Countless people grouse about overpaid athletes, and for good reason. Take Los Angeles Angels outfielder Vernon Wells, who earned $23 million this past season — yet batted just .218! Of course, at least some struggling athletes can put paying customers in the seats on name recognition alone. Corporate CEOs, however, don’t have the same advantage. CEOs need to perform. Thus it’s important to consider how a CEO is paid before you make an investment in his company. After all, if the CEOs interests aren’t aligned with your interests as a shareholder, there’s no point investing.
According to the AFL-CIOs Executive PayWatch website, there are 13 companies in the S&P 500 from the crude petroleum and natural gas industry. The average total compensation for those 13 CEOs in 2010 was $17 million. Occidental’s CEO, Ray Irani, earned a total of $76.1 million — $56.8 million more than Apache CEO Stephen Farris.
But before applying a guilty verdict to the board of directors at Occidental, it’s important that we understand how each executive is paid. It’s never black and white.
Dr. Irani has been chairman and chief executive officer of Occidental Petroleum since 1990. Its DEF14A states, “Dr. Irani has built Occidental into the fourth-largest oil and gas company in the United States, based on equity market capitalization. His distinguished professional, educational and career experience led him to transform Occidental from a conglomerate of unrelated business entities into a major oil and gas and chemical company …”
That’s quite an undertaking, but is it worth $76 million in total compensation? In 2010, Ray Irani received $40.3 million in stock awards and $31.6 million in non-equity incentive plan compensation — on top of a $1.2 million salary, $1.7 million in “other compensation” and a $1.4 million cash bonus — paid at the discretion of the board, of which he is chairman.
Dr. Irani owned 7.7 million OXY shares as of Feb. 28, 2011. At the Jan. 4, 2012, closing price of $96.92, his shares were worth $746 million, making him a very rich man. However, as best as I can tell, none of the shares were bought on the open market. They were all stock awards as part of his overall compensation. In the past five years alone, Irani has received $236.8 million in stock and option awards. As CEO since 1990, it’s easy to see how he accumulated his stake.
As alluded to earlier, Apache CEO Stephen Farris earned $19.3 million in 2010. Farris has been with the company since 1988 and CEO since May 2002. He owned 574,319 shares as of Feb. 28, 2011, worth approximately $55.4 million at current prices.
In 2010, Farris received 69% ($13.3 million) of his total compensation in the form of stock and option awards. Irani received 53% of his total compensation in a similar form. Farris might not make it on the Forbes Richest Americans list anytime soon, but he’s certainly comfortable. Both men are paid well for what they do.
Financial and Stock Performance
Just as mutual fund unit holders will turn a blind eye to high management fees when times are good, I imagine the same holds true for stockholders. While $76.1 million is arguably excessive compensation for any CEO — with the possible exception of the late Apple (NASDAQ:AAPL) CEO Steve Jobs, who did bring in paying customers — all shareholders really want is above-average returns on a consistent basis.
And in this respect at least, Irani delivers.
Since 2003, Occidental’s stock has had seven out of nine winning years compared to six out of nine for Apache. In those nine years, Occidental’s average annual total return was 28.1% — 870 basis points higher than Apache. In addition, on the two occasions where Occidental experienced negative returns — 2008 and 2011 — its losses weren’t nearly as great. If preservation of capital is important to you, Occidental has served shareholders well.
From a financial perspective, Occidental also seems to have outperformed Apache over the past nine years. While Apache grew free cash flow 108% between 2003 and 2011, Occidental managed to increase its free cash by 234%. Furthermore, its book value per share has grown 340% from $10.20 in 2003 to $44.85 in 2011. Apache’s book value per share has grown 240% in the same period. Both clearly have delivered excellent financial results in the past decade.
Occidental points out in its DEF14A that it has achieved total cumulative stockholder returns of 914% during the past 10 years. While shareholders have to be pleased, we know from Apache’s example that it’s possible to compensate the CEO with an industry-average wage and still get good results. That said, you have to tip your hat to Occidental’s performance.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.