Investors got whiplash from the stock market’s plunge and subsequent surge over the past three years. But in the down-and-up market, executives at Indiana’s public companies got rich.
Because the depth of the market crash in March 2009 coincided with the time of year most public companies grant stock and stock options to their executives, the shares were granted at nearly the lowest prices possible. Some companies even granted extra stock to help retain executives or to match the dollar value of previous years’ awards.
Share prices have since surged, turning standard stock awards into windfalls for corporate executives. WellPoint CEO Angela Braly received stock in March 2009 valued at $10 million, which now could be sold for $37 million. Cummins Inc. CEO Tim Solso received a $1.3 million stock award that could now be sold for more than $10 million.
But as great as the recovery has been, in most cases it has returned stock prices to no more than their pre-recession levels—and many are still far below that threshold. That means long-term shareholders have seen no increase in value—even though executives are sitting on piles of wealth—at least on paper.
“We never thought it would be as significant as it has been because we didn’t think the market would turn around as much,” said Bob Roeder, a national Mercer compensation consultant based in Indianapolis.
Consider CNO Financial Group Inc., a Carmel-based insurer. Its stock price is still 40 percent lower than it was at the end of 2007, when the recession began.
In April 2009—as CNO worked its way out of a liquidity crisis that had pushed it perilously close to defaulting on bank loans—the company gave four of its top executives special grants of restricted stock.
CNO’s share price at the time of the stock grants was a lowly $1.13. It now has risen more than sixfold, to about $7.50.
That surge has juiced the total value of CEO Jim Prieur’s 2009 stock awards from a total value of $1.3 million when they were made, to $4.4 million today.
Grants made to CNO’s chief financial officer and two business unit heads were substantially larger than in previous years—and now have soared in value. It does not appear that any executives have cashed in the awards.
According to CNO’s 2010 proxy statement, the special stock awards were designed to retain the top executives even though the board had decided against salary raises and because the company’s 2008 performance had not been good enough to generate the size of stock awards the board had intended to give that year.
Asked if the value of the grants now makes CNO’s executive compensation for 2009 seem inappropriately high, company spokesman Tony Zehnder answered no.
“Given the performance of the company [since then], it doesn’t,” he said. He added that the board wanted to recognize the executives’ hard work at restructuring the company, especially its complex spin-off of money-losing senior life insurance policies in fall 2008.
“It was in fact for the work done for the company,” Zehnder said. “So it seemed appropriate.”
Evansville-based Shoe Carnival Inc. also turned to special stock awards in an effort to retain top executives.
“The Compensation Committee determined that, given the deteriorating state of the economy and uncertainty within the retail industry at that time, a service-based equity grant was needed to encourage retention of our core management group,” stated the shoe retailer’s directors in their 2010 proxy statement.
In December 2008, the company awarded CEO Mark Lemond 25,000 shares of restricted stock. They were worth $265,500 at the time, but could now be sold for $665,500. Shoe Carnival’s chief financial officer and general merchandise manager received 18,000 shares each.
Meanwhile, Shoe Carnival shares remain more than 80 percent below their pre-recession value. The company declined to comment further.
Kevin Murphy, an executive compensation researcher at the University of Southern California, said there is little evidence to suggest executives were more likely to leave during the recession and market crash than they were before.
If anything, the mass corporate downsizings made it less likely even top executives would leave their jobs.
“There’s little excuse for retention reasons to provide mega grants above competitive levels,” Murphy said.
Roeder, the compensation consultant, said fear of losing top executives is real, but can get overblown.
“There are committees who fall in love with their CEOs and want to take care of them and will always throw up the specter that they may leave and go someplace else. Part of that is always going to be based on that bias and not based on total performance,” he said.
However, even during a huge downturn, when even CEOs might cling to whatever job they have, there are companies with cash to spend that can make a raid on a company’s management.
“We did have some people in some industries where the market continued to be hot,” Roeder said of the Great Recession. “And there will always be a market for talent.”
Not all the grants companies doled out during the dark days of the financial crisis have turned to gold.
Carmel-based ITT Educational Services Inc. was riding high in early 2009 as displaced workers returned to school to acquire new skills.
Its stock price was $121.56 on Jan. 19, 2009, when the company issued stock awards good for more than 1 million shares to its top five executives.
But now the economy is reversing—as is ITT’s stock price. CEO Kevin Modany’s 100,000 stock options from 2009 are all under water and the value of the 725,000 shares he received has plunged 45 percent.
But more typical is the course of WellPoint, the Indianapolis-based health insurer, which doled out extra shares and stock options to keep the dollar value of its compensation packages from falling. That’s because its shares were trading in March 2009 at a six-year low of $30.10 apiece.
“Based on those prices, the company needed to offer almost twice as many shares in 2009 to deliver the same expected value,” WellPoint spokesman Tony Felts explained in an e-mail.
The stock price has since recovered to nearly $80, but is still about 10 percent shy of its late 2007 level.
Braly has not cashed in any of the stock options she received in 2009, nor sold any of the stock, some of which has yet to vest. However, WellPoint CFO Wayne DeVeydt in March sold the half of his options that have vested, for a gain of $1.4 million. He also unloaded 46,000 shares for more than $3 million.
Some companies merely gave executives their typical number of shares in early 2009, but the firms’ performance since then has been so good, the gains are eye-popping.
At Indianapolis software firm Interactive Intelligence, CEO Don Brown received his usual grant of 50,000 stock options, with a strike price of $6.66 apiece and an estimated value at the time of $177,345. Interactive’s stock price has risen more than fivefold, and those options are now worth $1.4 million.
At Columbus-based engine maker Cummins, CEO Tim Solso received rights to 116,280 shares via restricted stock grants and stock options—about the same number of shares granted the year before. Other executives also received similar amounts of stock that year as before.
But Cummins’ sales have risen to new highs, and its stock price has zoomed from less than $20 when the stock was granted to about $105 per share now.
Cummins spokesman Mark Land said it’s a sign that Cummins’ executive compensation is working exactly as it’s supposed to.
“We don’t feel the significant increase in the stock price in 2010 resulted in inappropriately high executive compensation,” Land said in an e-mail. “Cummins’ executive compensation is built around a ‘pay for performance’ model. In this case, Cummins’ leaders, like our shareholders, benefited from the fact that Cummins’ stock was one of the top performers in the market in 2010.”
So far, investors across the country seem to agree. They’re more focused on the stellar returns they’ve seen in 2009 and 2010, even if share prices haven’t fully recovered.
The Standard & Poor’s 500 Index has soared 95 percent since its low point on March 9, 2009. However, it is still 10 percent below its level at the end of 2007, when the recession officially began.
Executive pay raised little commotion at annual meetings this year, where shareholders were able to cast non-binding votes either approving or disapproving 2010 executive compensation.
Shareholders at Cummins, WellPoint and CNO Financial easily approved those measures.
Even Calpers, the giant California pension fund, elected not to issue its annual Watch List that highlights poor-performing companies and targets them for improved corporate governance.
“Given the state of the business, there were cutbacks across the board, and equity compensation was a way to offset that,” said Mark Foster, chief investment officer at Kirr Marbach & Co., in Columbus, Ind., which has managed to generate nation-leading returns in its mutual fund.
“If the stock comes back and I’m making money then I don’t care as much.”
But Murphy, the USC professor, said the big stock and option awards of the past two years are going to continue to yield huge payouts to executives—and that could spark some backlash.
“We’re going to see, I just think, explosions in realized compensation over the next couple years,” he said. “How controversial it will be I think will depend a lot on the unemployment rate. No one seems to complain about executive pay when everybody seems to be getting better off.”•