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The Top 10 Highest Paid CEOs of 2008: Pay hits the gas pedal as the economy hits the brakes

#1: Blackstone

2009 The Corporate Library LLC (877) 479 7500

Company Name CEO Name Industry Total Realized

Compensation Blackstone Group L.P. (The) Stephen

A. Schwarzman Financial Services $702,440,573

Oracle Corporation Lawrence J. Ellison Computer

Software $556,976,600

Occidental Petroleum Corporation Ray

R. Irani Petroleum & Coal

Extraction $222,639,705

Hess Corporation John B. Hess Petroleum

Products $159,566,940

Ultra Petroleum Corp. Michael D. Watford Petroleum & Coal


Chesapeake Energy Corporation Aubrey

K. McClendon Petroleum & Coal


XTO Energy Inc. Bob R. Simpson Petroleum & Coal


EOG Resources, Inc. Mark G. Papa Petroleum & Coal


Nabors Industries Ltd. Eugene M. Isenberg Petroleum & Coal

Services $79,333,079

Abercrombie & Fitch Co. Michael S. Jeffries Retail Apparel $71,795,744

Stephen Schwarzman, Chief Executive Officer and founder of Blackstone Group, L.P., was the highest paid CEO in the United States in 2008,

but he was hardly a blip on The Corporate Librarys CEO pay radar in 2007. With a salary of $175,000 and total realized compensation of $354,482, Mr. Schwarzman certainly didnt stack up against his financial services industry counterparts in terms of realized compensation. However, these pay figures represent only about a half year of earnings (and no equity) as The Blackstone Group only

completed

its

initial

public

offering

in

June

2007. Mr. Schwarzmans awards had no time to bear fruit.

In 2008, Mr. Schwarzman saw an increase in total realized compensation of more than 200,000percent. In addition to all

other compensation that rose from under $200,000 to nearly $2.3 million, there was also the vesting of $699,792,941 worth of Blackstone Holdings

Partnership Units, or 25 percent of the equity he was granted in 2007. Given that the other 75 percent of his $4.7 billion 2007 equity grant will vest in equal installments over the next four years, it is reasonably safe to assume that Mr.

Schwarzman will remain at the top of highest paid CEOs list, or close to it, for a few years to come.

As a pre IPO owner, much of the equity compensation received by Mr. Schwarzman is a redistribution of his initial investment in the company. Gains on top of this investment are derived mainly from the performance of the firms investment funds. Further, these carried interest payments are largely deferred for

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three years, are subject to a performance based clawback provision, and at least 25 percent of the shares must be retained. The entire compensation package, it should be noted, was decided not by a compensation committee but by Mr. Schwarzman himself, who under the NYSE listing standards for limited partnerships is permitted to determine both his own compensation and that of the other named executive officers.

#2: Oracle

The number two earner of 2008, Lawrence Ellison of Oracle Corporation, held the top spot

in 2007, when he realized compensation of nearly $193 million. Mr. Ellison, who had been Oracles CEO for the past 32 years, exercised 13.5 million stock options in 2007 for a profit of nearly $182 million; in 2008, he exceeded that feat by exercising a remarkable 36 million options for a profit of more than $543 million. (As a comparison, the CEO who exercised the next highest number of options in 2008 is #3

ranked CEO Ray R. Irani of Occidental Petroleum Corporation, who exercised 3,006,424 options.)

While Oracles stock price declined almost $5 from $22.58 at the end of 2007 to $17.73 at the close of 2008, Mr. Ellisons total realized compensation was still more than half a billion dollars. With stock option grants of this size, its easy for the sheer volume of the grants to recompense for the more than 20 percent decline in stock price. In addition, Mr. Ellison still has approximately 33.4 million stock options outstanding, including a grant of seven million options (with a grant date value of more than $71.3 million) from July 2007, since Oracle continues to use conventional time based stock

options instead of equity that is more performance restricted. Mr. Ellison also remains a wellprotected executive, with the company picking up the tab on $1.4 million in home security personnel costs (down from $1.7 million the previous year).

