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Originally published June 25, 2011 at 9:55 PM | Page modified June 27, 2011 at 6:17 PM

CEO Pay | A 13% gain for Northwest CEOs in 2010 after 2 down years

Northwest CEO pay rose in 2010 after falling for the previous two years, according to a survey prepared for The Seattle Times by executive-pay research firm Equilar.

Seattle Times business reporter

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This stop-and-start economic recovery may not be a rising tide that lifts all boats.

But it's clearly lifting a few yachts.

Northwest CEO pay rose in 2010 after falling for the previous two years, according to a survey prepared for The Seattle Times by executive-pay research firm Equilar.

Starbucks Chairman, President and Chief Executive Officer Howard Schultz was the region's best-paid executive, for the second straight year. His reported compensation: more than $21.7 million.

The median pay of the top executives at 124 publicly traded companies headquartered in Washington, Oregon and Idaho was $1.34 million. That's a little higher than Equilar found in a similar survey in 2007, before the recession — although multiyear comparisons can be problematic because of CEO turnover.

Among CEOs on the job for all of 2009 and 2010, however, median pay rose 13 percent.

Seventy percent of those executives made more last year, after two years in which a majority saw their pay drop. More than a quarter got raises of at least 50 percent. The same was true across the country. Median CEO compensation at the nation's largest companies jumped 28 percent last year, according to another Equilar survey.

Their bank accounts swelled as high unemployment persisted and household income remained stagnant. The increases have given more ammunition to those who contend pay for top executives is out of control, a concern Congress acknowledged last year when it required companies to give shareholders an advisory "say on pay." But, while 2010 wasn't a good year for a lot of people, it was a very good year for many companies.

That's what drove the jump in CEO pay, for the most part. Many top executives got more because a big chunk of their compensation was linked to the company's financial performance.

Profits were up, sometimes in part because of downsizing and job cuts. Share prices were up, too; The Seattle Times index of Northwest stocks climbed more than 20 percent.

"When companies start to do better, you almost always see (CEO) pay go up," said Aaron Boyd, Equilar's head of research.

Seattle freight and logistics company Expeditors International of Washington, for instance, compensates its top executives almost exclusively with bonuses that are fixed percentages of the firm's annual operating income.

When income dropped 19 percent in 2009, so did Chairman and CEO Peter Rose's bonus. When income rebounded last year, Rose's bonus increased by $1.8 million.

Starbucks' Schultz earned 45 percent more last year than in 2009. Most of his raise stemmed directly from big jumps in the company's earnings per share and operating income.

Some performance awards were subjective. Weyerhaeuser, which made a profit last year after two years in the red, boosted President and CEO Daniel Fulton's pay 51 percent, mostly in the form of stock options and stock awards that vest in the future.

Those grants weren't tied to any specific measure of financial performance, however. Fulton got them for "superior performance" as measured against unquantified goals, as well as his leadership during a challenging time and other subjective factors, according to the company's proxy statement.

Weyerhaeuser has adopted more objective pay-for-performance standards for 2011, an approach most Northwest companies appear to rely on already. Many construct elaborate formulas early in their fiscal years that determine just how much incentive pay — if any — their CEOs will get.

Last year many hit the jackpot. Some examples:

• Nordstrom President Blake Nordstrom's annual bonus hinges mostly on the company's earnings before interest and taxes.

Early in 2010, the company's compensation committee decreed he would get about $262,000 if that measure of profitability grew at least 12 percent — but nothing if it fell below that level — and more for each fraction of a percentage point it exceeded the threshold.

Nordstrom's earnings before interest and taxes ended up climbing nearly 34 percent. Blake Nordstrom received a bonus of more than $2.1 million, nearly double his 2009 bonus. In 2008 he got no bonus at all.

• Bellevue embedded-systems developer Bsquare suspended its executive-bonus program in 2009, a year the company lost money. Last year Bsquare roared back to profitability, and its stock appreciated more than that of any other Northwest company.

President and CEO Brian Crowley's total pay nearly doubled, to $526,000. He collected a $95,000 cash bonus pegged mostly to the company's net income, and earned 50,000 shares of time-vested company stock when profits surpassed a target the compensation committee set partway through the year.

Those shares were valued at $156,000 when Bsquare awarded them last August. Now they're worth nearly twice that.

• Broadcaster Fisher Communications also lost money in 2009. President and CEO Colleen Brown took a voluntary 10 percent salary cut; the company's dismal financial performance ruled out any performance bonus.

Like Bsquare, Fisher bounced back in 2010. Brown's pay nearly doubled, to about $1.6 million, largely because of a cash bonus.

Early in the year Fisher's board gave Brown a target: She could earn an extra $226,000 if the company's earnings before interest, taxes, depreciation and amortization increased by 125 percent — more if that target were exceeded.

At year-end Fisher's earnings had climbed more than 300 percent. Brown earned a bonus that was double the target amount.

Setting targets

In retrospect, some experts say, the high payouts suggest that the performance targets companies set for rewarding their CEOs with extra cash, stock or options probably were too low.

Last year 80 percent of S&P 500 CEOs earned their target cash bonuses — sometimes much more — compared with just 54 percent in 2009, according to another Equilar survey.

"Any time you have 80 percent of CEOs hitting their targets, that suggests that for a lot of them the target was relatively easy to hit," Boyd said.

Companies based their 2010 performance goals on 2009 results, said Paul Hodgson, of Governance Metrics, another research firm, "and 2009 was a pretty terrible year for most companies." The targets might have looked ambitious from that perspective, he said, but a longer view would have shown they weren't that difficult to achieve.

If companies wanted to make incentive pay easier to earn, Hodgson said, they should have reduced the potential payouts.

Many targets probably were too conservative, agrees Doug Kilgore, executive director of the Worker Owner Council of Washington State — but consider the timing.

"Those targets were set at a time when the economy was still in the tank," said Kilgore, who monitors large Northwest companies on behalf of construction unions with large pension funds. "Nobody was sure if it would keep going down or flatten out or recover.

"When earnings and share prices recovered, it was an unexpected result. No one could have predicted it."

Objective performance standards can be rigorous — but they also can be manipulated to achieve a desired result, said Bruce Ellig, a retired Pfizer human-resources executive who now writes about compensation issues. "They're subject to too much game-playing," he said.

What's more, he and other experts say, in a year like 2010 it's hard to say how much of a company's improved performance can be attributed to its leaders, how much to broader economic and market trends.

To counteract those problems, Ellig said, more CEO incentive pay should be contingent instead on how companies fare in comparison with their peers and competitors.

Kilgore agreed. He pointed to Nordstrom, where Blake Nordstrom gets stock awards only if the company's total return to shareholders ranks in the top half of a group of companies that includes Abercrombie & Fitch, The Gap, J.C. Penney, Target and Tiffany.

But that's only a small part of Blake Nordstrom's incentive pay, Kilgore noted. And most companies haven't embraced the approach at all.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com

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