Famous movie director Woody Allen once said, "Eighty percent of success is just showing up." Never was this truer than in the case of CEO compensation. It seems in recent years that all chief executives needed to do was show up, and they were assured millions in bonuses, short- and long-term. I'm not just talking about the worst offenders; it seems even the most efficient companies are guilty of pay without merit. To illustrate, I'll examine some of the compensation practices of companies on Forbes' list of CEO pay.

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Example One - Nucor Steel (NYSE: NUE)
Page 62 of the Nucor 2008 Annual Report has a graph that shows $100 in Nucor stock invested in 2003 was worth almost $400 at the end of 2008. This compares very favorably with the S&P 500, which doubled in value during this period, and the S&P Steel Group Index, which was flat. It goes on to tell investors that Nucor stock comprised 65% of the total value of its peer group in 2008, up from 41% at the end of 2003. Very few investors would argue with this kind of success; me included. But that doesn't mean Nucor executives should have carte blanche when it comes to compensation.
Annual Incentives
Page 21 of Nucor's 2008 DEF 14A describes the annual incentives available to executives based on two targets: Return on equity (ROE) and sales growth relative to the steel industry peer group, which includes smaller companies like Steel Dynamics (Nasdaq: STLD) and Gerdau Ameristeel (NYSE: GNA). If the company achieves an ROE above 20% in any given year, executives are entitled to 225% of their base salary. In 2008, Nucor's ROE was 26.7%, which entitles all eligible executives the maximum bonus related to ROE. In the case of CEO Daniel DiMicco, that's an additional $1.8 million on top of his annual salary of $800,000. The second incentive pays a maximum 75% of salary based on sales growth versus its peers. In 2008, Nucor's sales grew 42.6%, ranking it fourth among its peers, resulting in an additional payment of 45% of DiMicco's base salary. This works out to $360,000 and a grand total of $2.16 million or 270% of his base salary.

Call It What It Is
The amount doesn't bother me as much as how the figure is determined. In the past four years, Nucor's ROE has been as high as 34% in 2005 and as low as 28% in 2008. Yet, in that same four-year period, its cash return on invested capital has dropped from over 30% to 12.3%. All the while, DiMicco and his team have collected the maximum 225% annual incentive for meeting the 20% threshold. What's the point in calling this an incentive if the goal is not breaking the company into new territory and you're virtually guaranteed to receive it just for showing up? They might as well pay DiMicco $2.16 million in annual salary and avoid playing games with shareholders.

Example Two - Public Storage (NYSE: PSA)
Forbes ranks DiMicco sixth in terms of pay for performance. Public Storage's CEO Ronald Havner, Jr. is next in line at seventh. In 2008, Havner made $952,543 in salary. His total compensation, however, is something different altogether. The CEO was paid $17.7 million last year including $16 million in bonuses. It's a tad high when you consider Vornado Realty Trust's (NYSE: VNO) CEO, Steven Roth, earned $8.4 million. Over the past three years, Havner, Jr. earned $28 million to Roth's $20 million. We won't be having any tag days for either executive, but at least Roth's compensation is consistent, not to mention fairer. Public Storage essentially paid its CEO and CFO $22.5 million above-and-beyond their $1.6 million combined base salary in 2008 to sell-off 51% of a European subsidiary. These are roles you would consider part of their job description as the top two officers in the company. That's hardly efficient in my opinion.

Bottom Line
As an investor, I don't have a problem with compensation that rewards people for a job well done. That's expected in a capitalist system. What I do object to is the sense of entitlement that senior executives have regarding their compensation. In Nucor's case, it would be nice if the company were actually improving on the previous year's results before maxing out the annual incentives. As for Public Storage, I have a hard time imagining the CEO and CFO did all the work required for the Shurgard divestiture, justifying such a high payout for two specific people. I'm sure you could find at least one example from every company on Forbes' list, and that's without scratching the surface. Heck, it's only our money they're playing with. Do we really care? (For related reading, see Reining In CEO Rewards and Pages From The Bad CEO Playbook.)

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Tickers in this Article: NUE, STLD, GNA, PSA, VNO

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