Here's a Disturbing Way to Gauge How Overpaid Some CEOs Are

Key Speakers At CERAWeek 2013 Energy Conference
F. Carter Smith/Bloomberg/Getty ImagesIn 2013, Charif Souki earned $141,949,280 from Cheniere Energy, which had a net loss before taxes of $554 million on $267 million in revenue.
Americans haven't found it hard to be outraged when it comes to CEO pay. Anyone -- at least, anyone not sitting in a corner office -- who looks at what the most highly compensated chief executives take home in a year has to wonder: What can a single person do to genuinely earn that much?

The answer from the defenders of those lavish paychecks, of course, is that the CEO, through his leadership, makes a lot of money for the company, and, therefore, its shareholders. Those people who landed on the recently released list, Equilar 200 Highest Paid CEO Pay Rankings? They must be worth those head-scratchingly high numbers.

But while the number that seems to fascinate most people is the total compensation figure (including salary, bonus, stock and benefits), there's another that I find similarly intriguing: CEO compensation as a percentage of the company's total revenue. For example, entrepreneur (and CEO) Kirk Maxey examined the data and concluded that one U.S. CEO took home almost half his company's gross revenue as a single year's pay package.

He was wrong. It was more than half.

That top earner, Charif Souki of Cheniere Energy (LNG), pulled down 53.1 percent of 2013 revenue with his total compensation of $141,949,280, according to public filings as reported by Google Finance. That was up 147 percent from the previous year. According to the company's proxy filings, five other corporate officers saw their pay double or more between 2012 and 2013.

Maybe Souki and his team pulled off something spectacular, though it would have had to be a victory that will only pay off in the future, as Cheniere had a net loss before taxes of $554 million on $267 million in revenue last year.

Regardless, that got me wondering how other companies would look if you compared their CEO pay to their gross revenue. So I received a data dump from Equilar, added the latest reported annual revenue for each company, did some analysis and talked to a few corporate governance experts. Although Cheniere was by far the most generous, I found a number of companies that paid a significant fraction of their annual revenues to their CEOs.

Companies avoid comparing CEO pay to revenue for a good reason. "That's like going back to the '80s, where basically CEOs were driven to expand the company and form conglomerates where there was no synergy," James McRitchie, publisher of the site Corporate Governance, told DailyFinance. It would be too easy for the top person to grow revenue at the expense of profits.

Multiple Metrics Are Used

Chief executives can just as easily build profits at the expense of necessary investment to maintain a sustainable business. Similarly, a CEO can often pump up share price, although it may happen at the expense of the company's overall health. "No one metric is the be all and end all of CEO comp," said John Roe, executive director of corporate services at proxy advisory firm Institutional Shareholder Servicese.

Looking at how much revenue is devoted to maintaining a CEO seems like a reasonable measure. That said, discussing anything as a percentage of revenue is difficult if you don't have a benchmark of a reasonable number. A company might be in an early stage of development (and therefore have low revenue) but be paying big money to an executive capable of developing it into a strong company within a few years. Under that circumstance, its easier to justify a CEO possibly getting paid multiple times his company's annual revenue. When a company has been around for a while, and brings in hundreds of millions in revenue, the dynamics for an investor are different.

Roe ran an analysis for DailyFinance of the 2,200 public companies that report their data to ISS. Remembering for a moment that investors typically give board vote recommendations overwhelming support -- the median is in the neighborhood of 96 percent -- it turns out that when CEO pay reaches 1 percent of revenue, there is a jump in shareholders voting against the compensation plan in advisory votes mandated by the Securities and Exchange Commission. Below are excerpts of the data. TDC means total direct compensation.
Source: ISS

Roe said the drop in support at 1 percent was significant in the world of boardrooms and major investors. So that seems a natural ceiling for compensation at publicly-held companies, all other things being equal. Out of the firms with the 200 highest-paid CEOs, 32, or 16 percent, made more than 1 percent, including cash and stock. Here are the top 10:

CompanyCEOCEO's total direct compensationFiscal Year 2013 revenueCompensation as percent of revenue
Cheniere EnergyCharif Souki$141,949,280$267,210,00053.1%
GAMCO Investors (GBL)Mario J. Gabelli$85,049,800$397,560,00021.4%
Zynga (ZNGA)Don A. Mattrick$57,814,391$873,270,0006.6%
Mobile Mini (MINI)Erik Olsson$24,073,209$406,490,0005.9%
Splunk (SPLK)Godfrey R. Sullivan$17,007,407$302,620,0005.6%
TripAdvisor (TRIP)Stephen Kaufer$39,014,227$944,660,0004.1%
Progress Software (PRGS)Philip M. Pead$13,350,959$334,000,0004.0%
zulily (ZU)Darrell Cavens$27,310,886$695,710,0003.9%
FleetCor Technologies (FLT)Ronald F. Clarke$32,858,319$895,170,0003.7%
Solera (SLH)Tony Aquila$29,895,611$838,100,0003.6%

Notice that all these companies are middle market players: between $10 million and $1 billion in size. They aren't giants, where massive revenues make compensation literally look like nothing in comparison. And, like Cheniere, not all are rewarding CEOs for stunning financial success. Zynga, for one, has been running in the red for the last several years. Mobile Mini's net income dropped 30 percent from 2012 to 2013, even as revenue was up 7 percent. There could be good reasons for such results, but it raises the question of why the CEO might get such a relatively large slice of revenue.

%VIRTUAL-article-sponsoredlinks%If you don't restrict the analysis to the top-paid CEOs, the number making 1 percent or more of revenue jumps. ISS found that 400 out of the total 2,200 companies it tracks, or 18 percent, were in the super pay category.

According to Gary Hewitt, managing director and head of research for GMI Ratings, CEO pay at most companies ran between 0.1 percent and 0.4 percent of revenue. "For a mature company, more than 0.75 percent would seem to be excessive except potentially in a very high-margin business," he told DailyFinance. "The companies that have a big percentage of revenues are typically smaller companies with smaller revenues."

The takeaway is that when you're investing in smaller companies, pay attention. More shareholder value than you realize may be going directly into a single person's paycheck.
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