While CEOs have frequently come under fire for not acting in the interest of shareholders, this year’s study of top executive compensation finds that CEOs of the largest companies actually have a substantial amount of “skin in the game.”

Other key findings of The Conference Board report released today, which are part of a larger study that will be released early in 2008, include:

-The highest median total compensation ($3.9 million) is recorded in utilities, food and tobacco, and insurance industries, with construction a close fourth. Median CEO compensation was computed for 22 industry groupings. Total compensation is defined as the sum of annualized salary, bonus, nonequity incentive compensation, the reported grant date present value of options, the value of stock awards, the change in pension value, and all other compensation.

-While the highest median CEO total compensation is recorded in utilities and food and tobacco industries and the median CEO compensation in the insurance industry ranks third, the median CEO cash compensation (sum of annualized salary, bonus and nonequity incentive compensation) is highest in the insurance industry ($1.6 million).

-Not surprisingly, larger companies (in terms of revenue) compensate their CEOs at a higher level. But less obvious is the notably smaller portion of compensation that is delivered through salary for CEOs of larger companies. The smallest (in terms of revenue) 10% of companies deliver 57% of their total compensation in salary and the largest 10% of companies (in terms of revenue) deliver only 12.45% as salary. Inversely, the fraction of compensation delivered in the form of stock and stock options (both forms of “at-risk” compensation) increases as the revenue of the company increases.

There are several likely reasons for this mix of compensation elements. The million-dollar cap on corporate tax deductibility for elements of compensation not related to performance makes it relatively more costly to compensate executives in cash using traditional vehicles such as salary and bonuses above $1 million.

“Small companies could also rely more heavily on salary because, in general, the impact of CEO leadership (new products, marketing or processes) may be more immediate and thus effectively rewarded using shorter-term compensation,” state the authors.

More ‘Skin in the Game’

The relatively large portion of compensation in the form of stock and stock options delivered to CEOs of large companies can accumulate over time. This creates stock and option wealth in the company such that, at the median, chief executives of the largest companies have a surprising amount of “skin in the game,” holding many multiples of their salary in stock and stock options in the company.

Looking at CEOs of the smallest companies, the median chief executive is holding 11 times salary in stock and stock options (total holdings, vested and unvested). But, his/her CEO counterpart among the largest 10% of companies is holding more than 80 times salary in company stock and stock options.

“There is a lot of debate about how making chief executives feel at risk for the stock price will align their interests more closely with those of the shareholders,” notes the report. “Under this logic, big multiples are good—it should make the CEO think more like shareholders. This measure would suggest that a significant degree of alignment should have been achieved already, especially for the largest companies.”

The amount of “skin in the game” appears less dramatic if total holdings are looked at as a percentage of total compensation instead of as a multiple of salary, prompting the question: is salary the right denominator for measuring how much skin there is in the game? It is also important to note that the “wealth” measured here in terms of company stock does not capture other forms of wealth or holdings of any stock beyond that of the CEO’s company.

The authors add that although invested wealth in the company is not a form of current compensation, it is linked to the stock price performance of the company. Executives who have large stakes of wealth in the company have a link between their own wealth and the stock price performance of the company, providing financial incentives (beyond current compensation) to guide their company toward positive performance.

Setting the Context: Changes in the Regulatory Landscape

The Securities and Exchange Commission (SEC) released new rules relating to the disclosure of executive and director compensation which took effect for companies reporting on executive compensation in 2007. These rules were intended to give shareholders and other readers of proxy statements more clarity and consistency in viewing executive compensation data. They provide companies with more direction regarding the form and content for presenting executive and director compensation information including both narrative and tabular requirements to provide more information about the compensation committee’s activities and considerations.

In addition to the new Compensation Discussion and Analysis (CD&A) the SEC requires more extensive executive compensation disclosures. These cover three broad categories: current compensation, equity-related holdings that can be the source of future gains, and retirement plans and other post-employment compensation. They also align the reporting of stock awards in certain tables with their accounting treatment. To control for different considerations in preparing numbers, this report uses data from a number of areas from company proxy reports and concentrates on seven elements of compensation: salary, bonus, nonequity incentive compensation, stock, stock options, changes in pension, and other compensation for CEOs across different company size (revenue) groupings and industries.

[www.conference-board.org]