A corporate superstar who runs one of the planet's best-known purveyors of caffeine and the head of a small, struggling Seattle biotech...
A corporate superstar who runs one of the planet’s best-known purveyors of caffeine and the head of a small, struggling Seattle biotech ranked one-two among Northwest CEOs in total pay in 2009.
Both giant Starbucks and tiny Cell Therapeutics awarded their top leaders millions of shares of company stock or stock options last year, pushing their total compensation to the top.
Starbucks Chairman, President and CEO Howard Schultz earned nearly $15 million, according to data compiled for The Seattle Times by Equilar, a California executive-compensation research firm. Cell Therapeutics CEO James Bianco was paid nearly $12.6 million.
But a closer look at the two CEOs’ pay packages illustrates just how tricky it is to get a handle on what executives really make, a hot-button issue in this era of bailouts, high unemployment and stagnant household incomes.
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The options Schultz got could be worth much more than the $12.4 million at which Starbucks valued them.
And Bianco, whose company has a market value about 2 percent that of Starbucks, may end up with much less than the $11.3 million estimated value of his stock awards.
Here’s the problem: Many executives get most of their compensation in stock or stock options. Schultz’s and Bianco’s equity awards accounted for well over 80 percent of their reported total pay.
But at the time stock options are awarded, there’s no way to know what they ultimately will be worth — recipients usually can’t exercise them for a year or more. The same goes for stock awards that don’t vest until months or years after they’re granted, or that vest only if performance goals are met.
In some cases the awards could be worthless.
Despite those uncertainties, the Securities and Exchange Commission requires companies to place a value on equity grants on the date they are given. Many firms employ complex formulas based on the stock’s historic volatility, the probability of different outcomes and other factors.
But, in the end, “it’s a guess,” said Aaron Boyd, Equilar’s head of research.
Here’s a look at the 2009 compensation of Schultz, Bianco and the next three best-paid Northwest CEOs:
Howard Schultz, Starbucks
After an eight-year hiatus, Schultz took back the reins at Starbucks in January 2008 amid concerns the coffee company had grown too fast and lost its soul.
As profits and sales fell, Starbucks closed stores and laid off workers. It announced partway through the fiscal year ending in September 2009 that Schultz would take almost no salary for the rest of the year. He spoke of “the shared sacrifice I want to make.”
But several months earlier, with Starbucks’ shares approaching lows not seen since 2001, the company’s board gave Schultz more options than it had awarded him in at least a decade — 2.7 million — at what in retrospect was a bargain-basement exercise price: $8.64 a share.
At the end of May, with Starbucks stock at $25.89, Schultz’s options package was worth a whopping $46.8 million, nearly quadruple the company’s estimate of its value when he got the options in November 2008.
“I would question why anybody needs to receive compensation at that level in order to be encouraged to do a good job,” said Doug Kilgore, executive director of the Worker Owner Council of Washington State, which monitors Northwest companies in which construction-union members have pension money invested.
Starbucks defends the award. The bulk of Schultz’s compensation hinged on increasing shareholder value, the company said, and that’s what he did.
All shareholders — not just Schultz — benefitted, Starbucks said.
Schultz hasn’t exercised any of his 2009 options — most haven’t vested yet. Last year he did exercise options granted in 1998 and 1999, netting more than $26 million, according to Starbucks’ proxy statement.
But options don’t always pay off so spectacularly. Most of the ones Starbucks awarded Schultz in 2005, 2006 and 2007, when he was chairman, are “underwater” now, with exercise prices higher than the company’s share price.
James Bianco, Cell Therapeutics
Cell Therapeutics’ co-founder and chief executive since 1992 got the largest raise of any Northwest CEO in 2009 — 736 percent.
At least on paper.
The company says it gave Bianco and other top executives large stock awards last year partly because it wanted to keep them. A big drop in CTI’s stock price — to 5 cents a share in March 2009 — had wiped out most of the value of the executives’ previous equity awards “and the retention and incentives values those awards were intended to convey,” the board’s compensation committee wrote.
