The Definition of Overpaid

Written by nickel - 9 Comments

Wouldn’t it be great if you could make millions regardless of your on-the-job performance? Well, that’s the deal that many CEOs have and, according to a recent article from MSN/Money, some of them are shockingly overpaid. According to the article, the five worst offenders are…

1. Patrick Nettles of Ciena. In the past four years he’s taken in $41.2 million while company shareholders have lost a whopping 93%.

2. Jure Sola of Sanmina-SCI, who earned $26.4 million during the past four years while Sanmina shareholders lost 78%.

3. Scott McNealy of Sun Microsystems, who earned $13.1 million over the past four years while Sun shareholders lost 76%.

4. Larry Johnston of Albertson’s, who earned $76.2 million over the past four years while shareholders lost 39%.

5. Peter Dolan of Bristol-Myers Squibb, who earned $41 million over the past four years while shareholders lost 48%.

Note that the lowest paid of these individuals (McNealy of Sun) makes over 32 times as much as the President of the United States — then again, he’s not burning through money nearly as fast as our current President, so maybe he’s worth it. Another interesting statistic from the article is the fact that the ratio of CEO compensation to that of regular workers has swelled from 200:1 in the early 1990s to 450:1 nowadays. From a shareholder perspective, it seems like we really need to get this under control by indexing executive pay to some reasonable measure of performance, as is already the case at some companies. Either that or we should all go out and get jobs as CEOs…

Published on August 24th, 2005 - 9 Comments
Filed under: Working
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Comments (scroll down to add your own):

It won’t happen. The CEOs control the lobbyists, the lobbyists control the lawmakers, the lawmakers control the laws, and the working man is too ignorant and lazy to try to do anything about it. I’m not that pessimistic, though…
Comment by Blaine Moore — Aug 24th 2005 @ 7:57 am
Um…why would lawmakers have anything to do with this?
Comment by Matt — Aug 25th 2005 @ 5:14 am
They wouldn’t. It’s up to shareholders and company boards to set the standards for CEO pay and performance.

Comment by nickel — Aug 25th 2005 @ 8:11 am
Don’t mind me, I misread the second to last sentence. I missed the “From a shareholder perspective,” part and nickel was going for some sorta regulation…
Comment by Blaine Moore — Aug 25th 2005 @ 8:17 am
I have voted on many of the companies I own to either tie Executive pay to performance or to limit them. Only a few have succeded, but only because many shareholders just don’t read the proxy statement and don’t vote on cosncience.

Vote correctly with the shares of the companies you own. Only in that way you can make sure executives get a fair compensation.
Comment by Jose Anes — Aug 25th 2005 @ 6:23 pm
Perhaps I am missing something, but how does a CEO control a stock price? All of the overpaid CEOs cited reflect how poorly shareholders lost their money. I personally don’t think a shareholder can control the stock price. Analysts (the great unbiased people who make recommendations on stocks) really have more control than CEOs do with regards to their company.

Nickel, I understand what your are getting at, but how is a large company going to attract a great CEO if it can’t guarantee them pay? Are there any CEO types that will work for a company pro bono until they raise the stock price? I don’t think so.
Comment by Financial Fruition — Aug 27th 2005 @ 12:07 am
First things first… CEOs ‘control’ stock price by whether or not they mismanage a company and drive it into the ground. I’m not sure what your point is on shareholders controlling price — I never suggested that they do (at least not directly). They exert indirect control by buying/selling shares — lots of buying, price goes up; lots of selling, price goes down. This is generally tied to the performance of the company (and expected future performance). Since shareholders own the company, they make the rules, and they actually have quite a bit of control over the future of the company (if they choose to exercise this power).

Analysts might have a major impact on share price in the short term, but it’s really the underlying value that guides it in the long term. And if the guy in charge sinks the company, share price will follow (mainly because analysts will spread the news about how badly the company is doing).

As far as attracting great CEOs goes, I’m not sure the companies listed above could have done much worse, so obviously big pay packages aren’t the full solution. If the performance incentives are good enough, then this shouldn’t be a problem. And I don’t think any shareholder in their right mind would complain about paying big bucks if they were getting their money’s worth.

Finally… Yes, there are some CEOs that work effectively pro bono, and only profit when the stock goes up. Steve Jobs of Apple Computer is one such example. Actually, he has a stated salary of $1/year, so it’s not truly pro bono. Since his return to the company Apple has done some great things.

Comment by nickel — Aug 27th 2005 @ 8:34 am
Sorry about the mistype, but I didn’t mean to refer to “Shareholders” as controlling a stock price. So let me correct that statement, “I personally don’t think a CEO can control the stock price”. I have the opportunity to have access to the CEO of the publicy held company I work for (he makes less than $1 mil., and the stock is up approx. 53% of the last 3 years), and there are a couple of things I’ve noticed:

1) You can ask the CEO or CFO, “hey what’s happening to the stock price” (up or down), and they can either explain that it’s a capital offering being oversold by underwriters or they don’t know. Most of the time it is the latter only twice has it been the former.
2) Sometimes our CEO refers to what the share price could possibly do if a decision were made one way or another. Seeing as he can only speculate on what might happen, he does not really control the share price. Also, I don’t think our CEO should think this way. If it is a business decision then it needs to be made with regards to all the information and projections to the company financials, not how the stock price will react. However, I do understand that in the long run the stock price will be a result of the business performance and company financials.
3) I know if we are approaching a quarter where we are “cutting it close” to the analysts’ estimates because the CEO will start “cracking the whip”. Should our company personnel have to get these warnings? No, because they should be cracking their own whip and the CEO shouldn’t have to do this just because he wants to make projected numbers. Or if you change your guidance on earnings, your stock will be gone (whether or not it was a business performance issue, or something you could not control). Can banks control the fed funds rate? Can retail shops control consumer spending?

So that I don’t sound off too much, I will sum up the comments and your original post with:I agree that CEOs should be paid in accordance with some reasonable measure of performance. What makes up that composite is really up to the Board of Directors of each company. However, it should not be share price. If the BOD doesn’t take these steps then it is ultimately up to the sharholder’s to vote their proxies for reform and new Directors.

Last but not least, Steve Jobs and the interim-CEO of the NYSE are exceptions to the rule regarding $1 salaries, it is really not the norm. Perhaps you are saying this is a possible scenario for the CEO to paid in that manner until they perform? That would be interesting.
Comment by Financial Fruition — Aug 31st 2005 @ 10:23 am
Personally I agree with you Nickel on many points. Steve Jobs is a great example of a top notch CEO whose main interest is his company and not his pocketbook. Don’t get me wrong I am sure the guy has made his share. But that is usually the case with a founder of a company. His passion is his legacy and company not his bank account. Personally I think corporate America has strayed greatly from the responsibility that they have to shareholders and the $40,000 to $50,000 a year worker their companies employ. When is making multimillions a year enough? When do these outrages compensation packages top out? I don’t advocate wealth distribution in this country. But come off of it. Most of these CEO’s are far too greedy and ignorant shareholders go along with it. There needs to be more cupability for CEO’s who don’t perform.
Comment by Lori — Sep 4th 2005 @ 3:55 pm