Top executives in the Buffalo Niagara region last year felt the sting from the growing push to link their pay to the performance of their company.
The median pay for the 57 highest-paid executives at the publicly traded companies in the Buffalo Niagara region slipped by 2.4 percent last year – the first decline in the 21 years that The Buffalo News has been tracking executive pay locally.
The culprit: Smaller bonuses and incentive pay, combined with less lucrative grants of stock options, which give top executives the chance to buy their company’s stock at a set price sometime during the next decade.
But even with the modest cut in their paychecks, local CEOs still are making out quite well for themselves, with a median pay package that’s worth $1.22 million after jumps of 22 percent in 2011 and 10 percent in 2010. It was the second straight year that the survey found the median total compensation for high-ranking local executives topped the $1 million mark.
The average worker in the Buffalo Niagara region is feeling the pinch on payday, too. The annual earnings of workers in the Buffalo Niagara region rose by just 0.8 percent during the 12 months that ended in September – not enough to keep pace with inflation – according to the U.S. Bureau of Labor Statistics.
Another measure of local worker compensation – average weekly wages in Erie County – fell by 3.6 percent to $786 a week from the third quarter of 2011 through the third quarter of 2012, the federal agency reported. With unemployment still running at an unusually high 7.7 percent during April and plenty of competition for every open position, workers have little leverage in negotiating wages.
The survey also shows there still is a yawning gap between what the typical worker makes and what the boss takes home. The median pay of the local executives last year was more than 29 times higher than the $41,600 that the average worker in the Buffalo Niagara region earned during the past year.
“It’s a different world,” said Jerry Newman, a University at Buffalo professor who studies local compensation trends.
Newman said the dip in CEO pay last year is a sign that companies are linking more of their top executives’ compensation to the overall performance of its business and its stock.
“The national trend is for a greater proportion of pay to be variable,” Newman said. “Western New York tends to be very blue-collar and blue-collar says earn your money. And earn your money means less fixed-pay and more variable-pay.”
As a result, CEO pay can vary quite a bit from year to year. Slightly less than half of the local executives included in the survey – 26 out of 57 – saw their total compensation jump by more than 10 percent last year. At the same time, a little more than two of every five executives – 24 out of 57 – earned less in 2012 than they did in 2011.
But the region’s cadre of highest-paid executives is growing. A total of 11 executives earned more than $3 million last year, led by David F. Smith, National Fuel’s chairman and former chief executive officer, whose total pay topped $7.5 million. A year ago, just six local executives topped the $3 million barrier. Sixteen – or more than a quarter of the 57 executives that were part of the survey – earned more than $2 million in total compensation. And for the second straight year, more than half of the local executives included in the survey – 34 in all – earned more than $1 million.
Even so, top executives in the Buffalo Niagara region don’t make nearly as much as their counterparts at much bigger companies across the country. The head of a typical large public company made $9.7 million in 2012, a 6.5 percent increase from a year earlier that was aided by a rising stock market, according to an analysis by the Associated Press.
Robert G. Wilmers’ $3.4 million pay package ranks 8th among local executives as chairman of M&T Bank – one of the nation’s 20 biggest financial institutions – but pales in comparison with the $26 million earned by Goldman Sachs Chief Executive Officer Lloyd Blankfein.
Wilmers earlier this year blasted his banking industry colleagues for their “astronomical” pay despite playing a key role in spawning the financial crisis that led to the Great Recession.
“For the average American, such salaries appear to be simply stratospheric – making possible a life-style which seems distant to Middle America – and naturally raises the question of why leaders at a handful of firms that have done so much damage to the economy and to the reputation of our industry continue to enjoy such lofty perks,” Wilmers wrote in his annual letter to shareholders.
Pay can vary
Top executives typically get a big part of their total compensation from so-called “incentive pay” programs that link their bonus payments to how well – or poorly – their company did in meeting certain performance targets during the previous year.
Hitting those targets, which can include goals for sales, profits and even cash flow, can pay off handsomely. But missing them can cost top executives hundreds of thousands of dollars in cash or stock payments that they might have reaped had the company done better.
Ecology & Environment’s top executives didn’t get any bonuses last year because the Lancaster-based environmental services firm’s profits plunged by 89 percent.
At Gibraltar Industries, the building products manufacturer’s long struggles with a slumping housing market took a big bite out of its top executives’ pay. While Brian J. Lipke, the company’s chief executive, stood to earn almost $2.1 million in total pay last year, his actual earnings were more than 17 percent lower because he missed out on stock worth nearly $360,000 when the total return on Gibraltar’s shares fell short of the gain in a benchmark small company stock index.
Timothy T. Tevens, Columbus McKinnon’s chief executive officer, missed out on a portion of his targeted incentive payment because of the struggles at the company’s forgings business in Tennessee, which was being restructured because of its poor performance.
And because Columbus McKinnon’s stock didn’t meet its performance target during the previous three years, Tevens and other top Columbus McKinnon executives were denied the stock payments that they originally had been granted three years earlier. Those stock payments typically make up 40 percent of the executives’ long-term incentive pay in any given year.
On the positive side, though, National Fuel’s Smith earned $2.25 million through the company’s incentive pay program as the Amherst energy company steadily expanded its natural gas drilling operations in the Marcellus Shale region of Pennsylvania.
“This list is a commentary on the lack of publicly traded companies headquartered in Western New York,” said Karen Merkel, a National Fuel spokeswoman.
“There is no commonality in the CEOs on this list either with respect to industry or size,” she said.
