Compensation moved up briskly last year for some CEOs involved with America’s largest LBO companies, especially for those whose companies’ fortunes improved during an economic recovery. Also for some whose didn’t.
CEO pay rose at all but two of the 10 companies in our study, sometimes by multiples of their 2009 compensation, when the economy was mired in a financial crisis (see tables, at right.)
At HCA Holdings Inc., for instance, salaries for Richard M. Bracken, the company’s chairman and chief executive officer, and R. Milton Johnson, an HCA executive vice president and its chief financial officer, remained unchanged from 2009, but the pair cashed in on “other compensation” in the lead-up to the IPO, with Bracken scoring $25 million (nearly a 10-fold increase in that column from the prior year) and Johnson doing nearly as well in percentage terms, taking in $16.5 million, according to an analysis by Buyouts of executive compensation data gathered from public filings by HCA and other sponsor-backed LBO giants.
At the IPO price of $30, HCA’s sponsors—
That’s the way the compensation structure is supposed to work, executive recruiters say. As a rule of thumb, performance-based compensation, such as bonuses and equity awards, typically range from 80 percent to 150 percent of base pay.
And while that is generally true of the portfolio companies in our study of executive compensation, the median salary for a CEO inched higher by 2.5 percent in 2010 to $989,992, and the cash bonus paid to that median CEO grew 2.5-fold to $3.6 million. Taking in the other forms of incentives, including stocks, options, non-equity incentives and other compensation, and total compensation for our median CEO came to more than $8.6 million, nearly nine times salary alone.
Of course, these multi-million dollar men (and they are almost all men; the only woman on our list is Kimberly A. Dang, vice president and chief financial officer at the idiosyncratic gas pipeline operator Kinder Morgan Inc., whose owners include
What, incidentally, makes Kinder Morgan so idiosyncratic? you might ask. It mainly has to do with Richard D. Kinder, chairman and chief executive officer, who co-founded the company in 1997 with William Morgan after both men left the energy giant Enron and bought its liquid pipeline properties. Kinder does not participate in any of the incentive programs that his company offers other executives, and he takes only $1 in annual salary. But he personally owns 216.5 million of his company’s Class A shares, 30.6 percent of the total, and he did not sell any of them when the company went public in February. That $2.9 billion IPO priced the shares at $30, meaning a $6.5 billion payday, on paper, for Mr. Kinder.
By far, however, the more common strategy is to combine a generous, if not extravagant, salary with an array of cash, stock, option and other incentives to align the interests of the executives with those of the company’s financial backers, and the regulatory filings often include extensive discussions of how these compensation packages are developed, often by comparisons to peer groups, with formulas that are frequently derived from comparisons to EBITDA targets. Unfortunately, these documents often do not report explicitly on their company’s EBITDA results. The tables on the following pages specify what measure of earnings we used for each company.
Stable Compensation Practices
While the companies in this study are uniformly from the halcyon days of the mid-decade buyout boom, the principles of executive pay have been pretty consistent, both before the boom and since the Great Recession that followed, according to Todd Monti, the managing partner of the global private equity and venture capital practice at the recruiting firm Heidrick & Struggles.
“I don’t think there has been any significant change in the way compensation is set,” Monti told Buyouts. “The only difference is the time frame today in which liquidity is monetized,” such as through markets for the secondary sales of private company stock.
In our compensation tables the companies are ranked according to their value at the time of the LBO. This list includes companies that have gone public again where the sponsors continue to have significant private equity ownership. It excludes deals such as real estate investment trusts, non-U.S. companies and companies that do not report to regulators on executive compensation.
Several of the biggest LBO targets went public again in 2011, but in most of those cases, the sponsor firms continue to retain significant stakes in those companies. The company’s status and sponsor stake is noted in the CEO compensation table.
One company that does report EBITDA is Energy Future Holding Corp. ( formerly TXU Corp.), the Texas electric and gas utility whose $44.4 billion LBO in 2007 still stands as the largest ever. While its adjusted EBITDA grew 7.9 percent to $5.2 billion, its revenue fell. Still, the owners—a group including
Energy Future Holding said the award was for Young’s success in leading the company in a difficult year, for saving $2 billion by renegotiating long term debt, and for operational and regulatory achievements. Buyouts, noting in April that the highly leveraged company had been downgraded by Moody’s Investors Service, was asking creditors to give it more time to pay back $20 billion and was potentially flirting with bankruptcy in the face of weak natural gas prices, said the deal could prove to be a “gargantuan failure for the Texas utility’s sponsors.”
On the other hand, sponsors are often willing to move aggressively to shake up management teams, even at the largest companies. First Data Corp., the giant payment processor taken private in September 2007 by KKR, Bain Capital and
With Forehand now approaching his one-year anniversary in the job, it is too soon to assess his performance. What we can say is that in the short run, the change was an expensive one; the three CEOs of First Data collectively received $23.3 million in total compensation in 2010, nearly triple the amount that Capellas alone earned in 2009. Judge earned $12.4 million, largely in the form of a bonus and stock options, for running the company in the fourth quarter.
Private sponsors in general are more able to move quickly to replace executives whom they consider to be underperforming, compared to the boards of public companies, said John Mitchell, the private equity practice leader at executive search firm Spencer Stuart. “It’s more difficult to max out (on compensation at a portfolio company) and not perform, versus public companies.”