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CEOs for $1 a year -- plus millions more
Many top executives at companies like Google and Capital One boast of taking salaries of just a buck when it seems they deserve much more. Don't worry; they get much more.
By Michael Brush
It sounds noble. A top executive takes a $1 salary, opting to base his pay on the performance of the company's stock, and thus the company itself.
The latest to do it: The CEO and two founders of Google (GOOG, news, msgs), whose pay packages were revealed last week. Other companies paying their chiefs $1 (or less) a year in salary include Kinder Morgan (KMI, news, msgs), Capital One Financial (COF, news, msgs), Apple Computer (AAPL, news, msgs) and Pixar (PIXR, news, msgs),.
At a time when the average CEO makes about $10 million a year, the $1 salary makes for good public relations. But dig into the pay packages and you'll find a different story. As a rule, CEOs on the dollar menu have some of the richest pay packages around. Heres a look at the vast riches obscured by some single-digit salaries.
I'm feeling lucky
Google CEO Eric Schmidt took a pay cut of $82,987 to go on the dollar plan last year -- a plan that continues in 2006. Google founders Sergey Brin and Larry Page each gave up salaries of $45,306.
But for Schmidt, Brin and Page, the sacrifice wasnt even a rounding error. Just look at the huge amounts of money they generate through stock sales.
Related news and commentary on MSN Money
Page has grossed an impressive $1.5 billion selling Google shares since the start of 2005, according to Thomson Financial.
Co-founder Brin generated $1.45 billion selling stock since the beginning of 2005.
Schmidt owns a smaller piece of the company, but he, too, is doing just fine. Schmidt made $387 million selling Google shares since the start of last year.
Theyre not making a huge sacrifice at Google, observes Eleanor Bloxham of the Value Alliance and Corporate Governance Alliance, a Westerville, Ohio-based company that advises boards and companies on corporate governance issues. To put these numbers in context, the average overall pay package for a CEO at a company in the S&P 500 ($INX) was $10 million.
In offloading shares, these Google execs were part of a rush to the market last year by insiders. Google insiders have sold $4.6 billion worth of stock in the past 12 months -- or roughly the equivalent of the annual gross domestic product of Nicaragua.
Corporate-governance experts say that $1 pay may be a bit misleading, but not a bad thing. Sometimes you question whether it is more publicity stunt than anything else, but other times it is a way for executives to indicate confidence in the stock, says Patrick McGurn, special counsel for Institutional Shareholder Services. At Google they did cash out a lot of value. But they took a chance and held the shares instead of selling out at the beginning in the initial public offering.
They take their lesson from Warren Buffett, which is to have a moderate salary but a large stake in the company, says McGurn.
CEO of the year
For the past six years, Richard Kinder, the founder, chairman and chief executive of Kinder Morgan, has taken $1 a year in salary. No bonus, no options, no restricted stock. How does he get by? He owns 24 million shares in the company, or 19% of the shares outstanding. Since the company paid an annual dividend of more than $3 per share last year, he made at least $72 million. Morningstar recently named Kinder its CEO of the year for 2005, in part because of how his compensation aligns his interests with those of shareholders.
As large as these pay packages are, theres nothing wrong with them, says Graef Crystal, who writes a column on executive pay for Bloomberg News. In each case, founders of companies are merely reaping the rewards for having a good idea for a business and making it work. They got that money legitimately, Crystal says. I dont see anything wrong with it. They founded the business, and the market now sets the value of their stock. It helps, of course, that shareholders have done well at all these companies, too.
Steve Jobs has a golden touch, having founded Apple and having played a big role in the development of Pixar. But he collects just $1 a year as Apple chairman and CEO and gets nothing for doing both jobs at Pixar.
Even so, he's well-compensated for his time.
In 2003, Jobs convinced Apple to exchange the options he held on 15 million Apple shares for 10 million restricted shares of Apple stock. Both numbers are adjusted for stock splits.
Options only pay off if a stock rises beyond a pre-set target price, and Jobs options were below their "strike" price. In essence, he received a smaller number of real shares in exchange for a larger batch of potential shares. Restricted shares are not registered with the Securities and Exchange Commission, and, typically, there are restrictions on when the shares may be sold. As it turns out, though, he would have made more money holding onto the options because of how well Apples shares have performed.
When the swap was made, the company said Jobs wanted to eliminate the "overhang" of unexercised options that might depress Apple's stock price. Apple said the move also freed up options that could be used to compensate other employees.
It wasnt the first creative pay maneuver at Apple for Jobs, who returned to the company in 1997. In 1999, Apple gave Jobs his own Gulfstream jet plus compensation for related expenses like taxes. Total value of the package: $90 million.
Ive never been able to figure out this pay package, but given the performance, something must be working, says McGurn. It is iconoclastic pay for an iconoclast. Somehow he has been able to offset it with performance, which has kept shareholders quiet about the extraordinary amount of compensation.
Jobs has done even better at Pixar despite the lack of any formal pay there, too. In lieu of pay, Jobs owns 60 million shares, or 50.6% of the company. He originally paid $10 million for that stake and later injected $50 million of his own money into the company, according to BusinessWeek. With Walt Disney's (DIS, news, msgs) deal to buy Pixar, that slug of stock was worth more than $3.4 billion.
Piling on
While pay experts don't mind seeing CEOs profit when their stock holdings appreciate, they have a different reaction when executives with big stakes in their companies continue to grab additional shares with annual options grants.
For example, Capital One Financial founder, chairman and chief executive Richard Fairbank hasnt taken a salary or bonus for years. But he more than makes up for it with an extremely generous options package each year.
At the end of 2003, Fairbank held options to purchase 11.7 million Capital One shares -- options then valued by the company at $356 million. Fairbank received another 360,000 stock options and up to 355,410 shares of performance-based restricted stock for his work in 2004.
Fairbank collected $56 million by exercising 1 million options in 2004. That left him with more than 10 million unexercised options valued by the company at $560 million that year. At the end of 2004, he got another 566,000 options as part of his pay for 2005. That options package was valued by the company at $18 million.
CEOs dont deserve credit for taking no salary if they are receiving excessive equity awards each year, says Brandon Rees of the Office of Investment at AFL-CIO, which monitors executive pay. It wouldnt be hard to find too many people who would agree to forfeit their salary for $18 million in stock options. A lot of hard-working Americans would take that deal in a second, and a lot of CEOs would, too.
Capital One said its compensation program reflects the company's commitment to aligning Fairbanks interests with its stockholders. We believe this program is an important component for retaining Rich Fairbank, Capital One's chairman and CEO, and motivating him to deliver long-term value to our stockholders, said a spokeswoman.
The options packages for Fairbank, however, are so large that corporate governance experts question whether they really have this effect. The stock didnt have to perform that well to more than make up for his not receiving any salary and bonus, says Paul Hodgson, author of "Building Value Through Compensation" and an analyst at the Corporate Library. The stock only has to go up a couple of dollars for Fairbank to make a fortune.
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