The executive compensation for many corporate and nonprofit top executives continued on an upward trajectory during 2018.
However, there could be a shift downward in 2019, as several corporations with significant Triad ties have had chief executive changes this year.
The Winston-Salem Journal takes a look each May at the compensation packages paid primarily in the previous year. The seventh-annual review includes 30 corporate and 12 nonprofit executives. Each executive made at least $191,000 in total compensation.
For corporate chief executives, stock and stock-option awards continued to be the major factor in their total compensation increases. Those awards represented just under 60% of the combined $233.9 million of those executives’ total compensation.
The review also includes top executives from four large not-for-profit healthcare systems and seven nonprofit community agencies.
The figures are based on annual company regulatory filings and most recent IRS filings for not-for-profit and nonprofits, the latter can be up to two years old.
Since Wake Forest Baptist Medical Center had a chief executive transition from Dr. John McConnell to Dr. Julie Ann Freischlag in May 2017, the compensation for both officials is included.
There was limited chief executive churn in 2018.
However, there already have been four chief executive departures or retirements this year involving Wells Fargo & Co, British American Tobacco Plc, Herbalife Nutrition Ltd. and Unifi Inc.
As such, those corporations’ chief executives are likely to make less than their predecessors since they will not have been in place as chief executive the entire year.
The chart also reflects a number of Triad-based companies being sold in the past three years, such as BAT purchasing Reynolds American Inc., F.N.B. Corp. buying Yadkin Financial Corp., Pinnacle National Financial Partners buying BNC Bancorp, First Horizon National Corp. buying Capital Bank Financial Corp. and United Technologies Corp acquiring Rockwell Collins Inc.
2018 millionaires aplenty
For 13 corporate and four not-for-profit executives, their base salary alone was enough to provide them with a millionaire’s compensation in 2017.
Topping the salary list was embattled Wells Fargo chief executive Timothy Sloan at $2.4 million. Sloan stepped down from his job March 28 amid mounting pressure from shareholders, consumer advocates and congressional leaders.
Incentive pay exceeded $1 million for 15 corporate and two not-for-profit executives, with a high of $7.6 million for FedEx Corp.’s Frederick Smith.
Yet, the chart continues to reflect decisions by corporate boards of directors to foremost reward top executives based on stock performance, rather than profits and revenue.
Corporate America made that shift during the depths of the 2008-11 economic downturn and the height of backlash against executive compensation.
As a result, stock and stock-option awards have become the top compensation category for 21 executives.
Those awards reflect what the company expects them to be worth over time, based on the company’s share price on the date of the award.
Although federal regulators require corporations to declare the value annually, executives typically are required to wait a specified amount of time — often one to three years — to receive those shares or exercise the options.
The prevailing theory is that executives will be more inclined to be prudent with shareholder value, potentially taking less risk, if their own compensation is weighted primarily toward share-price performance.
“When the awards are structured appropriately — set up in a way that rewards long-run, sustainable stock price appreciation and not an unsustainable short-term boost related to the illusion of improved short-term corporate earnings — they align the interests of executives with those of the shareholders,” said Tony Plath, a retired finance professor at UNC Charlotte.
“Both groups win when the stock price increases, providing the proper incentive to managers to work in the best interest of the shareholders,” Plath said.
If the stock awards are properly designed, the benefits received by the corporation will exceed the compensation that is offered to the executive, said Zagros Madjd-Sadjadi, an economics professor at Winston-Salem State University,
“Thus, if an executive increases the value of a company by $100 million over and above what would be expected if the executive had merely reached the benchmark that other companies in the industry have realized, it is not unreasonable that the executive might receive $50 million in deferred compensation since the benefits to the stockholders in terms of additional stock value exceed the costs of giving the stock grant.”
Madjd-Sadjadi said where some corporations have misfired is when the stock awards “are not properly designed.”
“This is why a superior method is to require corporate executives to own at least 1% of the company’s common stock and require them to purchase it with their own money and hold onto it for the entire time they are an executive.”
tops compensation list
The highest stock and stock-option award compensation, at just under $15 million, went to Jim Umpleby, Caterpillar Inc.’s chief executive.
Umpleby, unsurprisingly, topped the overall compensation chart with $27.29 million in compensation, up 94.4%.
The stock awards’ value rose in large part based on Caterpillar’s share price soaring following a drop in late 2016 and early 2017.
Douglas Parker, chief executive of American Airlines Group Inc., received nearly all of his compensation from stock-option awards valued at $11.94 million. In April 2015, American eliminated Parker’s annual salary and qualification for incentive pay in lieu of stock awards.
Also receiving at least $10 million in stock and stock-options awards were Wells Fargo’s Sloan ($14 million), United Technologies’ Greg Hayes ($12.04 million) and Lowes Cos. Inc.’s Marvin Ellison ($11.52 million).
For 17 corporate executives, their incentive pay and bonus exceeded their salary. The biggest gap was for executive chairman David Congdon at Old Dominion Freight Line Inc. at $630,108 in salary and $8.48 million in incentive and bonus pay. Greg Gantt, its chief executive, had $616,339 in salary and $3.79 million in incentive and bonus pay.
