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5 lousy CEOs who get fabulous pay
Big pay for big performance is one thing. But these CEOs took home generous pay and serious perks while their companies slumped.
By Michael Brush
The problem of executive pay has gotten so bad that pay experts quip that "pay for performance" has turned into "pay for pulse."
CEOs get rich pay packages just for staying alive and showing up -- regardless of how well their companies do. And many CEOs at the top of the pay pyramid do a pitiful job for shareholders.
Below, I'll list five of the worst offenders, taken from a recent study called "Pay for Failure." The study was created by Paul Hodgson of The Corporate Library, an independent research firm that helps investors assess risk in corporate governance practices.
Hodgson's study considers pay to include salary, bonus, "other pay" for perks like personal use of the corporate jet, restricted stock grants and the value of options. All numbers -- including pay and stock performance -- are for the years 2001 through 2005, unless otherwise noted.
As you read through the dismal stock performance results, keep in mind that the S&P 500 ($INX) was up 1% during this time frame. Besides ringing up big losses for shareholders, all these companies underperformed other companies in their industries.
Execs, drugs and rockin' pay
The compensation committee at Pfizer (PFE, news, msgs) says it believes executive pay "should be closely aligned with the performance of the company on both a short-term and long-term basis."
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But Pfizer shareholders can only wish that the company's stock price had done as well as Pfizer's CEO over the past five years. During this time, shareholders lost 35% as the stock fell to $24.60 from $38.20. Yet Pfizer chairman and chief executive Henry McKinnell made more than $15.5 million a year, on average, for a total of $78 million. He also has a pension package worth $83 million.
"Shareholders are getting hammered twice: Once for the bad performance of the stock, then because they have to foot the bill for that pay package," says Brandon Rees of the AFL-CIO Office of Investment. "Its salt in the wounds."
A Pfizer spokesman responds that drugs can take a decade or more to bring to market, so you have to judge pharmaceutical companies over a longer time frame. During the 35 years that McKinnell has held top management jobs, for example, Pfizer stock is up nearly 16-fold, says the spokesman. And despite the setback in the stock over the past few years, it still has produced annualized gains of 13.3% since the start of 1993, compared to 10.6% annualized gains for the S&P 500.
The company has also taken steps to better align executive pay to performance, says Pfizer. It has put limits on the growth of pensions, linked performance-share grants to shareholder return instead of earnings per share, and targeted chief executive pay to match the median of companies in the pharmaceutical industry, instead of setting it in the upper 25% range of pay for CEOs in the group.
Like Pfizer, pharmaceutical company Merck (MRK, news, msgs) says it structures pay to align the interests of execs with those of shareholders. It hasnt worked out that way. Shareholders have lost 41% in the past five years as the stock slipped to $33 near the end of last year from $56 at the start of 2001.
During the same time period, former chief executive Raymond Gilmartin made about $54 million, or around $10.8 million a year. That includes $37.8 million in profits from cashing out options over the past two years.
Gilmartin stepped down as CEO last May, and he stayed on with the company as a special advisor through March of this year. In retirement, he was scheduled to get a pension worth $784,000 a year by Hodgson's estimate, plus an office and a secretary for at least seven years.
One odd thing about Gilmartins pay package was that he got more stock options as a long-term incentive award in 2005, even though he is leaving the company this year. "There doesnt appear to be any purpose served in providing more stock options to the former CEO," says Hodgson.
Merck says in an e-mail that its compensation committee "believes that executive officer compensation for 2005 was consistent with the level of accomplishment and appropriately reflects company performance." In its corporate filings, the company also says it exceeded performance objectives in 2005 "with respect to operating performance and manufacturing productivity improvements, and met research and human-resources management objectives."
If you are having trouble understanding exactly what that means, thats part of the problem, say executive pay experts. Too often, companies claim they have performance targets, but they dont reveal any details, hiding behind claims that doing so would reveal proprietary secrets about their companies.
"Companies need to disclose enough so investors can see whether they set the bar two inches from the ground or created a real pay-for-performance pay package," says Patrick McGurn, special counsel for Institutional Shareholder Services, which advises investors on how to vote at shareholder meetings.
Dialing for dollars
As chairman and chief executive of AT&T (T, news, msgs) and of SBC Communications before it merged with AT&T, Edward Whitacre earned $85 million during the past five years, or about $17 million a year on average. Upon retirement he will continue as a consultant for three years at more than $1 million a year, and get lifetime access to the corporate jet, a car, an office and support staff. And he's in line for an annual pension of $5.3 million.
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Shareholders have a five-year loss of 40% to show for Whitacre's efforts, as the stock has fallen to $23.50 from $39.30.
AT&T declined to respond, but it notes in SEC filings that Whitacre's employment contract was signed "at a time when telecommunications and technology companies were, in general, performing well and in favor with investors." Compensation for experienced CEOs was fierce, so the company had to pay up to get Whitacre, whose contract was in line with others in the sector at the time, the filing says.
But Hodgson says other factors are at work. Whitacres contract, for example, has assured that his compensation would always be in the top 25% range of the pay for CEOs at similar companies, regardless of AT&Ts performance. His contract also guarantees that his salary and certain incentives cant be reduced.
Rich pay packages for poor performance seem common in the telecom sector. BellSouth (BLS, news, msgs) chairman and chief executive F. Duane Ackerman, for example, made about $46 million in the past five years. That works out to over $9 million a year. But shareholders lost 23% as stock fell to $27.40 from $35.60. Shareholders were treated unfairly, maintains Hodgson, because BellSouth paid out long-term performance awards even though the company did worse than peers. "It may be that there is a link to performance here, but from the data provided it is impossible to see what it is," says Paul.
"Thats just one organizations opinion," responds BellSouth spokesman Jeff Battcher. "It is certainly not the opinion of millions of shareholders who have supported Mr. Ackerman for years." Since the start of the year, BellSouth shareholders have enjoyed a 20% increase in their shares on news that the company is planning to merge with AT&T.
Bringing home the bacon
Safeway (SWY, news, msgs) chairman and chief executive Steven Burd earned $52 million, or $10.4 million a year, on average, over the past five years. During that time, shareholders lost 54% as the stock fell to $23.70 from $52.
Safeway spokesman Brian Dowling responds that you have to look at Burds whole tenure if you want to judge his performance. He joined the company in 1992. Since May of 1993, Safeway has produced 17.5% annualized returns.
"That beats the grocery-store sector and the S&P 500 by a country mile," says Dowling. "His tenure has been all about creating shareholder value." Dowling says Burds pay looks high over the past few years only because he exercised lots of stock options, the first time he has done so since joining the company.
CEOs paying CEOs
Why do so many CEOs get so much for so little? The basic problem is that many boards are too close to managers, even though they are supposed to look out for shareholders.
"We need reform in how boards are elected and how they can be held accountable to shareholders," says Rees. "Most directors are hand-picked by incumbent management."
He thinks shareholders should be empowered to nominate their own board candidates. Right now, candidates are picked by a nominating committee of board members -- who are influenced by management.
Another problem is that many board members are CEOs themselves, or former CEOs. This gives them a built-in bias in favor of big pay packages for other CEOs, says Sarah Anderson, who follows executive pay issues at the Institute for Policy Studies.
Sure enough, in the examples above, Pfizer has three former CEOs on its compensation committee, BellSouth has two and Merck has one. Safeway has one current CEO and one former chief executive, according to Hodgsons study. "There is a lack of objectivity on compensation committees, and that is why you have these jaw-dropping pay packages," says Rees.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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