by Will Ashworth | January 11, 2012 8:00 am
It used to be that executives were happy receiving a salary and cash bonus and then investing some of that compensation in the shares of their company. Call it a sense of pride. Today, company boards feel compelled to lavish CEOs with stock awards and other forms of performance-based compensation.
In my four previous articles looking at CEO compensation, I’ve been struck by one thing: How easy it is for directors, also handsomely compensated, to give away shareholder funds with little consideration for how it might appear to the rank and file on the front lines. Shame on them.
My final comparison is between a pair of pharmaceutical servicers — McKesson (NYSE:MCK) and CEO John Hammergren, and AmerisourceBergen (NYSE:ABC) and CEO R. David Yost.
Hammergren’s total compensation in fiscal 2011 (the most recent year available) was $46.1 million compared to Yost’s 2010 pay package of $7.4 million. Hammergren’s pay is 2.5% of McKesson’s operating income compared to 0.6% of ABC’s operating income for Yost. McKesson’s operating income is 1.5 times AmerisourceBergen’s, yet its CEO earned six times the total compensation of Yost, which begs the question — why?
Perhaps it’s because MCK has increased revenue in each of the past nine years — from $50 billion in 2002 to $112.1 billion in 2011. Hammergren has led McKesson since April 2001, prompting the board to argue that he had a lot to do with its success. However, Amerisource’s Yost has been CEO since August 2001, and in that time, revenues also grew in nine straight years — from $45.2 billion in 2002 to $80.2 billion in 2011.
On a cumulative basis, MCK’s revenue increased by 124% versus 77% for ABC. Based on operating income, McKesson’s cumulatively grew 171% over the past nine years compared to 68% for AmerisourceBergen. Using these two criteria, one could argue Hammergren’s total compensation should be double Yost’s given the difference in performance — but not six times, as is the case.
In the past five years, Hammergren’s total compensation — including restricted stock units — is $209 million. How many shares has Hammergren acquired on the open market since becoming CEO in 2001? None. According to InsiderCow.com, Hammergren’s only stock purchase in any year was in 2011, when he bought 1,000 shares of Hewlett-Packard (NYSE:HPQ), where he has been a director since 1999. If you look at McKesson’s most recent DEF14A, it suggests Hammergren owns 1.6 million MCK shares. However, a closer examination shows us that most of these shares are future restricted stock units or options that he’ll ultimately sell as he has in the past. Since 2005, Hammergren has easily made $200 million unloading McKesson stock, compared to about $35 million for Yost.
Footnoted.com does a great job highlighting Hammergren’s excessive compensation, pointing out that he also has an $83.4 million pension for just 15 years service. It makes people question gaps even in positive performances, with MCK stock outdoing ABC stock by only 1.5 percentage points in 2011. Even better, it magnifies failures, such as when McKesson’s stock underperformed in 2010, trailing both its sector and the S&P 500, while AmerisourceBergen had no such trouble.
If you were a McKesson shareholder then, you should’ve been hopping mad.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned stocks.
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