Arizona executive pay hits record high
Corporate America continues to hum along, and its success is showing up in higher pay for chief executive officers and other top officials at Arizona's larger public corporations.
Average compensation earned by CEOs hit a record $2.6 million for 2014, according to an analysis of corporate financial disclosures by The Arizona Republic. That is up from a previous record of $1.7 million last year. Another 93 vice presidents, chief financial officers and other top executives in Arizona earned at least $750,000, according to The Republic's analysis based on company disclosures.
Higher numbers also have shown up in national studies, reflecting robust corporate profits, healthy balance sheets and rising stock prices in U.S. markets. The economy is gradually gaining traction, although the improvement hasn't yet led to noticeably higher worker incomes.
Executive pay has skyrocketed compared with wages earned by mainstream Americans in recent decades — a possible factor behind the widening rich-poor gap. CEO pay scales are set by each company's board of directors, and many of these shareholder representatives are current or former CEOs themselves.
"America faces an income-inequality crisis because corporate CEOs have taken the raising-wages agenda and applied it only to themselves," said AFL-CIO President Richard Trumka in a statement on national trends.
Albert Cannella Jr., a management professor at Arizona State University, said many CEOs and top executives create value for their companies but, in some cases, could be replaced by equally competent successors willing to work for less-lucrative deals. "This upward spiral has gotten to wacky proportions," Cannella said.
J. Douglas Sanders, head of Sprouts Farmers Markets, tops the 2014 compensation list at $21.3 million because of the exercise of stock options granted in prior years. Normally, his combined compensation is much lower; last year, his pay was $4.1 million.
Rounding out Arizona's top five are James Moffett, chairman of Freeport-McMoRan ($15.1 million); Steve Sanghi, CEO of Microchip Technology ($14 million); Kevin Knight, now executive chairman of Knight Transportation ($11.6 million) and Amin Maredia, chief financial officer and treasurer at Sprouts Farmers Markets ($11.4 million).
All work for some of Arizona's biggest and most profitable corporations, where executives tend to receive the highest ongoing pay and are more likely to cash in big when they exercise options or see stock awards vest from prior years.
Compensation leaders
Executive-pay figures can be interpreted in various ways. The Republic starts with the annual numbers listed in the Summary Compensation table found in corporate proxy reports. This table lists salaries, bonuses, the value of current-year stock-option grants, pension benefits and other compensation. Public corporations must spell out these numbers in an annual filing with the U.S. Securities and Exchange Commission.
The Republic then subtracts the value of current-year stock option grants and awards, which generally only can be redeemed in future years if the shares rise in value. The Republic then adds the value of stock options that a top executive exercised or stock awards that vested during the year.
These realized amounts represent real money, from options and awards typically granted several years earlier. They appreciate only if a firm's shares rise over time and are designed to encourage top executives to make decisions that benefit all shareholders. These realized-pay numbers are disclosed by companies in a separate table in proxy reports.
The difference in methodology, emphasizing actual money received, can be illustrated in the numbers for Sanders, the Sprouts CEO. In the Republic report, he was Arizona's most highly compensated executive for 2014, based largely on $19.6 million in value realized from the exercise of stock options granted in prior years, when Sprouts was a private company. Using only the numbers from the Summary Compensation table, Sanders' remuneration was lower, at around $3 million.
Other Sprouts leaders and executives such as Kevin Knight of Knight Transportation, who realized large sums from exercised options or vested stock awards, saw the same result.
But sometimes The Republic's formula shows lower remuneration than what is reported in the Summary Compensation table.
Richard Adkerson, CEO of Freeport-McMoRan, Arizona's most valuable company in terms of market capitalization, received $6.8 million in compensation last year based on The Republic's formula, less than the $10.1 million that the mining company reported for him in the Summary Compensation table.
Adkerson had the highest remuneration in The Republic's executive pay reports covering compensation in 2013, 2012 and 2011.
The accompanying tables list the Summary Compensation numbers for executives, plus the value of options exercised during the past year or awards that vested, minus the value of current-year option awards and grants.
Company perspectives
CEOs and other top executives rarely comment directly on their own pay issues, which are determined by each organization's board of directors. Ten Arizona companies were asked to comment, with only two responding on the record to the request.
Steve Sanghi of Chandler-based Microchip Technology voiced frustration over the issue.
"The only people I hear discussing executive compensation are politicians and the media," Sanghi said. "I have never heard my employees complain about it. I have never heard my board complaining about it. I have never heard investors complain about it."
