NEW YORK (AP) — America’s top CEOs are set for a
once-in-a-lifetime pay bonanza.

Most of them got their annual stock compensation early last year
when the stock market was at a 12-year low. And companies doled out
more stock and options than usual because grants from the previous
year had fallen so much in value that many people thought they’d
never be worth anything.

But stock prices have generally surged ever since. Even with
last week’s sharp declines, CEOs still have enormous gains on
paper.

“The dirty secret of 2009 is that CEOs were sitting on more
wealth by the end of the year than they had accumulated in a long
time,” says David Wise, who advises boards on executive
compensation for the Hay Group, a management consulting firm.

An Associated Press analysis of companies in the Standard &
Poor’s 500 index shows that 85 percent of the stock options given
to CEOs last year are now worth more than they were on the day they
were granted. For some the value jumped by a factor of 10 or more.
A year ago, after the stock market had collapsed, 90 percent of the
options granted in 2008 were worth less than the original estimate,
or were considered “underwater,” according to the AP’s
analysis.

Ford Motor Co. CEO Alan Mulally’s pay package illustrates this
point. In March 2009, Ford granted 5 million stock options to
Mulally. Using a complex formula, Ford assigned the options an
estimated value of $5 million. At the time, Ford’s shares were
trading at $1.96. Since then, the stock has jumped nearly sixfold,
and Mulally’s options have a value on paper of about $48
million.

Mulally is also ahead on his 2008 options, which were valued at
$9 million when they were granted two years ago. Now, they’re worth
close to $21 million.

Mulally’s gains still exist only on paper, of course. The
ultimate size of his payday will fall if Ford’s stock falters. But
his gains could just as easily march even higher if Ford’s stock
continues to rise. And they take the sting out of a 30 percent
salary cut and the lack of a bonus. A Ford spokesman said the
structure of Mulally’s compensation means most of it is aligned
with the interests of shareholders.

Overall, the AP analysis found that the median 2009 pay package
for chief executives at companies in the Standard & Poor’s 500
index fell by about 11 percent to $7.2 million. That followed a 7
percent decline in 2008 in median pay. The median value is the
midpoint in the AP sample, meaning half of the CEOs made more and
half made less.

The total doesn’t take into account the increase in value on
paper of the stock and the options executives received. The median
pay only reflects the value that companies must assign to stock
compensation when it is initially granted.

Stock compensation in 2009 accounted for 58 percent of total pay
for CEOs. Cash bonuses that CEOs received from meeting performance
goals amounted to 20 percent and salaries represented 14 percent,
with the rest from guaranteed cash bonuses and perks.

Other findings in the AP analysis:

— The highest-paid CEO in 2009 was Yahoo Inc.’s Carol Bartz, who
received a $47.2 million compensation package during her first year
on the job. Ninety percent of her pay came from stock awards and
options that were all granted around the time she was hired in the
winter of 2009.

— No financial companies were in the AP’s top 10. Three were on
the 2008 list. Citigroup Inc.’s Vikram Pandit went from No. 10 in
2008 to the third-lowest paid CEO in the AP analysis in 2009.

— The median value of performance-based cash bonuses rose 19
percent, making it the fastest-growing component of executive pay
in the AP sample. CEOs generally had to meet goals for profits and
stock returns in 2009 to receive the bonuses. Some companies made
that easy. In early 2009, as the stock market was still falling and
the economy was in a deep recession, many companies lowered the bar
on the benchmarks for profit and stock returns. As profits began to
improve with the economy and the market rebounded, many executives
easily beat the stripped-down goals.

___

The AP’s analysis found evidence that boards took some action
amid a public outcry over executive pay following the financial
meltdown and the onset of the Great Recession. The median amount
CEOs received in perks fell by 15 percent in 2009, as companies cut
back on benefits such as the use of corporate jets for personal
travel. And fewer CEOs got a guaranteed cash bonus.

“There were deliberate efforts by companies to take away things
that could get them noticed,” says J. Robert Brown, a professor of
business law and corporate governance at the University of Denver
and an expert on compensation issues. “No one likes being an
outlier.”

Pandit’s pay for 2009 consisted of $125,001 in salary and $3,750
in the company-sponsored retirement benefits plan. Citigroup’s
board said he earned a bonus for his work in 2009, but Pandit said
he won’t take one until the company returns to profitability.

