from Washington Mutual. Cuomo’s lawsuit also attracted the attention of the U.S. Securities and Exchange Commission and the Office of Thrift Supervision.

Appraisals ascribe a value to property that determines the amounts that banks are willing to lend to the buyer. Mortgage brokers and lenders then collect fees based on the dollar value of the loans they make to the buyer of the property.

This means that in addition to its involvement in what is possibly illegal activity, Washington Mutual has a mortgage loan portfolio of lower quality than previously thought to be the case. The company now faces a higher risk of credit losses as homeowners are stuck with homes whose true value is much less than they thought and with mortgages they can’t pay.

Washington Mutual’s aggressive lending practices began to reveal their true value when losses began to mount. The company reported a $1.87 billion loss in the fourth quarter of 2007. Moody’s Investors Service cut the company’s credit rating to a notch above “junk.” The lower credit rating indicates that investing in Washington Mutual is considered to carry a higher risk than before. Toward the end of 2007, the company announced it would lay off 3,300 of its 50,000 workers.

Instead of properly monitoring risk, Washington Mutual has followed lending practices that make risk more difficult to identify and structured management’s compensation to sidestep the consequences, a scary proposition considering that further write-downs are expected. According to some estimates, the company will need $8 billion to cover borrowers who can’t afford their mortgage payments, although Moody’s estimated that the company might need as much as $12 billion.

And what if Washington Mutual goes the way of Bear Stearns or Countrywide? Killinger should have no worries, with a golden parachute worth more than $22 million, if he is terminated before a change in control."