#3: Occidental Petroleum

Although the two top spots went to executives in financial services and software, on the whole the top ranks of CEO pay in 2008 can be summed up in a single word: petroleum. Seven of the top ten highest paid CEOs are from the oil industry. Occidental Petroleum Corporation

CEO Ray Irani, the third highest paid U.S. CEO, received total realized compensation of $222.6 million. Although he profited roughly $15 million less from the vesting of equity than in the previous year, Dr. Irani exercised just over three million stock options in 2008, profiting more than $184 million. Earnings that high require careful tax and financial services planning; in 2008, shareholders footed the bill

for $403,285 worth of such services for Dr. Irani. In addition, his employment agreement (amended in October 2008) stipulates that his annual cash bonus is to be determined at the reasonable discretion of the Board and its Compensation Committee. In 2008, that reasonable discretion awarded him $900,000, a sum paid in part due to exceptional performance in implementing a cost cutting

initiative in anticipation of a world wide economic deterioration. All told, Dr. Irani has received more than $4 million over the last three years in discretionary bonuses that were not justified in proxy statements by any concrete performance metrics.

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In January 2009, Occidental Petroleum announced that its board approved a 'say on pay' policy for shareholders, effective at the 2010 annual meeting. It will be interesting to see what messages investors send to the company about its pay practices, and whether they remain the same going forward.

#4: Hess Corporation

Hess Corporations John B. Hess, ranked #4 in CEO pay, was the only CEO in our coverage universe other than Dr. Irani who realized more than $100 million in profit from stock options and also earned more than $30 million from

vested stock. Between year end 2006 and year end 2008, Hess Corporations stock price first doubled, then fell almost to its previous levels (year end prices were $49.57, $100.86, and $53.64, at the ends of 2006, 2007, and 2008, respectively). With a steady stream of equity grants vesting during that time, including hundreds of thousands of options with strike prices under $20, Mr. Hess not only stood to

gain greatly from strong increases in stock price when the price of oil skyrocketed, but also to profit from even the most modest gains in stock value. The 186,000 stock options granted to Mr. Hess in February 2008 increased his number of unexercised options to more than one million, and in March 2008, he was also granted 124,000 shares of restricted stock worth almost $12 million. In the last two years

alone, Mr. Hess gained more than $191 million from option exercises and vested stock. Mr. Hess also received an 11 percent raise in his base salary for 2008 and is the only CEO among these seven petroleum industry heads to collect pension benefits from the company; the

value of his accumulated benefits was more than $27 million at the end of 2008.

#5: Ultra Petroleum Corp.

Number fiveranked Michael D. Watford of

Ultra Petroleum Corp. earned just $600,000 in base salary in 2008. Ninety seven percent of his 2008 total realized compensation of almost $117 million was in the form of profits made from exercising more than two million stock options. Mr. Watfords option profits should continue to increase in ensuing months; he has 500,000 options with a strike price of 25 cents that are almost ten years old and set to expire

in spring 2010 and another 500,000 options with a strike price of $1.49 that will expire the year after. Option grants for Mr. Watford have slowed over the last couple of years with the integration of more restricted stock into the compensation plan; however, he previously received 100,000 to 250,000 options annually for about a decade and by the end of 2005, already owned inthe money options worth

more than $240 million. In addition, as of December 31, 2008, Mr. Watford held about 63 percent of all common shares controlled by directors and officers.

#6: Chesapeake Energy Corporation

Aubrey K. McClendon of Chesapeake Energy Corporation, the sixth highest paid CEO in our sample, earned more than $114 million in realized compensation for 2008, including a bonus just shy of $80 million. This was the highest bonus received by any CEO in our coverage universe. Despite a 40 percent decline in stock price for 2008, the bonus was paid pursuant to the companys Founder Well Participation Program, in which Mr. McClendon


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acts as a working interest owner in new natural gas and oil wells explored by Chesapeake Energy. The bonus will most likely be invested into the drilling program at Chesapeake. In addition to the lucrative cofounder side deal, Mr. McClendon also received plenty of company equity. His restricted stock profits were more than $34.5 million in 2008, and he received additional restricted stock grants worth almost $33 million. However, his recently amended employment agreement actually reduced his required equity ownership after a forced liquidation of more than 30 million company shares in order to satisfy margin calls. The following is from an October 10, 2008 press release on Chesapeake Energys website:

Mr. McClendon commented, "I am very disappointed to have been required to sell substantially all of my shares of Chesapeake. These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis. In no way do

these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential. I have been the company's largest individual shareholder for the past three years and frequently purchased additional shares of stock on

margin as an expression of my complete confidence in the value of the company's

strategy and assets. My confidence in Chesapeake remains undiminished, and I look forward to rebuilding my ownership position in the company in the months and years ahead.

