The GMI Blog

On the twelfth day of Enron my comp committee gave to me: ’12, the year shareholders see compensation figures that are fair and truly represent performance

By Scott Patterson - Compensation Analyst Team Leader

Well there you have it: gifts of compensation that may reflect the corporate world of the post-Enron era.  We all know that in the 10 years that have passed since Enron’s collapse we have seen some improvements in corporate governance (Sarbanes-Oxley, public consciousness, and GMI).  However, it has been clear that there is a long way to go in the advancement of shareholder and stakeholder rights.

Excessive compensation has not been the only abuse.  The sub-prime mortgage crisis, financial meltdown, oil spills, employee deaths and phone hacking have all been evident over the years, wreaking havoc with shareholder values and the livelihoods of millions. The question we may now ask is: is enough being done to prevent them from recurring again.  Will 2012 be the year we solve our corporate ills or will more wrongdoings be called for to get us moving toward a more just corporate system?

A review of the previous eleven days:

• 11 CEOs earning over $73 million in actual compensation during FY2007.
• 10 year tenure with a $120 million earned in the final full year.
• 9 energy company CEOs earning more than $64 million in actual compensation in FY2008.
• $8 million salary.  (Actually it is really $8.1 million, but that makes it harder to sing.)
• 7 million options granted each year since 2007.
• 6 million (times 17.75) in pension and deferred compensation earnings.  (That calculates to $106.5 million)
• 5 equity awards with a grant date value over $70 million.
• 4 straight years of $30 million or more in discretionary bonus.
• 3 years of over $100 million in actual compensation.
• 2 awards for a total of $109,688,700.
• 1 $4.7 Billion Grant (That’s right, billion)

Banker Stripped of Knighthood

By Paul Hodgson - CCO and Senior Research Associate

In an article in the FT today, news spread that Fred Goodwin, the banker formerly known as Sir Fred Goodwin and the CEO of RBS, was to be stripped of his knighthood. It appears that the British government’s huge stake in the company wasn’t enough to strip Mr. (not Sir) Goodwin of his GBP16.9 million pension (he only gave up a third of that) but it was enough to strip him of his knighthood. Of course the decision was not taken by Mr. Cameron, the UK’s Prime Minister but by the Forfeiture Committee made up of Britain’s most senior civil servants. According to the FT:

Normally honours are only removed in the event of serious criminal activity or if the holder is struck off by the relevant regulatory authority. Neither of these applied to Mr Goodwin, but the committee said “the scale and severity of the impact of his actions as CEO of RBS made this an exceptional case”.

This action created the extraordinary picture of Alistair Darling, the former Labour Chancellor, defending Sir… oops, I keep forgetting… Mr. Goodwin as being used as a scapegoat.

Elsewhere, also in the FT, came the news that because the current RBS CEO, Stephen Hester, had been forced to give up his GBP 1 million bonus amid political, public and press pressure, the bank was struggling to redesign its bonus plans so that it did not have to suffer this embarrassment again.

Bankers designing bonuses that DON’T pay out? What next? Bankers falling on their swords? Bankers admitting they were to blame?

“Oh, how very British,” commented a colleague, when I told him the news. It is, isn’t it? But, frankly, that’s for me to say! I’m the Brit here!

On the eleventh day of Enron my comp committee gave to me: 11 CEOs earning over $73 million in realized compensation during fiscal year 2007

By Scott Patterson - Compensation Analyst Manager

While fiscal year 2008 was the year of energy CEOs (see the On the Ninth Day of Enron), top fiscal year 2007 realized pay was slightly more diverse with six of the 11 top earners tied to the financial sector. Earlier we discussed Angelo Mozilo (seeOn the Third Day of Enron) leading the mortgage giant Countrywide Financial to its demise, who took home $126.8 million for fiscal year 2007. However, it was information services giant IAC/InterActiveCorp’s Barry Diller with $184+ million in realized compensation who beat Mr.  Mozilo for the top spot in fiscal year 2007 thanks to over $183 million in options realized.

The insurance industry had two representatives in the top 11. Insurance holding company W.R. Berkley provided their founder/CEO William Berkley with $95.87 million thanks in part by a $13.5 million cash bonus and over $8 million in change in pension/NQDC, and in large part to $72.5 million in options realized. And Aflac’s Daniel Amos had something to quack about, taking in $77.2 million.

