The most overpaid CEOs in America - MSN Money
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Company Focus 6/6/2007 12:01 AM ET
The most overpaid CEOs in America
Executive compensation continues to soar, even for many CEOs whose job performance has been terrible. These five companies paid the most to CEOS while their stocks did little for shareholders.
By Michael Brush I have a friend living in Harlem who works at a clothing shop in midtown Manhattan several days a week to help pay her way through college. When she hustles on the job, has a little luck and "makes her numbers" for the month, she'll get an extra $100 bonus on top of the $850 she earns in the $8.50-an-hour job. If not, she has trouble paying her bills. Now let's contrast her situation with that of another New Yorker, Richard Parsons, who works just a few blocks away as chief executive and chairman of Time Warner (TWX, news, msgs). Granted, his job is much more complex than working at a clothing shop. But no matter how you slice it, one of the main tasks Time Warner shareholders pay him for is to "make his numbers" -- so that the stock goes up and they are rewarded. At this job, Parsons has failed badly. He has been CEO since May 16, 2002, during which time the stock has advanced 16%, compared with a 44% gain for the S&P 500 index ($INX). Time Warner stock also lost 31% in the five years ending in December, 2006. And yet, despite having "missed his numbers" big time -- at least from a shareholder perspective -- Parsons has collected a juicy cash bonus of $7.5 million to $8.5 million in each of the past four years. Minus taxes, the $32 million in bonus for 2003-2006 that Time Warner's board has lavished on Parsons -- even though he let shareholders down -- would cover four years worth of state-school tuition for about a thousand students. Throw in other compensation, and Parsons has collected a whopping $53 million in the five years ending May 31, even though shareholders only saw gains of 17%, compared with S&P 500 gains of 43%. Is there any way to look at the stark contrasts in details of how these two New Yorkers are rewarded for doing their jobs and believe structure of pay in this country is fair anymore? I don't think so. But this is more than just the story of two people in Manhattan.
Raising the maximum wage
While average pay for CEOs at 350 of the biggest companies examined by Mercer Human Resource Consulting jumped 8.9% last year to $6.5 million, the federal minimum wage hasn't budged in 10 years. It's still at $5.15 an hour -- although under new legislation, it is set to begin rising on July 24 in the first of three scheduled hikes. Anyone working for minimum wage at the $5.15 rate has earned $10,300 a year, assuming two weeks of vacation. Last year, on average, CEOs at big companies earned 110 times the 2005 average household income, which was $58,700, according to the Bureau of Labor Statistics.
Video: CEO pay and performance
Even more troubling, this is the story of corporate boards out of control, unable to limit CEO pay or link pay to performance. Despite a public outcry against excessive CEO pay, compensation packages keep ballooning, even for the top brass who are failing shareholders on their jobs. We get a fresh glimpse of the extreme cases of excessive pay for failure in the corner office this spring now that the proxies are in and they've been analyzed by pay experts like Paul Hodgson at the Corporate Library. Here's a list of Hodgson's most-overpaid CEOs:
Company Dell (DELL, news, msgs), Eli Lilly (LLY, news, msgs) Ford Motor (F, news, msgs) Time Warner (TWX, news, msgs) Wal-Mart Stores (WMT, news, msgs) CEOs Kevin Rollins, Michael Dell* Sidney Taurel William Ford Jr., Alan Mulally** Richard Parsons H. Lee Scott 2005 2006
$39,314,839$153,223,079 $16,643,068$10,799,582 $7,905,158 $19,501,100 $12,668,761$13,095,627 $10,610,858$8,956,062
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*2006 = Michael Dell's pay; 2005 = Kevin Rollins' pay. **2006 = Alan Mulally's pay; 2005 = William Ford's pay. Pay = base salary, bonus, other pay, gains from exercising options, value of incentive stock that vested and increases in the value of pension plan. Source: The Corporate Library
Picking shareholder pockets
Easily the biggest CEO payouts have come from Dell (DELL, news, msgs), according to the numbers in a recent report by Hodgson, called Pay for Failure II, that came out last month. Michael Dell, who has been chairman of the troubled computer maker for the past several years and CEO for much of that time, as he is now, booked an astonishing $153 million gain in the company's 2006 fiscal year by exercising options. That's enough to buy each of the nation's incoming freshmen a laptop for the next 38 years, at current prices. It's also roughly equivalent to the annual gross domestic product of the Marshall Islands. (Dell hasn't actually sold the stock yet, so he's still got just paper gains on those options.) The prior year, Dell reported that former CEO Kevin Rollins netted $39 million chiefly by exercising and cashing out a huge number of options in 2004. All told, the two got at least $281 million in the past five years while at the helm of the company, according to Hodgson's report. Dell's stock has slipped 1.7% in that time, compared with 43% gains for the S&P 500 (in the five years ending May 31). Hodgson's total excludes options gains realized by Rollins when he was president and chief operating officer, like the $36 million he got in the 12 months leading up to July 2004, when he became CEO. "That's a big five-year total for Dell while performance has only gotten worse," says Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees. "Dell is now losing the competition to Hewlett-Packard (HPQ, news, msgs) when the expectation was that they would be cleaning Hewlett-Packard's clock. So the question is whether (Michael) Dell is picking the pockets of his shareholders when he continues to get paid and the shareholders don't." Continued: Friends in the boardroom The company declined to comment. In fairness to Michael Dell, at least he's feeling some of the pain along with shareholders, since he owned 226 million shares of Dell as of May 2006. Dell is an example of a board "handing out equity awards like candy and granting so many stock options that they can pay off substantially even if the stock doesn't do well," says Patrick McGurn, special counsel for Institutional Shareholder Services. Both Dell and Rollins also benefited because they got discounts on hundreds of thousands of stock options issued from 1997 to 2003, says Hodgson. Eli Lilly (LLY, news, msgs) CEO Sidney Taurel has also been pulling down huge amounts of pay for lousy performance -- at least from a shareholder's perspective. He made $10.8 million last year and $43.7 million in the past five years, according to the Corporate Library report. Yet shareholders have gained only 3% in the past five years compared with a 43% gain for the S&P 500, as of May 31. Shares are up about 9% since he took over as CEO in July 1998, while the S&P 500 has advanced 55%. Like Parsons at Time Warner, Taurel got a substantial portion of that pay in the form of annual bonuses, says Hodgson, including cash bonuses of $2.26 million in 2005, $1.5 million in 2004 and $1.2 million in 2003.
