CEO Cash Pay Jumps, Stock Options Drop

The increase in cash payments, salaries and bonuses, help to offset the overall 9% decrease seen in total compensation of United States CEOs, a drop almost entirely due to a decline in the value of stock options. Overall, the value of stock options fell 18% last year to a median value of $4.2 million, using the Black-Scholes method, a valuation method that has come under fire, criticized as an imprecise measure (See Black-Scholes Overvalues Stock Options ).

Nonetheless, corporate boards in general raised cash payments to CEOs. Median salaries rose 6% and the median bonus soared 21%. Measured on a mean basis, bonuses declined 1.6%, but such figures were skewed by the small number of very large bonuses, according to analysis done for Reuters by Equilar Inc

Stock Drop

The decrease in the number of stock options issued to CEOs is due to growing pressure on companies to count the cost of options against profits, as well as the accounting complexity of giving a dollar value to what are essentially long-term wagers on stock prices. In this vacuum, awards of restricted stock, grants of company shares that cannot be sold for a period of time and sometimes only when the company meets performance goals, rose 40% on average last year, with an average value of $1.3 million, up from $937,000 in 2001.

The value of restricted stock is easily valued by investors and companies alike, since it is basically a conditional gift of stock. By comparison, companies have long argued that stock options are difficult, if not impossible, to give a dollar value to.

Under current US guidelines, companies can choose to subtract the expense of stock options from their income statements or disclose their theoretical value in the footnotes of their financial statements. With the exception of a handful of early volunteers and the approximately 130 recent coverts, most companies opt to record the expenses in their footnotes (See Fewer Companies Volunteer Stock Option Expenses ).