Diversified financial titans Goldman Sachs and Capital One Financial both edged over the $73 million mark. A bonus of nearly $27 million under the Discount Stock Program and $45.75 million in stock vesting provided Lloyd Blankfein with $73.725 million only to watch the stock price fall more than 50 percent from the end of 2007 to today. Despite zeroes for salary, bonus and NEIC, Richard Fairbank of Capital One realized nearly $55 million in options and $18.25 in stock vesting to total $73.18 million in realized compensation. Jeffrey Sprecher of IntercontinentalExchange, Inc. earned just shy of $75 million in fiscal 2007 to round out the financial contenders. As a comparison, Blackstone Group and LPL Investment were the only financial sector companies to pay over $70 million in realized compensation for fiscal year 2010.

The rest of the field in the top eleven included Meg Whitman of eBay (see On the Tenth Day of Enron) with over $120 million, Target Corporation’s Robert Ulrich earned nearly $117 million, MEMC Electronic Materials’ Nabeel Gareeb who earned $79.56 million and George David of Aerospace & Defense giant United Technologies netted just over $73 million. With the recession officially starting at the end of 2007 the 11 CEOs mentioned above appeared to have benefited just in time.

First Nay on Pay for 2012

By Paul Hodgson - CCO and Senior Research Associate

Thanks to Broc Romanek’s blog on TheCorporateCounsel.net for spotting the first failed Say on Pay vote this year. Actuant's Form 8-K reports that shareholders did not approve the vote, with 54 percent voting against it. The negative 20.44 percent TSR over the last five years cannot have sat well with the $3.3 million in option profits made by the CEO and the $1.7 million cash bonus probably didn’t sit well with the one-year TSR of negative 13.81 percent. Rather a lot of withhold votes for the directors also. When will these people learn?

Say on Pay Votes Getting Teeth in the U.K.

By Greg Ruel- Research Associate

The word "non" has been removed from "non-binding shareholder vote" in the latest attempt to curb rising executive compensation. Not in America, we aren't there yet, but an article in today's Financial Times lays out some of the terms proposed for a binding shareholder vote on executive compensation in the U.K. Vince Cable, U.K. Business Secretary, proposes that pay plans be supported by 75% of shareholders in order to pass. That threshold certainly would have produced a number of additional high profile failures in the U.S. during 2011. If you remember, we released a report in November outlining 157 companies in the Russell 3000 who failed to garner even 70% of shareholder support including Pfizer (55%), Abercrombie (56%), News Corporation (65%), Exxon Mobil (66%), and Yahoo! Inc. (69%)

In addition, Mr. Cable says the government intends to propose legislation for greater transparency on compensation policy, including employees views on company pay. Executive pay discussion has been boiling over in the U.K. in recent weeks, especially regarding big banks paying out large bonuses while barely removed from taxpayer funded bailouts. Under new rules, shareholders would have a binding vote on severance pay with clawbacks implemented for executives who failed to produce during their term.

Board shake-ups are also planned, from increasing diversity to include more academics and public servants, to preventing executives from serving on compensation committees of other publicly traded companies. This new say on pay legislation won't be without controversy, including the potential to enhance the power of proxy advisory firms with conflicts of interest, but these moves certainly mark a shift in the balance of power between shareholders and management.

On the tenth day of Enron my comp committee gave to me: 10-year tenure with $120 million earned in the final full year

By Scott Patterson - Compensation Analyst Manager

Meg Whitman led eBay for 10 years taking it from start up to a Fortune 500 company and along the way she was well rewarded. She became a billionaire thanks to shares owned when the company went public in September 1998, and then went on to see shares surpass $300. Her running of the company was filled with ups and downs with the end of her tenure being a downtime with a share price below $30 on her final day at the helm. Yet she still brought in $120,427,360 as total realized compensation during her final full year as CEO.

Once again it appears that stock options played the key role in the $100 million plus payout. With some of her final actions at eBay consisting of exercising options Ms. Whitman realized nearly $117 million in value during fiscal 2007. An additional $6+ million was realized in fiscal 2008, her final year as an eBay executive. The remaining options outstanding at 2008 fiscal year end of over 2.5 million appear to be underwater at the moment but she has a few more years before they terminate.

