Are Investors Getting Their Money's Worth from High-Paid CEOs?

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Are CEOs Worth the High Salaries and Big Bonuses?CEO bonuses are up 30.5% in the last year, according to an analysis of 50 large companies published Friday in The Wall Street Journal. But how are investors to know whether they are getting their money's worth? If a company has more than $75 million in stock market value, the Dodd-Frank Act now gives them a say on pay: Shareholders can talk about executive pay at board meetings -- big deal! Ultimately, that alleged input is toothless unless it changes compensation practices.

On a macro level, companies are doing better than they ever have: U.S. businesses posted record profits of $1.66 trillion and piled $1.9 trillion in cash onto their balance sheets in 2010. (Of course, workers are paying the price for corporate good fortune, thanks to the nation's 8.9% unemployment rate, a 2.6% boost in productivity, and a 1.5% drop in unit labor costs.) But the ultimate measure of whether a CEO is worth the money can only be found at the level of the individual company: How much does the CEO receive compared to the shareholder value the company created during the year.

For that, let's apply an analysis I wrote for DailyFinance's sister site, BloggingStocks, in October 2006 of CEOs and their pay -- including all compensation, not just the bonuses -- that divided them into three classes:
  • Bargain CEOs who created shareholder value on the cheap;
  • Hogs who added shareholder value but got paid too much to do so; and
  • Value Destroyers who were paid big bucks to lose shareholder value.
The Wall Street Journal's analysis, conducted by Hay Group, reviewed proxy statements for 50 companies with revenues of at least $4 billion. The 50 CEOs received a total of $126.1 million in 2010 bonuses, up 30.5% from their 2009 take of $83 million as their profits grew 19%.

Applying my analysis to the 12 of those 50 CEOs who were mentioned in article reveals that they got paid an average of $15.9 million while boosting their market value $2.1 billion, an average of 9.7%. Based on the change in the number of employees reported in their 10Ks, on average, these 12 companies cut jobs by 0.7% to 76,640. Of these 12, four were Bargain CEOs whose companies may be worth a look. I'd be less inclined to put money into the four Hogs and the four Value Destroyers.

Bargain CEOs
  • Starbucks (SBUX). CEO Howard Schultz got paid $13.75 million and created $7.1 billion in market value increase (up 37.3%), a pay to market value ratio of 0.2% while cutting 5,000 jobs;
  • General Electric (GE). CEO Jeffrey Immelt's pay: $21.4 million; value created: $12.4 billion (+6.5%); a pay to market value increase ratio of 0.2% with 17,000 job cuts;
  • Johnson Controls (JCI). CEO Stephen Roell's pay: about $17.6 million; value created: $5.1 billion (+23.6%); a pay to market value increase ratio of 0.3% while adding 7,000 jobs; and
  • Navistar (NAV). CEO Daniel Ustian's pay: $10.4 million; value created: $1.6 billion (+55.2%); a pay to market value increase ratio of 0.6% while adding 800 jobs.

Hogs

  • Jabil Circuit (JBL). CEO Timothy Mann's pay: $9.8 million; value created: $144 million (+5%); a pay to market value increase ratio of 5% as it cut 400 jobs.
  • Clorox (CLX). CEO Donald Knauss's pay: $10.1 million; value created: $454 million (+5.1%); a pay to market value ratio of 2.2% as its job count remained unchanged at 8,300.
  • Walt Disney (DIS). CEO Bob Iger's pay: $28 million; value created: $1.3 billion (+20.8%); a pay to market value ratio of 2.1% while adding 5,000 jobs; and
  • Jacobs Engineering (JEC). CEO Craig Martin's pay: $6.4 million; value created: $455 million (+8.1%); a pay to market value ratio of 1.4% as it cut 400 jobs.

Value Destroyers

  • Whirlpool (WHR). CEO Jeff Fettig made $48.6 million while his company lost $687 million in market value, down 10% even as it added 4,000 jobs;
  • Monsanto (MON). CEO Hugh Grant made $13.2 million while his company lost $2.7 billion in market value, a 7% drop and cut 300 jobs;
  • Oshkosh (OSK). CEO Robert Bohn made $4.1 million while his company lost $600 million in market value, a 16.4% fall while adding 100 jobs; and
  • Beazer Homes (BZH). CEO Ian McCarthy made $6.9 million while his company lost $44 million in market value, down 12% while trimming 18 people.
In considering whether to invest in any of these companies, I would examine many other variables -- including their valuations in comparison to their growth potential. But all things being equal, I'd prefer to cast my vote on CEO pay by investing in shares of companies run by the Bargain CEOs, while shunning the Hogs and Value Destroyers.

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