Howard Schultz is representative of a class of CEOs who have steered their companies through the worst of the recession and are reaping the rewards, helping drive up CEO pay overall, says pay expert.
Think of Howard Schultz’s 2010 compensation this way:
If he wanted to spend it all in one place, he could walk into the Starbucks at Westlake Avenue and Denny Way in Seattle and order not one, but two $4 grande skinny vanilla lattes for every man, woman and child in King and Snohomish counties.
And leave a $500,000 tip.
Schultz, Starbucks’ chairman, president, CEO and public face, was the Northwest’s best-paid executive for the second straight year, according to a survey conducted for The Seattle Times by executive-pay research firm Equilar.
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He earned more than $21.7 million, Starbucks reported, 45 percent more than in 2009.
The reason: Much of Schultz’s pay hinged on Starbucks’ financial performance. And Starbucks had its best year ever.
Schultz is widely credited with rebooting Starbucks after its revenues, profits — and mojo — sagged in 2007 and 2008. He celebrated the company’s turnaround in “Onward,” the memoir published earlier this year.
“Yes, it is possible to rise, fall, and rise again … ” Schultz wrote. “The raw feeling of accomplishing something that others did not think possible … is extremely gratifying.”
In November 2009 Starbucks’ compensation committee told Schultz he could earn anywhere from 24,000 to 476,000 shares of company stock in 2010. The actual payout would hinge solely on where the company’s earnings per share landed on a scale the panel constructed.
If earnings grew less than 9 percent, Schultz would get nothing. If they grew 28 percent or more, he’d get the maximum.
Starbucks’ earnings per share ended up skyrocketing a whopping 60 percent. Schultz maxed out.
Half those 476,000 shares vest this November, half in November 2012. In its proxy statement, Starbucks valued them at $10.5 million, based on the stock price in November 2009.
Depending on how Starbucks’ shares fare, they could be worth a lot more — or less — when they vest. Schultz got no stock in 2009.
He also received a $3.5 million cash bonus in 2010 — again, the maximum the compensation committee allowed — based on Starbucks’ earnings per share and operating income, which soared 65 percent.
The wide margins by which Schultz cleared the performance bar suggests Starbucks’ compensation committee didn’t set it high enough, said Doug Kilgore, executive director of the labor-oriented Worker Owner Council of Washington State.
Starbucks disagrees. Meaningful year-over-year growth in a “challenging economic environment” was required for Schultz to hit his incentive-pay targets, spokesman Alan Hilowitz said.
Schultz benefited because shareholders benefited, he added.
Schultz is representative of a class of CEOs who have steered their companies through the worst of the recession and now are reaping the rewards, helping drive up CEO pay overall, said Aaron Boyd, Equilar’s head of research.
“A lot of these are CEOs that survived the down years and have kind of made it through,” he said. “Many others didn’t.”
Schultz’s reported compensation, like that of most CEOs, is only an estimate — the amount he actually will realize depends largely on what happens to Starbucks’ stock.
For instance, those 476,000 not-yet-vested shares that the company awarded to Schultz and valued at $10.5 million in its proxy statement are worth closer to $18 million on paper now.
Same goes for the 610,000 stock options Starbucks awarded Schultz last year. Some won’t vest until November 2013.
The company valued the options at $6.2 million, using a complex formula the Securities and Exchange Commission has embraced. On paper, they’re worth more like $9.3 million now.
Schultz did net more than 24 million real dollars from old options he exercised in 2010. And he’s in a position to collect much more.
The 2.7 million options he was granted in late 2008 — when Starbucks’ stock price was nearing lows not seen since 2001 — have a value on paper of nearly $78 million now.
Half already have vested. The rest will vest within 18 months.
Here’s a look at the 2010 compensation of the next four best-paid Northwest CEOs:
Mark Parker, Nike
Parker’s total compensation jumped 84 percent, to more than $13 million, in 2010. And a majority of the extra dollars came in cash bonuses tied to company performance.
At the start of Nike’s fiscal year, for instance, the board’s compensation committee said Parker could earn a bonus ranging from $1 million to $3 million based on how much pretax income the company generated during the year.
For Parker to get the maximum payout, Nike’s income had to increase nearly 20 percent. It surpassed that easily, climbing nearly 29 percent. Parker had received no annual bonus the year before, when the Beaverton, Ore., company’s pretax income fell.
The CEO also was awarded a $1.45 million bonus last year based on the athletic shoe and apparel maker’s cumulative revenues and earnings per share between 2008 and 2010.
Nike’s compensation committee also gave Parker more stock options than in 2009. And it awarded him time-vested stock it valued at $3.5 million — $1.25 million more than the year before — in part to keep up with the grants its corporate peers were awarding, according to Nike’s proxy statement.
Parker collected an additional $7.3 million in 2010 by exercising options granted in previous years.
Appleton’s pay increased 20 percent, to $9.8 million. But without nearly $2.1 million in cash bonuses, he would have earned less.
No Micron executive got a bonus in fiscal 2009, the second straight year the Boise, Idaho, semiconductor producer lost money. Appleton’s base salary was slashed 20 percent early that year, and a few months later he took another 10 percent cut.
For 2010, Micron’s compensation committee decreed Appleton could earn a bonus of up to 150 percent of his pre-recession base salary if the company hit several short-term financial targets.
The panel put the most weight — and biggest payout — on a return to profitability, which Micron achieved. At the end of the year, Appleton pocketed a bonus of $1.28 million, 135 percent of his salary.
He also got a $428,000 supplemental bonus for “extraordinary achievement'” for the company’s financial turnaround, and a third, $380,000 bonus to reimburse him for the 2009 salary cuts, which were restored in mid-2010.
John McAdam, F5 Networks
Last year also was good to Seattle-based F5, which makes software and hardware for managing Internet applications. Revenue rose 35 percent, profit 65 percent, share price 162 percent.
McAdam, like other CEOs, reaped some of the rewards of his company’s success. His total pay jumped 79 percent, to $8.88 million.
McAdam got a 5 percent salary increase. His bonus, linked to revenue and earnings, was $285,000 more than he got in 2009.
But cash accounted for less than 10 percent of the $3.9 million in additional compensation McAdam received in 2010. The bulk of it came in the form of restricted stock that won’t completely vest for more than two years.
Some of that was based on company performance. But McAdam also got a special “retention award” of 25,000 shares, valued by the company at $2.2 million.
F5’s future hinges on keeping McAdam and other key executives, F5 said in its proxy statement in explaining the award: “The company’s success and higher industry profile increase the risk that other companies may attempt to recruit our key employees.”
Those shares don’t vest until August 2013. It’s unclear whether McAdam still must be at F5 then to claim them.
Donegan earned $7.75 million in 2010. But, at 12 percent, his raise was relatively modest.
Donegan’s performance-based bonus actually dropped, from $1.19 million to $828,000, because the Portland-based metal-parts manufacturer’s earnings per share and return on net assets both were lower on the scale Precision’s compensation committee established for calculating the award.
But Donegan was awarded stock options that Precision valued at $5.3 million, the second-largest such grant among all Northwest CEOs. And the company’s complex, SEC-certified guesstimate of what those options are worth — some won’t vest until 2014 — may well be conservative.
Their value hinges on what happens to Precision’s share price. It has climbed more than 50 percent since Donegan’s options were awarded in November 2009. Late last week they had a value, on paper, of more than $8.3 million.
Eric Pryne: 206-464-2231 or firstname.lastname@example.org
Susan Jouflas /
The Seattle Times