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By Jon Markman Purchase Jon Markman's book "Swing Trading" at MSN Shopping. Related Resources See how StockScouter rates a stock View the all 50 top-rated stocks What were the best-performing industries? SuperModels Recent articles: • Readers rage over worst CEOs -- their bosses, 6/16/2004 • The nation's worst CEOs, 6/9/2004 • 3 battled-tested fiber-optic survivors under $5, 6/3/2004 More... | SuperModels Big paydays for bad CEOs It's not that they make huge paychecks. It's that they make huge paychecks by chiseling their workers, their customers and their investors. By Jon D. Markman Russian moralist Leo Tolstoy once wrote that all happy families resemble one another, while each unhappy family is unhappy in its own way. In the business world you could flip that around, for it seems that most unhappy companies resemble one another: According to mail from more than a thousand readers of this column on the subject of the nations worst chief executives, a great number of dysfunctional companies are run by tyrants who gouge gross compensation packages for themselves and their cronies out of the hides of their workers and customers. What makes a worst CEO in the minds of so many investors and employees is not merely poor decision-making on the allocation of capital and other resources. Almost everyone can tolerate well-intentioned plans that go awry. Instead, it is the ugly way that CEOs have normalized the behavior of compensating themselves at increasingly more obscene levels -- often on the basis of self-set relative performance targets that fail to account for the absolute performance that matters most to all stakeholders: long-term corporate value as reflected in a higher stock price. Massive payday for WellPoint execs In Southern California, anger at CEOs has reached the boiling point over the recent discovery last week that the proposed purchase of local insurer WellPoint Health Networks by Indiana-based Anthem
Why did these guys believe they could get away with such a massive payday from a public companys treasury at a time of soaring medical costs nationwide? The jackpot, buried deep in a 200-page proxy statement, was explained away by a WellPoint consultant at a hearing before state lawmakers with the comment that the pay package fell within industry norms. It is clear that the stealthy creation of a chief executive royalty class, oddly unhampered by the corporate accounting and criminal scandals of the past few years, threatens to undermine our market-based system. California politicians -- who know a populist cause when they see one -- vowed last week to scuttle the WellPoint deal. If they do, theyll be offering a government solution to a market problem -- a slippery slope leading to higher costs for everyone. You would think that major companies by now would be more thoughtful about the perception of selfishness, and try to avoid public ridicule. But the practice of piggish compensation continues unabated, wrapped up in the Im-OK-Youre-OK rubric of relative merit. More CEO compensation commentary on MSN Money
AT&T: industry accolades? Consider the e-mail that I received from AT&T She added: Nor did you mention that Dave Dorman is doing the best job possible playing the hand we've been dealt at a time of immense regulatory uncertainty and industry oversupply. Weaver justifies Dormans performance, in other words, by stating that hes won pats on the back from telecom analysts and has done relatively well in difficult times. And yet what are the actual results of his efforts, quantified in a way that shareholders care about? A steady year-by-year erosion of revenue, and a steady year-by-year erosion of the stock price, coupled with a rather steady increase in Dormans compensation, as shown in the following table.
* Sources: Media General and AT&Ts 2003 proxy statement AT&T still does fairly well in large enterprise sales, but price and margin compression in long distance and missteps in the local consumer market have clouded its prospects. With a 5.8% yield, its probably as cheap as it has been in recent history, so the price could advance on valuation alone. Yet hard times and the potential for a modest rebound are not good reasons for a pay package wildly out of touch with business performance. If Dorman succeeds in the future, then the board should compensate him for it in the future; they shouldnt lavish rewards now. Abuse for Albertson's CEO This misalignment between chief executive performance and business growth is behind much of the disenchantment of stakeholders today. And its not just in the teetering telecom industry. A chief executive who came in for some of the greatest abuse by readers was Lawrence Johnston of Albertson's According to an article in The Seattle Times, the average grocery worker in the Puget Sound area makes $18,000 per year. At that rate, the paper notes, it would take the average grocery worker 911 years to equal Johnstons average salary for one year. The 911:1 ratio of CEO to worker pay is extreme, but not by much. BusinessWeek, which has tracked executive pay for half a century, figures that CEOs of the country's largest corporations last year were paid about 300 times the average factory worker. In Europe, in contrast, chief executive pay tops out at 30 times the average worker. Americans might defend this disparity by declaring that U.S. companies are better run, but are these companies more than 10 times better run? Reader Jim Leary sees a revolution brewing. The average worker doesnt fully understand how self-interest runs most corporations. Ive seen it first hand, and it is disgusting, he said. What needs to be done is radical but necessary to protect workers: Shareholder and labor representatives in the boardroom. No corporate royalty without representation! he wrote. If it sounds like 1776, youre right. . . . The goal of any corporation is to maximize shareholder wealth -- not to maximize the wealth of management. Companies with common sense Shareholders can exercise some control over executive compensation by investing in companies with common-sense approaches. Expeditors International Expeditors Chief Executive Peter J. Rose received bonuses of $2.2 million, $2.6 million and $2.8 million in 2001, 2002 and 2003 -- a time period when company revenue, earnings and cash flow all rose steadily and the stock price rose 55% while the S&P 500 Index fell 15%. Its time to bring the worst, and most absurdly compensated, CEOs to justice. Not with vigilantism, of course, but with righteous personal investment practices. If you have any other examples of properly or improperly compensated CEOs, or suggestions on fixing the executive pay system, please e-mail them to me at sm@jonmark.com and put COMP in the subject line. Fine Print To see AT&Ts latest proxy, in which all compensations details are described in detail, visit this page . . . No matter how many times I review executive compensation packages like the ones at AT&T, I continue to be blown away by the array of financial perks, including financial-planning fees, family travel allowances, million-dollar low-interest loans, tax payments and home allowances, insurance policies, and more. No wonder these guys are so isolated. . . . To read the Expeditors International proxy, visit this page. . . . Graef Crystal writes regularly on executive pay for Bloomberg. Read his columns here. In a May 6 column, he noted that three top CEOs earn literally nothing or next to nothing: Jerrold Perenchio at Univision Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at sm@jonmark.com; put COMMENT in the subject line. At the time of publication, Markman had positions in: Expeditors International. | |||||||||||||||||||||||||||||||||||||||||||||||||
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