When a 20% executive pay cut isn’t as painful as people might think

Air Products CEO John McGlade.
Air Products CEO John McGlade.
Image: Image courtesy of Air Products and Chemicals, Inc.
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Air Products & Chemicals got some press recently when it was held up as an example of corporate America’s renewed dedication to paying CEOs only if they perform.

The US industrial gas company’s chief, John E. McGlade, saw his pay cut 20%, including a whopping 65% decline in his annual bonus for the year. McGlade’s sin: Earnings fell short of the company’s goal.

It sounds like a big wallop, but the example also holds a lesson for anyone trying to make sense of executive pay at a time of high scrutiny. Looked at more broadly, McGlade’s haircut could be as little as 11% or 12%—less dramatic, if still noticeable.

The difference: which compensation you think really matters.

Companies and compensation consultants like to talk about “total direct compensation.” It translates roughly to cash and stock: salary, bonus, stock options and restricted shares. It’s what the executive gets to take home soon after the end of the year, and it’s easy to calculate.

By that measure, McGlade was taken out to the woodshed: His bonus was slashed to just shy of $900,000 from $2.55 million the prior year, as laid out in Air Products’ Dec. 12 proxy filing. His options and stock awards dropped by more than $500,000. Total direct compensation fell to almost $9.1 million, from $11.2 million.

But total direct compensation leaves out a big chunk of pay for a lot of executives, including McGlade. Chiefly, in McGlade’s case, his pension rose by $2.7 million last year—that’s the increase, not the total value, which reached more than $25.5 million.

Taking such other elements of pay into account can make a big difference—call it indirect compensation if you like, but a growing pension is another kind of pay. McGlade’s pension gains and a few other details, including perks and unusually high interest on some of his deferred compensation, worked out to a quarter (24%) of his total compensation last year.

This broader view shows that McGlade’s big bonus cut and stock trimming turns out to reflect about 11.6% of his total pay, which fell to just about $12 million from $13.5 million.

In a statement, an Air Products spokesman said the company ties executive pay to company performance, including earnings growth, return on capital and stock performance, and chalked up McGlade’s drop in 2012 pay to “economic trends and slow manufacturing growth.” The company also favors evaluating total direct compensation, rather than total pay, he said, because elements like pension gains are affected by factors that the company’s compensation committee doesn’t control, including interest rates and federal pension rules.

Either way, McGlade probably still noticed. But in terms of his total compensation, it’s not quite the haircut it seemed to be.