Ms. Whitman was the beneficiary of eBay’s quick rise to riches and became an executive icon whose fame led to a run for governor of California. With this run for public office, eBay’s performance during Ms. Whitman’s reign was discussed and debated. Her fortune amassed through eBay was unquestionable, but how it was earned became questionable. Was her taking the position of CEO just prior to the company’s IPO just great timing and the wealth that came with it was not indicative of her work, or was it her decision making that created the internet giant?  Her final years as CEO were not as bright as the first half of her tenure, so her earning over $120 million in total realized compensation for her final full year in the top position must have led shareholders to question why a billionaire was reaping such high reward during a time of uncertainty for the company.

On the ninth day of Enron my comp committee gave to me: nine energy company CEOs earning more than $64 million in realized compensation in fiscal 2008

By Scott Patterson - Compensation Analyst Manager

Remember three years ago at this time when we were struggling with the reality of a recession?  We were discussing how president-elect Obama would continue President Bush’s recovery strategy.  Home foreclosures, collapsing financial institutions and unemployment were spelling doomsday for the economy and our way of life.  However there were some who were immune from the troubles of 2008.

Although facing tough economic times, we all flipped a switch or pressed the power button in our day to day activities.  Well, some of that money you spent on energy-related items ended up in the hands of the executives running energy companies. Nine CEOs from energy companies each took home over $64 million each during fiscal 2008.  Two of them have been talked about during our previous days of post Enron excess: Mr. McClendon with his founder’s program bonus and map collection ($114+M) and Mr. Simpson with his yearly bonus awards (103+M). 

Ray Irani of Occidental Petroleum took home over $222 million thanks to the stock price jumping to a 2008 high of $97.85 on May 20^th when it was just $54.79 a year prior, enabling $184 million in option profits and over $30 million in stock vesting during fiscal 2008.  John Hess of Hess Corporation (share price topped $128 in May 2008) and Ultra Petroleum’s Michael Watford ($99.69 in June) also topped $100 million in the same manner as Mr. Irani, earning $159.5 million and $117 million respectively.  Mark Papa of EOG Resources earned $88 million in option profits and stock vesting during fiscal 2008 to take home over $90 million in total realized compensation.

The other CEOs answering the $64 million question for fiscal 2008 were Nabors Industries’ Eugene Isenberg ($79.3 million) thanks to a $58.7 million bonus, Paul Evanson of Allegheny Energy ($68+ million) and Plains Exploration & Production Company’s James Flores ($64.6 million).  Looking over fiscal 2010, there were eight CEOs earning over $64 million in total realized compensation, none representing the energy group.  We’ll see what fiscal 2011 brings; and if the year was a happy one for energy executives.

GMI’s Largest Severance Packages of the Millennium

GMI released today a report detailing the largest severance packages paid to CEOs since 2000. In total, the 21 CEOs received severance of almost $4 billion.It identifies 21 CEOs who received “walk-away” packages in excess of $100 million. The list includes some of the most controversial termination payments of all time, including Jack Welch’s (GE) perks and divorce debacle and Hank McKinnell’s (Pfizer) pay for failure.

The report indentifies stock and option awards, pensions and other deferred compensation as representing the largest part of the severance packages, approximately 80 percent on average. The report arrived at the full “walk-away” packages for the CEOs – many of which have not be calculated elsewhere – by including all forms of compensation paid in the final year of employment. The types of compensation covered include:

• final year salary and bonuses, as well as perks and benefits
• any full-value stock that vested during the year, as well as any stock option profits
• actual cash and perquisite severance amounts, including any enhancement to pensions
• the value of any full-value stock that that did not lapse as a result of the termination
• the notional profit on the exercise of any stock options that did not lapse
• the total accumulated benefits of any qualified or non-qualified executive retirement plans
• all other deferred compensation
• any disclosed excise tax gross-up payments

Timothy Cook Receives More Than $376 Million in Stock as new Apple CEO

By Greg Ruel, Research Associate

Mr. Cook took over as CEO of Apple, Inc. in August 2011, receiving one million RSUs as a "promotion and retention award" on the same day Mr. Jobs resigned. Half the award will vest five years from the grant date and the other half will vest a decade after grant. As long as he stays with Apple, the entirety of the stock grant is his in ten years and should comprise the majority of his compensation over this period. While there is no telling what these shares will be worth when they vest, with a stock price of $376.18 at the grant date, Mr. Cook's award was immediately valued at $376,180,000.

