NEW YORK, United States – AMERICA’S top CEOs are set for a once-in-a-lifetime pay bonanza.

Most of them got their annual stock compensation early last year when the stock market was at a 12-year low. And companies doled out more stock and options than usual because grants from the previous year had fallen so much in value that many people thought they’d never be worth anything.

But stock prices have generally surged ever since. Even with last week’s sharp declines, CEOs still have enormous gains on paper.

“The dirty secret of 2009 is that CEOs were sitting on more wealth by the end of the year than they had accumulated in a long time,” says David Wise, who advises boards on executive compensation for the Hay Group, a management consulting firm.

An Associated Press analysis of companies in the Standard & Poor’s 500 index shows that 85 per cent of the stock options given to CEOs last year are now worth more than they were on the day they were granted. For some the value jumped by a factor of 10 or more. A year ago, after the stock market had collapsed, 90 per cent of the options granted in 2008 were worth less than the original estimate, or were considered “underwater”, according to the AP’s analysis.

Ford Motor Co CEO Alan Mulally’s pay package illustrates this point. In March 2009, Ford granted five million stock options to Mulally. Using a complex formula, Ford assigned the options an estimated value of US$5 million. At the time, Ford’s shares were trading at US$1.96. Since then, the stock has jumped nearly sixfold, and Mulally’s options have a value on paper of about US$48 million.

Mulally is also ahead on his 2008 options, which were valued at US$9 million when they were granted two years ago. Now, they’re worth close to US$21 million.

Mulally’s gains still exist only on paper, of course. The ultimate size of his payday will fall if Ford’s stock falters. But his gains could just as easily march even higher if Ford’s stock continues to rise. And they take the sting out of a 30 per cent salary cut and the lack of a bonus. A Ford spokesman said the structure of Mulally’s compensation means most of it is aligned with the interests of shareholders.

Overall, the AP analysis found that the median 2009 pay package for chief executives at companies in the Standard & Poor’s 500 index fell by about 11 per cent to US$7.2 million. That followed a seven per cent decline in 2008 in median pay. The median value is the midpoint in the AP sample, meaning half of the CEOs made more and half made less.

The total doesn’t take into account the increase in value on paper of the stock and the options executives received. The median pay only reflects the value that companies must assign to stock compensation when it is initially granted.

Stock compensation in 2009 accounted for 58 per cent of total pay for CEOs. Cash bonuses that CEOs received from meeting performance goals amounted to 20 per cent and salaries represented 14 per cent, with the rest from guaranteed cash bonuses and perks.

Other findings in the AP analysis:

* The highest-paid CEO in 2009 was Yahoo Inc’s Carol Bartz, who received a US$47.2-million compensation package during her first year on the job. Ninety per cent of her pay came from stock awards and options that were all granted around the time she was hired in the winter of 2009.

* No financial companies were in the AP’s top 10. Three were on the 2008 list. Citigroup Inc’s Vikram Pandit went from No 10 in 2008 to the third-lowest paid CEO in the AP analysis in 2009.

* The median value of performance-based cash bonuses rose 19 per cent, making it the fastest-growing component of executive pay in the AP sample. CEOs generally had to meet goals for profits and stock returns in 2009 to receive the bonuses. Some companies made that easy. In early 2009, as the stock market was still falling and the economy was in a deep recession, many companies lowered the bar on the benchmarks for profit and stock returns. As profits began to improve with the economy and the market rebounded, many executives easily beat the stripped-down goals.

The AP’s analysis found evidence that boards took some action amid a public outcry over executive pay following the financial meltdown and the onset of the Great Recession. The median amount CEOs received in perks fell by 15 per cent in 2009, as companies cut back on benefits such as the use of corporate jets for personal travel. And fewer CEOs got a guaranteed cash bonus.

“There were deliberate efforts by companies to take away things that could get them noticed,” says J Robert Brown, a professor of business law and corporate governance at the University of Denver and an expert on compensation issues. “No one likes being an outlier.”

Pandit’s pay for 2009 consisted of US$125,001 in salary and US$3,750 in the company-sponsored retirement benefits plan. Citigroup’s board said he earned a bonus for his work in 2009, but Pandit said he won’t take one until the company returns to profitability.

