By Dan Roberts in New York
The Financial Times
July 28 2004

Executive pay in the US is rising faster than previously thought, according to a new analysis which includes the value of cashed-in stock options.

Total compensation for chief executives at the top 500 companies rose 22.2 per cent in 2003, double the rise in the previous year, says the Corporate Library, an independent research firm.

The figure is by far the highest estimate calculated from this season's company disclosures and undermines claims that corporate governance reforms and pressure from investors are encouraging more restraint.

Previous research, largely carried out by industry compensation consultants, has put the average increase in 2003 at between 9.1 and 16.4 per cent.

Calculations of overall pay inflation can differ because of the variety of schemes in place for chief executives, ranging from pay and cash bonuses to share options and incentive grants.

The Corporate Library claims its analysis is the most comprehensive because it includes the cash value of share options exercised in any given year, instead of a nominal value for future options that were awarded.

Last year's stock market recovery encouraged many executives to cash in their options at the same time they received increased cash and stock incentives for performance, taking total compensation to record levels.

Paul Hodgson, who carried out the research, said his method gave the closest approximation to the total cash executives took home: "It shows that even after three not particularly good years, people can make enormous amounts from stock options."

The conclusions are far from academic. Compensation consultants have used lower numbers this year to argue that employers are bringing pay levels closer in line with company performance. Others claim that self-restraint has made attempts to force companies to expense stock options an unnecessary burden.

Instead, the Corporate Library analysis demonstrates that indiscriminate use of stock options in the past has generated enormous rewards for many executives.

"It might have been thought that, after three years, the almost constant criticism of excessive CEO pay levels would have started to have an effect," said Mr Hodgson. "But, despite a few scattered instances, 2003 is business as usual."

Increases of more than 1,000 per cent were found at four companies - Oracle, Apple Computers, Yahoo and Colgate-Palmolive - where large numbers of stock options were exercised or new awards of restricted stock were made.

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