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While fiscal 2009 were not as profitable as fiscal 2008 in terms of take-home pay, Lawrence J. Ellison still raked in more than $130 million in total realized compensation (TRC). Most of this, similar to last year, is comprised of value realized on the exercise of ten million stock options for a profit of more than $124 million. We will refrain from comparing Mr. Ellison’s compensation to that of an island nation this year, but instead compare the amount to something more close to home. Mr. Ellison’s TRC is more than 325 times President Barack Obama’s salary of $400,000 (excluding monthly allowances). Currently, the CEO holds more than 30 million unexercised options (13,150,000 are exercisable), including seven million stock options granted in July 2008 with a grant date value of more than $78 million. As we’ve previously stated last year, the granting of market-priced stock options raises concerns about the link between executive compensation and company performance, since small fluctuations in the market as a whole can lead to large compensation consequences. Moreover, the continued granting of stock options to someone who already owns over one-fifth of the company is questionable.
Furthermore, the company’s formulas for the calculation of annual cash bonuses should raise red flags. Named executive officers' bonuses are equal to a percentage of the growth in the company’s non-GAAP pre-tax profits. CEO Ellison’s bonus was equal to .5 % multiplied by the growth of the non-GAAP pre-tax profits. While no bonuses are paid if there is no growth, such a method for calculating annual incentives at this level of management as well as at an established S&P 500 company (rather than one at an early stage of its growth) is inappropriate.
In addition, the amount of the CEO’s “all other compensation” of approximately $1.5 million is very difficult to justify in terms of shareholder benefit. This amount consists of $1,479,072 for security-related costs and expenses for Mr. Ellison’s residence. The amount and nature of this perquisite calls into question the board’s ability to ensure that the executive compensation is sufficiently performance-related.
Finally, the CEO has agreed to reduce his annual base salary to just one dollar from one million a year. While this may be a positive thing in the minds of some shareholders, it realistically changes little. For instance, annual incentives are not based on a percentage of base salary, as mentioned above. Thus bonuses will not be affected here. Long-term incentives, which have been entirely comprised of stock options, are based on subjective evaluations, not based on clearly-defined objectives or a multiple of an executive’s base salary. While this may be a PR effort to demonstrate to shareholders that the CEO is making sacrifices, the adjustment should be regarded with considerable skepticism.