His compensation in 2008 was an estimated US$38 million, mainly because of a large grant of stock awards and options in January 2008 shortly after he became CEO. That stock compensation was granted when Citigroup’s stock traded around US$23 a share. Today, it trades around US$4 a share. Pandit still has time for Citigroup’s stock to rebound. His options don’t expire until 2018.

A few other CEOs, including General Electric Co’s Jeffrey Immelt, turned down bonuses. United States Steel Corp CEO John Surma took a salary cut and refused any stock compensation because of the difficult business climate.

But experts say those examples weren’t typical. “There have been gains chipping away at the sides, but the real fundamental changes still need to be made,” says Jesse Brill, chair of the website CompensationStandards.com and an expert on CEO pay.

Chief among those changes: Limiting how much wealth CEOs can accumulate through big grants of stock and options.

“The purpose of stock options was to create a nest egg that a CEO would receive after a successful career,” Brill says. “Once that number is big, there is no reason to keep adding to it. Additional grants do not provide additional motivation.”

The AP’s analysis looked at 320 companies in the S&P 500 that filed proxy statements with federal regulators between January 1 and April 30 and had the same CEO for the past two years. CEOs new to the job in 2009 were included on the AP’s highest-paid list but were not used in the year-over-year analysis.

Stock market data were provided to the AP by Capital IQ, a unit of Standard & Poor’s. The prices used in the analysis were as of the end of trading on May 7.

The AP formula captures how corporate boards value their executives’ pay packages. It adds up salary, bonuses, perks and the company’s estimate of the value of stock options and awards of restricted stock on the day they were granted. That value is intended to represent how much the executive could receive from exercising options in the future.

Consider this hypothetical example: An executive is granted options in 2009 to buy 300,000 shares at US$40 each. The company puts a value on the options of US$5 million. The options vest over three years, meaning in 2010 he can exercise 100,000 shares at US$40 each and the same in 2011 and 2012. As at most companies, the CEO has 10 years to exercise the options.

The CEO would only exercise his right to buy those options if the stock was trading above the exercise price. In 2013, the stock has risen to US$75 a share. The CEO decides to exercise all of the 300,000 options at US$40 a share for US$12 million. He then immediately sells at US$75 a share for US$22.5 million. His profit on those options: US$10.5 million.

The example shows that the initial value a company puts on an executive’s stock options, which is disclosed in company proxy statements and used in AP’s calculation of annual compensation, probably won’t be what the executive ultimately receives. In this hypothetical case, the initial value was US$5 million and the executive made US$10.5 million.

The AP analysis found that two-thirds of the stock compensation granted to CEOs was awarded in the first three months of 2009. That is the time of year when most boards typically make their annual compensation decisions, but in 2009 it happened as the market crumbled to a 12-year low. The Dow Jones industrial average bottomed out at 6,547 on March 9, 2009, the same day the S&P 500 index dropped to 676. Both were down more than 50 per cent from records set in October 2007.

“When the Dow hit 6,600, we didn’t know if it was going to 9,000 or 3,000 in the next three months. Boards and management were terrified,” says Ira Kay, one of the nation’s leading compensation consultants.

The fact that stock options awarded in early 2008 were so far underwater had a big effect on stock compensation that boards granted in early 2009. Some boards increased the amount of stock awards and options they gave CEOs, or granted special one-time awards.

“Everything was underwater,” Kay says. “Executive teams had not been paid. The boards were trying to keep executives as whole as possible.”

What no one knew was that the market would soon start a powerful rally. The Dow and S&P 500 have climbed about 60 per cent since March 2009. The gains have left executives poised to win big unless the stock market nosedives.

So how big will the bonanza be?

Here’s a clue: Last year, CEOs in the AP sample exercised options and had previous stock awards vest worth US$1.72 billion, according to data provided to the AP by compensation research firm Equilar. If the market doesn’t crater, as it did during the financial meltdown, the payouts will dwarf that total in the coming years.

“This shows you how executives are always taken care of,” says Lisa Lindsley, director of capital strategies at the American Federation of State, County and Municipal Employees, a labour group that is also an institutional shareholder with US$850 million in assets.