His compensation in 2008 was an estimated $38 million, mainly
because of a large grant of stock awards and options in January
2008 shortly after he became CEO. That stock compensation was
granted when Citigroup’s stock traded around $23 a share. Today, it
trades around $4 a share. Pandit still has time for Citigroup’s
stock to rebound. His options don’t expire until 2018.

A few other CEOs, including General Electric Co.’s Jeffrey
Immelt, turned down bonuses. United States Steel Corp. CEO John
Surma took a salary cut and refused any stock compensation because
of the difficult business climate.

But experts say those examples weren’t typical. “There have been
gains chipping away at the sides, but the real fundamental changes
still need to be made,” says Jesse Brill, chair of the website
CompensationStandards.com and an expert on CEO pay.

Chief among those changes: Limiting how much wealth CEOs can
accumulate through big grants of stock and options.

“The purpose of stock options was to create a nest egg that a
CEO would receive after a successful career,” Brill says. “Once
that number is big, there is no reason to keep adding to it.
Additional grants do not provide additional motivation.”

___

The AP’s analysis looked at 320 companies in the S&P 500
that filed proxy statements with federal regulators between Jan. 1
and April 30 and had the same CEO for the past two years. CEOs new
to the job in 2009 were included on the AP’s highest-paid list but
were not used in the year-over-year analysis.

Stock market data were provided to the AP by Capital IQ, a unit
of Standard & Poor’s. The prices used in the analysis were as
of the end of trading on May 7.

The AP formula captures how corporate boards value their
executives’ pay packages. It adds up salary, bonuses, perks and the
company’s estimate of the value of stock options and awards of
restricted stock on the day they were granted. That value is
intended to represent how much the executive could receive from
exercising options in the future.

Consider this hypothetical example: An executive is granted
options in 2009 to buy 300,000 shares at $40 each. The company puts
a value on the options of $5 million. The options vest over three
years, meaning in 2010 he can exercise 100,000 shares at $40 each
and the same in 2011 and 2012. As at most companies, the CEO has 10
years to exercise the options.

The CEO would only exercise his right to buy those options if
the stock was trading above the exercise price. In 2013, the stock
has risen to $75 a share. The CEO decides to exercise all of the
300,000 options at $40 a share for $12 million. He then immediately
sells at $75 a share for $22.5 million. His profit on those
options: $10.5 million.

The example shows that the initial value a company puts on an
executive’s stock options, which is disclosed in company proxy
statements and used in AP’s calculation of annual compensation,
probably won’t be what the executive ultimately receives. In this
hypothetical case, the initial value was $5 million and the
executive made $10.5 million.

The AP analysis found that two-thirds of the stock compensation
granted to CEOs was awarded in the first three months of 2009. That
is the time of year when most boards typically make their annual
compensation decisions, but in 2009 it happened as the market
crumbled to a 12-year low. The Dow Jones industrial average
bottomed out at 6,547 on March 9, 2009, the same day the S&P
500 index dropped to 676. Both were down more than 50 percent from
records set in October 2007.

“When the Dow hit 6,600, we didn’t know if it was going to 9,000
or 3,000 in the next three months. Boards and management were
terrified,” says Ira Kay, one of the nation’s leading compensation
consultants.

The fact that stock options awarded in early 2008 were so far
underwater had a big effect on stock compensation that boards
granted in early 2009. Some boards increased the amount of stock
awards and options they gave CEOs, or granted special one-time
awards.

“Everything was underwater,” Kay says. “Executive teams had not
been paid. The boards were trying to keep executives as whole as
possible.”

What no one knew was that the market would soon start a powerful
rally. The Dow and S&P 500 have climbed about 60 percent since
March 2009. The gains have left executives poised to win big unless
the stock market nosedives.

So how big will the bonanza be?

Here’s a clue: Last year, CEOs in the AP sample exercised
options and had previous stock awards vest worth $1.72 billion,
according to data provided to the AP by compensation research firm Equilar. If the market doesn’t
crater, as it did during the financial meltdown, the payouts will
dwarf that total in the coming years.

“This shows you how executives are always taken care of,” says
Lisa Lindsley, director of capital strategies at the American
Federation of State, County and Municipal Employees, a labor group
that is also an institutional shareholder with $850 million in
assets.