Controversial CEO pay ratios
Executive packages have been a hot-button issue in recent years, particularly as the gap between executive and rank-and-file pay continues to widen despite whether overall company financial performance was good or bad.
A Dodd-Frank Act rule requires corporations — for the first time with their 2017 proxy filings— to put a number and a ratio to the compensation gap between chief executives and their median employee salary. Median is defined as the middle value in a list of numbers.
For some corporations, particularly those that have a significant number, if not the bulk, of their employees working offshore, the pay ratio between the chief executive and median employee can seem miles apart.
Total compensation for Hanesbrands Inc. chief executive Gerald Evans Jr. was $8.83 million in 2018. Although Evans was paid $1.1 million in salary, the bulk of his compensation was $6.25 million in stock awards. Those awards are accounted for and payable over multiple years but must be declared annually.
By comparison, Hanesbrands reported to shareholders that the median annual employee compensation was $5,880 for its nearly 67,200 employees, of which about 88% work outside the U.S.
That means Evans’ pay ratio is $1,392 in total compensation for every $1 paid to a median employee, with Evans receiving $187 in salary for every $1 paid to a median employee.
Meanwhile, for Herbalife Nutrition Ltd., which also has a major international presence, its sizable U.S. employee base — including about 750 workers in Winston-Salem — reduced the pay-ratio gap for former chief executive Rich Goudis.
Goudis was paid $1 million in salary and $6.1 million in total compensation in 2018. That represented a total compensation ratio of $224 to $1 and salary ratio of $25.97 to $1 for a median employee with a $37,220 annual salary.
Comparisons are challenging
Executive-compensation comparisons can be a challenge for most not-for-profits and nonprofits because they declare those payments primarily in annual IRS filings.
For the 2018 chart, the compensation for the not-for-profit and nonprofit groups typically reflect 2017 totals reported in their Form 990 with the IRS. Some of the latest compensation figures may be as much as four years old for some local nonprofit agencies.
Carl Armato, chief executive and president of Novant Health Inc., received a 5.8% increase in salary during fiscal 2017 to $1.43 million. His incentive pay dropped 9.1% to $1.28 million. Armato’s total compensation fell 0.4% to $3.42 million.
The system said Novant’s executive team performed “in the top quartile nationally.”
“Novant Health’s goals focus on the quality and safety of healthcare, improving the patient experience, transforming to an electronic health record, financial stewardship and providing community benefits.”
Wake Forest Baptist Medical Center paid a combined $3.35 million in total compensation to its former and current chief executive in 2017, the system reported Wednesday.
Dr. John McConnell moved on May 1, 2017, from chief executive after nearly nine years to serve as executive director of Wake Forest Healthcare Ventures. McConnell’s total compensation was $2.15 million, down 6.5% from fiscal 2016.
The 2017 compensation of $1.2 million for Dr. Julie Ann Freischlag reflects from when she took over as chief executive on May 1, 2017. Freischlag became permanent dean of the medical school in February 2018 after serving as interim deal for seven months. Freischlag’s first full year of compensation as chief executive and medical school dean will not be reported until May 15, 2020.
Critics say hospital systems use their nonprofit status for tax advantages and public-relations purposes even as they pay corporate-level wages and benefits to top executives.
Wake Forest Baptist said the compensation for top executives is justified because academic medical centers “are very complex organizations that require a special set of skills and experience ... (that) takes proven talents possessed by a small group of health care executives.”
“Compensating executives, as we do all our employees, competitively and appropriately, is crucial to the success of Wake Forest Baptist and to northwest North Carolina,” the medical center said.
Dr. Roy Poses, a clinical associate professor of medicine at Brown University in Providence, R.I., and a former physician at three academic medical centers, writes a blog called “Health Care Renewal” in which he frequently tackles the issue of executive compensation.
“When health care organizations are asked to justify their executives’ compensation, they invoke the same talking points: that these payments are necessary to retain executives; that the executives are brilliant and doing extremely hard jobs; and the compensation is set by the market,” Poses said.
“All three points have been debunked, at least when used to justify the compensation of executives in big, for-profit companies.
“Yet rarely are the talking points challenged when used to justify hospital executives’ pay.”
The federal tax reform bill that went into effect in January 2018 may play a slowing role in not-for-profit and nonprofit executive-compensation increases, said Elliot Dinkin, president and chief executive of Cowden Associates, a Pittsburgh-based specialist in risk management and compensation plans.
The law imposes a 21% excise tax on nonprofit employers for salaries of more than $1 million.
Although it was aimed mostly as reining in higher education salaries, such as coaches and university chancellors, it also is projected to have an impact on not-for-profit hospitals nationwide.
“In an environment in which every dollar counts, nonprofit boards will need to justify that it is worthwhile to pay the additional excise tax rather than cut back on salary,” Dinkin said.
In regard to nonprofit executives, Madjd-Sadjadi said it is not surprising that their compensation is rising in tandem with corporate executives “since both nonprofits and for-profit entities are competing for the same talent.”
“Until we effectively ensure that executives face considerable downside risk, rather than the all-too-typical golden parachute, we are not going to have a proper alignment of incentives and the growing wealth gap in our society will only continue to increase.”