Paying Steep CEO Salaries For Flat Share Price Performance

By Glenn Curtis | January 22, 2007 AAA

According to the U.S. Census Bureau, in 2004 the median household income in the United States was about $43,000. That equates to $117.81 a day, or $4.91 an hour for every hour of the day.

That's what's considered "normal".

Now consider the severance packages that some of these big name execs are getting, and what they are raking in during one year.

For example, when Home Depot's (HD) chief exec Bob Nardelli recently resigned, his door prize included $20 million in cash, the acceleration of unvested stock grants valued at $77 million, about $9 million in long-term incentive awards, retirement benefits valued at $32 million and a variety of other perks.

His total take? About $210 million. That equates to about $95,000 for each day (over roughly six years), and more than $3,900 per hour he was on the job. Not bad for a guy that presided over an essentially flat stock price!

Of course, Nardelli's pay package wasn't some sort of isolated event. Corporate America is flush with excess. Consider that:

Carly Fiorina, who worked at Hewlett-Packard (HPQ) for about 5 ½ years, netted a $21.38 million payout, which equates to $10,459 a day, or $435.83 an hour.

Philip Purcell, Morgan Stanley's (MS) ex chief exec raked in $43 million upon "retiring". That equates to about $14,726 a day over his eight years with the company (counting from when Morgan Stanley and Dean Witter merged), or roughly $613 per hour.

Jill Barad, Mattel's (MAT) chief executive landed $50 million upon her termination. That comes out to about $45,000 for every day she was at the helm. That's $1,902 an hour.

Viacom's (VIA) president, Mel Karmazin took in $35 million when he quit in June, 2004. His parting gift equates to about $23,972 for every day on the job, or $998 per hour.

Then there's Michael Ovitz, Disney's (DIS) ex president. Ovitz scored a $138 million golden parachute after just 14 months on the job. His total take equates to a mind-blowing $324,705 a day, or $13,529 an hour.

Still, some will say, "So what? They're worth it".

Oh really?

Fiorina will forever be linked with her company's corporate spying scandal. Purcell for nasty infighting with Morgan Stanley's board, and reaping a 45% increase while his firm's profits grew at about half that rate. Barad for presiding over a 50% plus decline in her company's share price. Karmazin for his well reported disagreements with Sumner Redstone, the lackluster stock price performance under his tenure and the persistent weakness of the company's Infinity radio division. Even Ovitz during his short time with Disney received a great deal of scrutiny for his inability to revive his company's struggling stock.

Of course to be fair, sometimes paying big bucks for a chief exec does pay off. Jack Welch is a terrific example. After all, he garnered a large majority of his estimated $720 million net worth heading up General Electric (GE). However, during his tenure he can also proudly point to the fact that GE's market capitalization increased by some $400 billion. So at least you can argue that he earned it.

Still, I prefer to look at Warren Buffett as an example. Heading up Berkshire Hathaway (BRK.A) he takes home an annual salary of just $100,000 a year and has lived in the same modest house that he bought in Omaha roughly 40 years ago for $31,500. Had you invested $10,000 in Berkshire in 1965 when Buffett took the helm, your bankroll would have grown to about $50 million.

The big lesson here folks is that paying up for a big name CEO rarely makes sense. Instead, look for companies that are run by individuals that either have money of their own (and work because they love it), or who have worked their way up through the ranks and have ample incentive to actually earn the big bucks.

When it comes to determining whether or not a CEO indeed has sufficient compensation incentives in place to truly work towards generating wealth for shareholders, this is no easy task. Executive pay packages can be quite complex, but it's in your interest as an investor to put in the time understanding you CEO's pay package (consider reading Lifting the Lid on CEO Compensation for a refresher on sizing up the incentives at work in an executive's compensation scheme).

As far as I can tell, the bottom line is that steep executive compensation seems to generate little more than flat share price performance.

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