“Rather than compare the compensation of area CEOs, the true and accurate comparison should be among appropriate industry peers,” Merkel said. “If you were to compare the executive compensation packages of National Fuel with other integrated energy companies you would see that National Fuel’s compensation structure is in line with industry peers in the energy sector.”
Say on pay
Two years after the adoption of “say-on-pay” provisions that give shareholders a vote on the pay packages that top corporate executives receive, all of the companies in the Buffalo Niagara region have won shareholder approval of their compensation plans by wide margins. That mirrors a nationwide trend, where 93 percent of the “say-on-pay” provisions have passed with at least 70 percent of the vote, according to data compiled by Semler Brossy Consulting Group in Los Angeles.
But that doesn’t mean the votes haven’t had an impact. After Gibraltar’s pay plan was approved by 70 percent of its shareholders last year, the company discussed its compensation plans with eight of its biggest independent shareholders, leading to changes in the structure of its pay plans for this year that linked the pay of its top executives more closely with how the company’s stock fared and other internal investment metrics.
The same thing happened at National Fuel, where the company held discussions with a group of major shareholders after gaining just 70 percent of the vote in its “say-on-pay” ballot last year. A prominent shareholder advisory firm, Institutional Shareholder Services, opposed National Fuel’s executive compensation plan for the second straight year, arguing that there was a “pay for performance disconnect” in its pay practices. This year, National Fuel’s “say-on-pay” proposal won 83 percent of the vote.
Despite their lucrative stock- and performance-based pay, along with salary increases that averaged around 5 percent – more than double the inflation rate and more than five times the growth in the average worker’s annual earnings – CEOs also get a host of valuable perks that a typical worker can only dream of.
Computer Task Group, for instance, pays of CEO James R. Boldt’s long-term disability insurance. And while regular workers grapple with rising co-pays and reduced benefits on their ever-more-costly health insurance, CTG will reimburse its top executives for up to $10,000 in medical or dental expenses that aren’t covered by their insurance.
Cleveland BioLabs picked up three-quarters of the tab for the apartment that its president, Michael Fonstein, keeps in Buffalo and uses during the roughly two weeks per month that he travels here from his home outside Chicago. The company said paying for most of Fonstein’s apartment rent is in place of the hotel costs it otherwise would have to reimburse him for while he was in town.
Moving costs also can be hefty for high-ranking executives. Greatbatch Inc. shelled out nearly $550,000 to cover relocation expenses for three top executives, including nearly $146,000 for CEO Thomas J. Hook, who moved to suburban Dallas as part of the company’s decision last year to shift its headquarters to Texas.
First Niagara Financial Group paid more than $294,000 to Oliver Sommer, one of its executive vice presidents who is leaving his job in June, to cover relocation expenses and the taxes he had to pay in association with that move to New York.
For some highly paid executives, a significant portion of the pay that is reported as being earned last year doesn’t end up in their pockets right away. That’s because the pay reporting rules require companies to disclose changes in the value of pension benefits, and for executives with lucrative supplemental pension plans, those changes can be worth millions from one year to the next.
For Warren C. Johnson, who runs Moog Inc.’s aircraft group and ranked second on this year’s list of highly paid executives, the nearly $4 million increase in the value of his pension accounted for more than three-quarters of his reported pay, which totaled $5.17 million. Other Moog executives also saw big jumps in their calculated pension value, including a $2.7 million increase for CEO John R. Scannell, whose retirement benefits rose, in part, because of his promotion to chief executive and the higher salary that comes with the job.
Pension values also rose because Moog continues to grow and become more profitable. That leads to bigger bonuses for those top executives, who can use the biggest cash bonus during the most recent five year period in calculating their pension value.
Robert T. Brady, Moog’s executive chairman, said the requirement that changes in pension value be counted as compensation is misleading.
“First, you’ve got to live long enough to collect it,” Brady said. “Most of the big increase in pension value comes from changes in the discount rate. As the discount rate declines, the value of your pension increases.”
Smith, National Fuel’s executive chairman who stepped down as CEO last year, also saw the value of his pension benefits swell by $3.2 million last year, largely because his average earnings over the past five years, which are used to calculate his pension, have jumped as more years from his tenure as CEO are included in the calculation.
Excluding the change in pension value, Smith’s compensation fell by 9 percent last year, rather than rising by 8 percent when the retirement benefits are included. At Moog, Scannell’s total pay jumped by 19 percent following his promotion, as opposed to more than tripling when the pension benefits are factored in, while Johnson’s slipped by almost 2 percent, rather than quadrupling when the value of his pension is included.
Despite the fluctuations, supplemental pension plans are highly lucrative. Astronics, for instance, added two of its top local executives to its supplemental retirement plan last year, which could pay both of those officers as much as half of their average annual compensation over the three years leading up to their retirement. The present value of those benefits ranged from $1.1 million to more than $1.3 million.
Top executives who lose their job also don’t have to worry where their next paycheck is coming from.
Peter G. Humphrey lost his job as the top executive at Financial Institutions, the Warsaw company that runs Five Star Bank, leaving with nearly $475,000 in cash payments and his company car, valued at almost $43,000. He also has accumulated pension benefits that have a present value of more than $2.7 million.
Cynthia Rich lost her job as executive vice president at Evans Bancorp last August, but she didn’t just receive two weeks pay for every year she’d worked at the bank – a typical severance arrangement. Rich received $543,435 in severance payments – a sum equal to three times her highest base salary during her final three years at the bank. Her health insurance will be paid by the company for three years, and she will continue to receive a car allowance of $750 a month during that time.