Mercer: CEO Total Comp Is 10% Higher in 2002

With the increase, total annual compensation (base salary and annual bonus) is now at $1.8 million in 2002, representing a turnaround from 2001’s decline of 2.8%. Across the board, individual components were up, especially prevalent in median net income, according to the Wall Street Journal/Mercer Human Resource Consulting 2002 CEO Compensation Survey of 350 US public companies.

Median net income’s increase of 14.8% corresponded to a median 15% increase in CEO bonus to $918,000. Reflecting slightly better business results, only a total of 50 CEOs in the 2002 study received no bonus, compared to 79 in 2001.

However, increases in total direct compensation – base salary, annual bonus, the value of stock options, restricted stock, and other target long-term incentives – were not as impressive, rising only a median 2.2% in 2002 to $6.1 million.

Among the components, salaries increased a median 2.2% to $925,000 in 2002. This number was tempered by the number of companies giving zero increases rising to 132, compared to 92 companies in 2001. Comparatively, exempt employees’ annual compensation was only up 3.5% in 2002.

Long-term Shifts

Long-term incentives (LTI) continue to be the main vehicle for CEO compensation. The portion of CEO pay represented by LTI climbed steadily to 71% in 2001 from 62% in 1998, but dropped to 68% in 2002. Salary and bonus now each account for 16% of the overall CEO pay mix.

The median LTI value, made up of the binomial value of stock options, restricted stock, and other target long-term incentives, was flat from 2001 to 2002, at $4.5 million, marking the first time in a decade that LTI values have not risen year over year.

The number of CEOs receiving stock option grants fell to 295 in 2002 from 314 in 2001. Median option grant values, the present value of CEOs’ stock options, declined to $3.8 million in 2002 from $4.3 million in 2001. Also, median gains on option exercises fell to $1.7 million in 2002 from $2.1 million in 2001.

Also, the number of CEOs receiving stock option mega-grants – with face value of at least eight times total annual compensation – fell to 62 in 2002 from 92 in 2001. Looking ahead, Mercer expects to see a continued decline in the use of stock options, in part because of growing dilution concerns and in part because of the expectation that accounting rules for stock options will change within the next few years.

Industry-by-Industry

Median total direct compensation increased most dramatically in 2002 for CEOs in the non-cyclical and basic materials industries; both saw an increase of 22.7% over 2001 compensation levels. Compensation decreased most dramatically in the energy industry; where CEOs saw a 55.5% decline in median total direct compensation. Likewise, CEOs in the technology industry saw their compensation decline by 19.9%.

CEOs in the telecommunications industry had the highest median total direct compensation in 2002 at $18.3 million, followed by CEOs in the health care and financial industries at $11.7 million and $9.8 million, respectively. CEOs in the industrial and utilities industries had the lowest median total direct compensation in 2002 at $4.5 million and $4.8 million, respectively.