CEO Compensation

April 16, 2014

Here are two recent surveys of 2013 CEO compensation. Take your choice. The major difference between the two is that GMI counts as compensation that which is realized by the executive from sale of stock options in the current year, regardless of when those options were granted. Equilar only counts the value of options granted this year–i.e., the difference between the market price of the stock and the grant price at time of option issue.

GMI:  http://www3.gmiratings.com/home/2013/10/gmi-ratings-2013-ceo-pay-survey-reveals-ceo-pay-is-still-on-the-rise/

Equilar:  http://www.equilar.com/nytimes/the-new-york-times-100-highest-paid-ceos

GMI is an independent research providing firm, which does not do consulting for the firms they evaluate. In the 2012 Independent Research in Responsible Investment (IRRI) Survey conducted by Thomson Reuters Extel and SRI-CONNECT.com, GMI Ratings was named “The Best Independent Corporate Governance Research Provider.”

Equilar is a privately held company focusing on providing information on executive compensation, frequently cited in Bloomberg, BusinessWeek, The New York Times, Financial Times, the Wall Street Journal, and other business publications.  

I stipulate that both of these analyses are probably correct. The difference is easy to understand, clearly explained in their respective assumptions or methodologies. To illustrate the difference in their respective tallies, take the case of Tim Cook of Apple. Equilar shows Cook’s total comp at $4.3 million. This was his salary and bonus, and included only $175,000 of currently issued stock options. Presumably, his 2013 option grants were extended at a price very close to current market–so there is little “equity” at the time issued. Of course, it is hoped that there will be substantial equity in those options as the Apple stock price advances in the future.

GMI Ratings shows Cook’s total 2013 compensation as $143.8 million. All of the difference between these two reports is the amount of gain Cook realized in 2013, for options granted in the past.

Personally, I vote for the GMI approach. It seems a more appropriate measure of total comp. Between the end of 2012 and the end of 2013, Cook’s wealth (before taxes) increased, due to Apple, not by $4.3 million, but by $143.8 million. If we never count as compensation, year to year as we follow executive comp, that portion of his/her total wealth that is accumulated from the sale of options granted in past years, then we are not really properly evaluating total executive comp. Those gains are part of total comp. In fact, for the majority of CEO’s, that is the largest portion of total comp across their term as CEO.

The reality that executive comp is now structured in most publicly traded companies, such as to put the majority of it in potential stock option gains, is a very troublesome development. It means that the primary motivation of the CEO and his top staff is to do whatever they can to raise the stock price.  The timing of those stock price increases is also important for the CEO who wishes to cash out some of his options–thus motivating results at certain dates, vs. for the long term. Other critical actions important to the long term sustainability of the enterprise often have little impact on stock price, or even a negative impact–such as spending more time and money to achieve diversity in the workforce, raising the pay of the workforce, etc. 

Take a look at the views of Graef Crystal, one of the long time experts on CEO compensation: “It’s a rigged game. When the company’s stock goes up, says Crystal, the chief executive views himself as a hero. And when it goes down, ‘it’s Janet Yellen’s or Barack Obama’s fault'” (http://www.nytimes.com/2014/04/15/opinion/ceo-pay-goes-up-up-and-away.html?hp&rref=opinion&_r=0).

For these reasons, I would personally much prefer the previous system. I would prefer the Directors have the authority to make discretionary bonus decisions. These options packages are often of outrageous value and they do dilute the per share value of the company to common shareholders.

But for the most important point about CEO compensation, I don’t care which of the two approaches you use–you can ask yourself–is it right that Larry Ellison of Oracle was paid $78.4 million, using the Equilar approach? Or, is it right that Mark Zuckerberg was paid $2.3 billion, using the GMI Ratings approach. It seems doubtful to me that either is right.

In my judgment, both awards are likely well beyond what is necessary to compensate a highly effective CEO for either of those companies. Perhaps both Ellison and Zuckerberg are good leaders. But can anyone really believe that it is necessary to pay these amounts in order to attract and retain excellent leadership? Is there no excellent leader in the whole business world, who would take either of those jobs for $10 million, or maybe even just $5 million in annual compensation?

What other consideration can be appropriate to justify such payments?




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