Video: CEO pay and performance
To calculate pay, Hodgson tallies base salary, bonus and other pay, as well as gains from exercising stock options, the value of incentive stock that vested in the given year and increases in the value of pension plans. Because Hodgson excludes the company-estimated value of options and incentive stock that will kick in years down the road, his numbers are different from estimates you may see reported elsewhere. Often they are lower. But in a sense they are a better picture of reality, because they show how much an exec actually pocketed in a given year, before taxes.
Friends in the boardroom
How do CEOs make so much for performing so badly? It's easy when you have friends in the boardroom who shower you with lots of stock options or set "performance targets" so low that you get rewarded even for performance that doesn't impress investors. For example, Time Warner says in filings that most of Parsons' annual cash bonus is linked to financial performance of the company in areas like revenue, free-cash-flow growth and reductions in debt. The only problem is it doesn't reveal specific targets. Given the below-average performance of the stock, it's safe to conclude that those targets were set low enough to be reachable but not high enough to wow investors. The board also states it has been rewarding Parsons for achievements like better relations with shareholders and the press, attracting strong managers, increasing diversity and "articulating the company's strategy of operating its businesses as best in class." But vague milestones like these are hard for outsiders to quantify. Time Warner made progress last year by deciding to link half of executive incentive stock awards to share-price performance, says Hodgson. But it dropped the ball by allowing awards even for mediocre performance, he adds. Execs get incentive stock as long as Time Warner stock does better than 25% of its peers. "When Dick Parsons took over as CEO in 2002, the company had a debt-heavy balance sheet, faced a series of government
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investigations and was hit with several shareholder lawsuits," responds Keith Cocozza, a Time Warner spokesman. Those issues helped push the stock down as low as $9, but it has risen 120% since hitting that low. "Mr. Parsons has successfully resolved these issues over the last five years, while also positioning Time Warner's businesses to grow and thrive in an increasingly digital environment that is more competitive and global every day." Eli Lilly has similarly low hurdles. Managers get bonuses even if sales and earnings-per-share growth lags that of peers, points out Hodgson. Besides, using earnings per share as a benchmark seems dubious since the company has been buying back stock to boost earnings -- at a time when it has negative cash flow, says Hodgson. Lilly spokesman Phil Belt responds that Taurel's pay has been "among the lowest in the pharmaceutical industry" even though the 9% gain in Lilly stock since he took over in 1998 is better than losses of as much as 28% in the stock of competitors like Pfizer (PFE, news, msgs), Schering-Plough (SGP, news, msgs) and Bristol-Myers Squibb (BMY, news, msgs). Under Taurel's watch since 2001, Lilly has launched nine new products that account for more than a quarter of total sales. "With no major patent expirations on the horizon through the end of this decade, we believe we are well-positioned under Sidney's leadership to continue to be successful," says Belt. Here are two other companies that have rewarded CEOs handsomely for poor performance.
Ford Motor (F, news, msgs) has paid chief executives William Ford Jr. and Alan Mulally, who took over as CEO last September, $46.8 million over the past five years. Mulally got $19.5 million last year just for signing on. Ford stock declined 41% in the five years up to the end of last year. Ford responds that it had to pay Mulally that much to entice him away from his job at Boeing (BA, news, msgs). It says Ford, who now serves as chairman, has sworn off pay until the automotive division becomes profitable. He's also given away over 1 million shares in incentive pay to charity over the past few years. Wal-Mart Stores (WMT, news, msgs) CEO H. Lee Scott has earned $65.3 million in the past five years. He got a $4 million bonus in each of the past four years for improvements in pre-tax profits -improvements that haven't meant much to investors because Wal-Mart stock declined 15.5% in the five years through the end of last year.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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