Are technology CEOs overpaid?

Does the corporate governance system work as it should? Do shareholders always get their money's worth? Let's find out.

CEO compensation. That's all you have to say to get some people jumping up and down, screaming, and sputtering like raving lunatics. Me, I'm not sure how I feel about executive pay. After all, I was an executive, even a CEO, however briefly. But don't hold that against me.

In any case, I'll try to come up with an objective position by the end of the post.

In the meantime, let's take a look at some CEOs of high-profile, publicly traded technology companies. To be sure, these folks have some things in common. They shoulder a great deal of responsibility and risk; they have really tough jobs; and like it or not, they make tons of dough.

Do shareholders always get their money's worth? Well, not exactly.

Let's start with Mark Hurd of Hewlett-Packard. In fiscal 2006, Mark's total compensation--including equity-based compensation--was at least $19 million. That's a lot of money, right? Let's reserve judgment for the moment.

HP's performance during that time frame was $92 billion in revenue, $6 billion in net income, and $2.18 earnings per share. The stock responded accordingly; shareholders were treated to a market cap gain of $28 billion. For every dollar earned, Hurd returned roughly $1,500 to shareholders. I'd say he earned his keep.

Now let's have a look at former Yahoo CEO Terry Semel. In 2006, Terry's total comp was just shy of $40 million, about twice what Hurd made. And how did Yahoo fair? $6.4 billion in revenue, $751 million in profit, and an anemic $0.52 earnings per share. And the stock? Shares of Yahoo lost about 35 percent of their value that year. Shareholders had every right to scream for Semel's head .

Here's another perspective: In 2006, Hector Ruiz of AMD made $12.8 million, a third more than his rival, Paul Otellini of Intel. And for what? AMD lost money and the stock plummeted that year. Intel was off its game as well, but its fundamentals were nowhere near as poor as AMD's.

From a shareholder perspective, neither guy should have made as much as he did, but you can at least make an argument that Otellini deserved something for running the world's largest chip company. As for Ruiz, well, best just leave it at that.

Whatever happened to pay for performance, anyway? It's alive and well at Apple and Google. Steve Jobs and Eric Schmidt opted for big, restricted stock awards in lieu of annual cash compensation. If the stock goes up, they make out big time. If it goes down, they stand to lose just as much. Granted, they're actually losing what they were originally awarded, but I still call that having skin in the game.

It's gratifying to see some executives put their bacon on the line for shareholders.

On the flip side, what really pisses me off is when boards keep high-paid CEOs in the saddle a decade or more after they stopped delivering shareholder value. We discussed this ad nauseam in "What happens when founding CEOs go bad, the sequel" some weeks ago. I just don't get how some board directors can sleep at night, knowing they're hosing the very shareholders that rely on them to mind the store.

Of course, founding CEOs generally pick their board directors--an unusual and dysfunctional situation. Boards are supposed to hire CEOs, compensation committees are supposed to determine CEO pay, and board directors are supposed to be elected by shareholders. So, shareholders have a say in executive pay, albeit indirectly.

Still, shareholders have to trust their elected directors to do the right thing. Either that or get activist shareholders--investment firms with big positions in very few companies--on every board. Doesn't seem likely.

In the meantime, this is our system of corporate governance. Sometimes it works, other times, not so much. Still, CEOs are our nation's business leadership. In aggregate, they are the embodiment of U.S. market capitalism. As individuals, they take on huge responsibility, risk and work loads. They do it because they can, also because it's what drives them. Compensation also drives them. I'm not sure you can have one without the other; it's the essence of capitalism.

That said, pay for performance is probably a good thing, as long as executives don't commit accounting fraud to make their numbers. And I'm sure shareholders would appreciate a bit more objectivity on the part of board compensation committees. If all else fails, unhappy shareholders can easily vote with their investment dollars. That's how the system works.

 

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