For what it’s worth

Jim Rogers made more than $3 million in salary and bonus as chief executive of Cinergy Corp. in 2005, the year before the Cincinnati-based electric utility merged with Charlotte-based Duke Energy Corp. When he agreed to work for stock and options as Duke’s CEO last year, it made a good impression on shareholders but not his wife. “I can’t honestly say there wasn’t a comment from the other part of my team,” he admits.

Chances are, things will work out just fine for Team Rogers. Upon completion of the merger in April 2006, the company awarded him a stock-and-option package so big it made him the highest-paid CEO of the 75 largest public companies based in North Carolina. For the first time in four years, Bank of America Corp.’s Ken Lewis doesn’t top the list, compiled for Business North Carolina by the Charlotte office of human-resources consultant Findley Davies Inc.

That’s fitting because this year is one for breaking with tradition. At the direction of the U.S. Securities and Exchange Commission, most companies changed the way they report compensation; the rest will soon follow. That’s a step in the right direction, experts say, but it hasn’t ended debate over how best to set or evaluate CEO pay. “In compensation, there’s no absolute answer,” says Hank Federal, principal and market leader for Findley Davies’ Southeast compensation practice. The new requirements aim for one. Companies must tally CEO pay and report a total. But that number doesn’t represent what chief executives received, just what they cost the company during the year. The difference can be large. Duke, for example, reported that Rogers’ pay for the fiscal year that ended in December totaled $12.9 million. That’s not bad for nine months of work, but it underestimates what Duke actually gave him by more than $17 million, according to the pay formula BNC uses.

Most of Rogers’ compensation came from options that will vest over three years. Because their ultimate worth depends on stock fluctuations, there’s more than one way to value them. The SEC requires expensing options gradually during the vesting period, typically three to five years. Duke reported that the options for the 1.9 million shares cost it $4.7 million in 2006, but they could end up worth more or less to Rogers. By our estimate — using an equation that puts all CEOs on a level playing field — they are worth nearly $22 million.

The SEC method is designed to smooth out pay for CEOs that get big stock or option grants every few years. Rogers’ predecessor, Paul Anderson, represents an extreme case. After big grants in 2003 pushed him up to second on BNC’s annual ranking, he received no measurable compensation in the subsequent two years and fell to the bottom of the list. Under the new SEC rules, his annual changes in pay might have been less dramatic — but no more correct — than counting them in the year his stock and options were granted. “The good news is you can look at both,” says Robert Bushman, professor of accounting at UNC Chapel Hill’s Kenan-Flagler Business School. “If you feel like that smooth number is not what you really want to know, you can fix that.”

BNC and the SEC differ on another point: whether to include what the SEC calls “change in pension value and nonqualified deferred compensation earnings.” Our ranking doesn’t use the measure because it reflects changes in the value of income from previous periods. “If what he earns is a market rate of return, that’s not interesting,” Bushman says. “Why should I report a market rate of return? What I should report is if the company is paying him an extra-special return on that. I don’t think that column does a good job of separating those.”

The new rules prod companies to clarify and value perks under the heading of “all other compensation.” Use of corporate aircraft, car allowances, club memberships and company contributions to retirement plans are common among the larger companies. Rogers’ big-ticket item was $108,480 in legal and consulting fees that the company paid. But none of the companies with the 10 highest-paid Tar Heel CEOs reported outlandish fringe benefits. “I think some of the garbage has disappeared because people decided, ‘Well, do I really want to report that I’m giving my CEO this perk?’” Bushman says.

Companies are providing more analysis of executive pay. “We’ve gone from maybe five or six pages to 15 pages of narrative,” Federal says. But SEC Chairman Christopher Cox complained earlier this year that “the average Compensation Disclosure and Analysis section isn’t anywhere close to plain English. In fact, according to objective third-party testing, most of it’s as tough to read as a Ph.D. dissertation.“ Federal expects proxy statements to improve as companies get used to the new requirements.

By then, there might be a new king of compensation in North Carolina. If Rogers’ pay follows the trajectory of Anderson’s, it could drop significantly next year, according to BNC’s formula. That would leave the door open for some other CEO to claim the top spot. It might be Wachovia Corp.’s Ken Thompson, the perennial second-place finisher who earned more than Lewis this year but still finished second. Or it could be Lewis. Again.

Below is a partial breakdown of how companies are providing more analysis of executive pay.

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