There is no doubt this is a retention award. Restricted stock awards more typically have annual vesting provisions that start after about three years with full vesting with five years. Mr. Cook will have to serve five years as CEO to receive any of these shares and a full decade to reap the full benefits of his granted stock. There is very little insight however into how the board arrived at this retention package in the annual proxy released yesterday.

The Board’s determination of the amount of the RSU award was subjective. There was no formula or peer group “benchmark” used in determining the award amount. Rather, the award was the product of the Board’s business judgment, which was informed by the experience of the Board members, the input received from Mr. Jobs, and the Board’s assessment of Mr. Cook’s performance in assuming responsibility for the Company’s day-to-day operations during Mr. Jobs’s prior leaves of absence.

Mr. Cook had been well-compensated in prior periods when he filled in for Mr. Jobs. In March 2010, this same compensation committee awarded him $17 million worth of RSUs to go with a discretionary cash bonus of $5 million when he filled in as CEO during a leave of absence. This was followed by another RSU grant in September 2010, this time worth more than $35 million. All told, Mr. Cook was granted more than $52 million in 2010, slightly less than his September 2008 equity grants worth more than $58 million and scheduled to vest in full by next spring. His total 2010 compensation was $59 million and he profited almost $69 million on the vesting of 300,000 restricted shares in 2010 alone.

So, is $376 million in new stock too much for 2011? It certainly would be if this were an annual grant. In terms of a 10-year award it is quite a lot as well, coming to about $37 million a year, though that works out to much less annually than the $52 million he got in equity awards for 2010. The simple answer at this point is yes, it's a lot, but we are talking about Apple for which benchmarking and peer comparisons can prove difficult, though the compensation committee didn't even try to justify the award in those terms.

The Apple board views the retention of Mr. Cook as critical to the success of the company and for a smooth transition in leadership. As if to emphasize the point, he's received one of the most valuable equity grants in the history of Corporate America. Only time will tell the true value of this stock grant but one thing is for sure. There isn't one good reason I can think of for him to be granted any additional equity over the next decade. Inclusion in annual salary and bonus programs also seem unnecessary given these valuable equity holdings. The success of Mr. Cook as CEO of Apple may very well be judged in large part by the change in value of this 2011 retention award.

Read Paul Hodgson's thoughts on the compensation package for Apple's new CEO here.

On the eighth day of Enron my comp committee gave to me: an $8 million salary (It’s really $8.1 million, but that makes it harder to sing)

By Scott Patterson - Compensation Analyst Manager

Since 2007, K. Rupert Murdoch, News Corp’s CEO, has been paid a base salary of $8.1 million a year.  The fiscal 2011 summary compensation table lists the figure under salary, yet despite it being such an outlier, neither the compensation discussion and analysis (CD&A) nor the rest of the proxy for that matter makes any mention (or defense) of Mr. Murdoch’s egregious $8.1 million base pay.  In the 2007 proxy the CD&A states,

For purposes of pay parity between Messrs. K.R. Murdoch and Chernin, the Compensation Committee approved an increase of $3.6 million in Mr. K.R. Murdoch’s base salary for fiscal 2007, making it equal to Mr. Chernin’s contractual base salary of $8.1 million.

A $3.6 million raise for the sake of parity?  Why else would you pay such a sum?   With the departure of Mr. Chernin, parity is no longer the issue as Mr. Murdoch’s closest salary match is Mr. Ailes’ $5,000,000.  CFO David DeVoe’s $2,853,750 salary is the lowest of the top five named executive officers (NEOs).  A company that pays no mind to the Internal Revenue Code Section 162(m) is definitely one investors would be wise to follow with a watchful eye.  With such outrageous salary payments, no one should be surprised that News Corp’s troubles go far beyond salary.