Sanghi drew a parallel between CEOs and professional athletes.
"The owner of a team looks at how much money the team has and figures out how much it can pay a star athlete," he said in a statement to The Republic. "The owner will then offer a salary for the athlete that is enough to make the athlete choose that team over another. The same situation happens with corporations and executives across the country all the time, but no one cheers for CEOs."
Microchip, one of Arizona's most valuable corporations, has enjoyed steady growth over the years and now is worth about $10 billion. "The economic value it (the company) has created for the city, state, country and world is enormous," Sanghi said. "But no one cares about that. They would rather stand up and cheer for a star sports player who dribbled and dunks the ball very well, and makes $20 million a year."
Politicians, he added, would prefer to throw out the first pitch at a baseball game and praise sports teams and players who commonly earn millions of dollars. "Then they hold press conferences and scold CEOs for making too much money."
Top executives "are the people creating substantial wealth in the country and managing innovation," Sanghi said in the statement. "Shareholders, who are the owners of public companies, have the ability to lower CEO pay through the process of board-member nomination and election, but I do not see that happening very much."
Some scrutiny of executive pay packages occurs behind the scenes through input to boards and executives from representatives of pension funds, mutual funds and other large institutional investors and by firms such as ISS and Glass Lewis that advise investors on proxy issues, said Robert Newbury, director of executive-compensation research at Towers Watson in Columbus, Ohio.
But when shareholders benefit from a company's performance, criticism is likely to be muted.
Apollo Education Group also responded to the Republic's request for comment, with Mark Brenner, a senior vice president, pointing out that most compensation for the education company's top executives is tied to financial performance.
"This pay-for-performance approach helps to align the interests of our executive team with those of our stakeholders," Brenner said in a statement. "Compensation is also decided by considering competitive market data and recommendations from an independent compensation consultant," he said.
For Apollo CEO Gregory Cappelli, the only component of compensation that isn't at risk is his base salary, Brenner said. The long-term stock incentives provided to him and other executives by the company's board "further focus the executive team on the long-term success of the organization," Brenner continued, adding that Cappelli hasn't sold any shares besides those that are legally required to be sold to meet tax-withholding obligations outside his control.
Cappelli received $5.3 million in compensation in 2014.
Shareholder approval
Despite sometimes-critical reports, the shareholders who collectively own corporations rarely take actions to oust CEOs or directors over perceived excesses. In fact, shareholders usually favor company policies in "say on pay" votes.
Some say-on-pay votes are binding and others are merely advisory. "But the consequences for companies and their boards are the same: No one wants to receive a failed vote on pay," wrote Matt Orsagh, a chartered financial analyst in a commentary for the CFA Institute. "A negative say-on-pay vote has the potential to adversely brand a company and its board in the minds of investors and the public at large."
Sprouts shareholders overwhelmingly approved the company's executive-compensation plan in an advisory vote this spring, with 99 percent of the votes in favor (excluding abstentions and nonvotes). Results for other large Arizona companies holding votes in recent months include Avnet (97.6 percent in favor), Republic Services (97.5 percent), Microchip Technology (96.9 percent), First Solar (84.9 percent) and Pinnacle West Capital (84 percent).
Twenty-one of 1,232 companies nationally garnered less than a 50 percent favorable vote on their pay packages so far this year, according to a May tally by Semler Brossy Consulting Group. No Arizona companies failed, although not all firms put their policies up for a vote — companies must do that once every three years.
The Securities and Exchange Commission, which regulates public companies, has taken various actions over the years to require more disclosure on executive pay, culminating in introduction of the Summary Compensation table in the early 1990s, with further refinements in the years since. Corporate boards also explain their policies in lengthy narratives.
The SEC from time to time issues new regulations designed to promote greater transparency and understanding by investors. In late April, it adopted a rule that will require companies to disclose the relationship between compensation paid to executives and a company's financial performance. This change will show up in corporate proxy reports in future years.
TOP 10 HIGHEST-PAID CEOS IN AMERICA
Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.
Arizona's 5 most highly compensated executives for 2014
J. Douglas Sanders, Sprouts Farmers Markets,$21.3 million
James Moffett, Freeport-McMoRan Inc., $15.1 million
Steve Sanghi, Microchip Technology, $14 million
Kevin Knight, Knight Transporation, $11.6 million
Amin Maredia, Sprouts Farmers Markets, $11.4 million