Pay Cuts Hit CEOs

They’re still rich—but the pressure’s on to earn it.

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Everybody would love to be paid like a CEO—except the job may not be quite as lucrative as it used to be.

Several prominent CEOs have had their pay whacked recently as a consequence of weak performance or other problems at their companies. The latest skydiver is J.C. Penney CEO Ron Johnson, who forfeited his entire 2012 bonus on account of plunging sales at the retailer and a 44 percent slide in the stock price. He still collected about $1.9 million in total compensation last year, but that was a 96 percent drop from the $50 million or so he reaped in 2012.

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Chevron cut the 2012 bonuses paid to CEO John Watson and four other executives by 6 to 16 percent. Sears and Newell Rubbermaid recently revealed their CEOs endured sharp pay cuts in 2012. Even Wall Street is slashing pay. Morgan Stanley CEO James Gorman earned 25 percent less in 2012 than the year before, and J.P. Morgan Chase CEO Jamie Dimon had his pay cut by 50 percent, to $11.5 million, following the "London Whale" debacle that cost his bank more than $6 billion.

Complete data for CEO pay in 2012 won't be available for a couple of months, but it's no secret that until now, chief executives have been largely immune from the flat or falling pay millions of U.S. household have had to contend with. The latest available figures show median household income fell by 8 percent from 2007 to 2011. During the same time, total pay for big-company CEOs rose by about 14 percent, according to Equilar, an executive compensation data firm. Median pay for big-company CEOs was $9.6 million in 2011, but that may have been the high-water mark.

"We're not seeing pay going down, but it's certainly leveling out," says Aaron Boyd, director of research at Equilar. "The big trend is that CEO pay is becoming more aligned with performance, in the interest of shareholders."

That's not an accident. The Dodd-Frank reforms that became law in 2010 included a new "say on pay" rule requiring public companies to allow shareholders to vote on the pay packages for top executives. The votes aren't binding, but they've become a way for activist shareholders to shame executives they feel are overpaid and perhaps draw additional scrutiny to their performance.

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"Companies don't want to fail the vote," says Boyd. "Even if you pass, but get less than 70 or 80 percent of the vote, that's not a great result."

Many companies have also been embarrassed by excessive perks for top executives, such as the corporate jets the chiefs of General Motors, Ford and Chrysler flew to Washington in December 2008, when they appeared before Congress to lobby for aid to their industry. New limits have been put on those types of bennies, which typically count as compensation. Even more dubious perks, such as "tax gross-ups" that basically amount to firms paying the tax bill associated with certain types of CEO compensation, have been eliminated at many companies.

Boards of directors, long castigated at many firms for merely rubber-stamping whatever the CEO wanted, have also become more alert—sometimes ending up in the crosshairs themselves. Raymond Lane, chairman of Hewlett-Packard's board, recently resigned amid shareholder outrage over the botched 2011 acquisition of software firm Autonomy and other problems at the struggling tech giant.

CEOs certainly have no need to hold out a tin cup. The AFL-CIO points out that CEO pay in 2011 was 380 times the average worker's pay, nearly 9 times larger than the gap in 1980. CEOs have also benefited directly from the stock-market boom of the last four years, since the majority of company stocks tend to rise when the market overall is going up. For ordinary workers, it's harder to cash in on a bull market, especially if you lack the savings to invest.

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By the same token, it's worth noting that CEO pay is likely to fall during a bear market, which is what happened in 2008 and 2009. But don't worry—they've more than recouped their losses.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.