More than $6 million of Bianco’s reported $11.3 million in equity compensation last year came in the form of fully vested stock he got in July and November as a reward for a big run-up in the company’s share price — it peaked at $2.10 last June.
Recently, however, it has plummeted again, partly because the Food and Drug Administration rebuffed the main cancer drug CTI was developing.
The stock ended May at 36 cents.
Executive Vice President Dan Eramian said Bianco’s awards were warranted — “definitely, if you were an investor who realized the 500 percent and 1,000 percent return.”
But Bianco, for the most part, didn’t cash in himself. The stock from those awards that he still holds is worth significantly less now than when it was granted.
What’s more, Bianco may never see up to $4.5 million — that’s 40 percent — of his reported 2009 equity compensation.
That’s the value accountants placed on stock awards that will vest only if the company, which has never made a profit, hits significant performance targets by the end of 2011 — drug approvals, tens of millions in annual sales, annual earnings of at least 5 cents a share, a stock price of at least $2.94.
Eramian said he couldn’t speculate on whether those goals will be achieved. It’s unlikely, said analyst David Miller of Seattle’s Biotech Stock Research, who follows CTI.
“The company has never got a drug of their own through the approval process,” he said, “and they’ve spent $1.4 billion.”
William Morrow, Clearwire
The Kirkland telecom hired the former CEO of giant California utility Pacific Gas & Electric on March 9, 2009, when its stock — and the overall stock market — were scraping bottom.
From a compensation standpoint, Morrow’s timing couldn’t have been much better.
He received total pay valued at $11.7 million in 2009. The bulk of that — about $9.8 million — was the value Clearwire placed on equity it awarded him as part of his signing package: 2 million shares of restricted stock, plus options to buy 2 million more shares.
But those valuations reflected Clearwire’s low share price at the time. By the end of May, less than 15 months later, the stock had risen 170 percent — and Morrow’s equity awards, most of which haven’t vested yet, had a value on paper of well over $20 million.
Morrow also received a $200,000 signing bonus, plus a $954,000 bonus for the company’s 2009 performance.
Clearwire defends Morrow’s compensation. Since he came aboard, it said, the company has doubled its subscriber base, increased revenue significantly and raised more than $4 billion in new capital.
The telecom has a history of paying its CEO well. Morrow’s predecessor ranked second among Northwest top executives in total compensation in both 2007 and 2008.
Steven Appleton, Micron Technology
Appleton’s total compensation slipped 1 percent last year, to $8.2 million, according to Equilar.
He and other top executives at the Boise semiconductor producer swallowed a 20 percent salary cut at the start of Micron’s fiscal year, a response to the recession. His salary was trimmed another 10 percent a few months later.
But, like other CEOs, Appleton’s 2009 pay may end up exceeding his 2008 package because the value of his stock and stock options has climbed.
Micron valued those equity awards at about $7.4 million when they were granted in October 2008, basing that valuation on the company’s stock at the time.
By the end of May Micron’s share price had more than doubled.
Mark Parker, Nike
Parker’s total compensation fell 7 percent to a little over $7.1 million last year, the athletic shoe and apparel maker reported.
While his base salary rose about 6 percent, his performance-based annual bonus plunged from nearly $2.7 million to $900,000 because Nike didn’t reach short-term financial goals.
Parker received stock and stock options Nike estimated at $4.56 million. But because the Beaverton, Ore., company’s fiscal year is different from most, the value of Parker’s awards hasn’t soared like those of some other Northwest CEOs.
Nike’s fiscal year runs not from January to December, but from June to May. So Parker got his equity awards for 2009 on July 18, 2008, eight months before the market hit bottom.
He received options to buy 135,000 shares at $58.20 — Nike’s closing price that day — with the last shares vesting in 2012. At the end of May, when Nike shares closed at $72.38, those options had a total value on paper of more than $1.9 million.
That’s nothing to sneeze at. But it’s actually less than the value Nike placed on the options in its proxy statement.
And if Nike had granted them in early March 2009, when its stock was trading below $40, Parker’s options would be worth several million more now.
Eric Pryne: 206-464-2231 or email@example.com