#7: XTO Energy

In his final year as CEO of XTO Energy Inc., number seven earner Bob R. Simpson received slightly more than $1.6 million in base salary, which exceeds the salaries of all other petroleum executives in this top ten list. Mr. Simpson also received a discretionary bonus of $30 million in 2008, which follows similar discretionary bonuses of $35.5 million and $31 million, respectively, over the prior two years. In awarding these bonuses, the company does not rely on hard targets or long term performance metrics vital to driving company growth. The company justifies them through reflection on areas of success it sustained over the year, such as stock price and operating results. In addition to the previously mentioned $96.5 million in discretionary bonuses Mr. Simpson has earned in the last three years, he has made more than $133 million in stock option profits over that time, $68 million of it in 2008 alone.

#8: EOG Resources Eighth ranked CEO Mark G. Papa of EOG Resources, Inc. earned slightly more in option profits than Mr. Simpson in 2008, about $69.6 million, despite exercising more than one million fewer options. This indicates that the stock price growth during the period or the profit per share was higher for EOG Resources

than for industry peer XTO Energy, enabling him to make more money on fewer stock options. Like Mr. Simpson, there is also a discretionary element to Mr. Papas pay, though his was in the form of a discretionary pool of stock options and restricted stock instead of cash. His restricted stock awards


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vested in the amount of more than $18 million in 2008, resulting in total realized compensation in excess of $90 million.

#9: Nabors Industries

Compensation in 2008 for the ninth highest paid CEO, Eugene M. Isenberg of Nabors Industries Ltd., is quite similar to that of Mr. McClendon of Chesapeake Energy. Both chiefs oversaw dramatic declines in stock price, with Nabors Industries down 56 percent from the prior year and Chesapeake Energy about 40 percent. Despite this fact, Mr. Isenberg and Mr. McClendon received by a significant margin the

two highest bonuses of all the CEOs in this group. Mr. Isenberg received a bonus just shy of $59 million, comprising 74 percent of his more than $79 million in total realized compensation. Like Mr. McClendons, this bonus is derived from rather favorable provisions in Mr. Isenbergs employment agreement that have been in place since he joined Nabors Industries in 1987. His bonus

formula, which awards him a percentage of company cash flow, has resulted in approximately $625 million in aggregate bonuses over the years, according to Nabors Industries most recent proxy statement. The provisions of this contract were recently amended, but as an inducement to enter into the amended document, the company is going to credit $600,000 to Mr. Isenbergs deferred

compensation plan at the end of every quarter beginning in June 2009 regardless of company performance. In addition to the bonus, the CEO realized profits just shy of $20 million from vested restricted stock and received two more restricted stock grants in February and December 2008, each with a grant date value in

excess of $28 million. His 2008 base salary also includes $50,000 in fees to serve as a director on the companys board, the annual retainer typically bestowed upon non employee directors.

#10: Abercrombie & Fitch

Finally, the tenth highest paid CEO of 2008 was the 17year veteran of Abercrombie & Fitch Co., Michael S. Jeffries. His total realized compensation was almost $72 million, of which 86 percent was comprised of profits earned from the exercise of options and from the vesting of restricted stock. Some of the vested

equity was replaced in the form of five separate stock appreciation rights (SARs) grants in December 2008, constituting 40 percent of the four million SARs he was to receive upon entering into a new employment agreement with Abercrombie. Also part of the agreement was a discretionary stay bonus of $6 million, awarded as a result of remaining in the companys employ as Chairman and CEO

through December 2008. The retention value of the award is questionable given his already strong equity ownership in Abercrombie plus his new 2008 equity grants. In addition to a $6 million stay bonus and base salary of $1.5 million, Mr. Jeffries also accrued more than $2 million in perquisites for the year. These included almost $1.3 million in personal aircraft usage and associated tax gross ups, as well as

$382,687 in company contributions towards Mr. Jeffries retirement in the form of 401(k), nonqualified savings and supplemental retirement plan payments.


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