by Will Ashworth | January 9, 2012 5:45 am
It pays to be a good communicator. In 2010, CEOs in charge of communications-related S&P 500 businesses earned an average of $23.2 million in total compensation. According to the AFL-CIO, that’s 686 times the median worker’s pay.
At the very top of the list is Viacom‘s (NASDAQ:VIAB) Philippe Dauman, who hauled in $84.5 million in just nine months, making him the highest-paid CEO in America. Not too far behind Dauman was News Corp. (NASDAQ:NWS) CEO Rupert Murdoch, who made $22.7 million in fiscal 2010.
Although Murdoch will forever be synonymous with the words “phone hacking,” he does run an impressive media empire — and while no person is truly deserving of such excess, it’s always a good idea to understand who does a better job delivering the goods.
While there’s any number of ways to evaluate the effectiveness of a CEO, most investors would consider financial and investment returns the top two criteria in that decision. Philippe Dauman has been Viacom’s CEO since September 2006, while Murdoch has been at the helm of News Corp. since 1979. Dauman was just 24 at the time, and as such, we’ll focus solely on the years 2006 through 2011. With Dauman’s pay packet being so large, Viacom’s performance over the six year period will have to be dramatically superior to those of News Corp. to provide any justification to shareholders.
Although Viacom’s year-end changed in 2011 from Dec. 31 to Sept. 30, it shouldn’t make a noticeable difference in the comparisons. Viacom’s revenues at the end of 2005 were $9.6 billion, coinciding with the spinoff of CBS (NYSE:CBS) into its own separate company. At the end of September 2011, those revenues had grown to $14.9 billion — an annual growth rate of 9.7%. News Corp.’s went from $25.3 billion in June 2006 to $33.9 billion at the end of September, for an annual growth rate of 5.7%. From a revenue standpoint, Viacom has performed much better.
In operating cash flow, Viacom appears to have done a far superior job than News Corp., growing operating cash flow 10.8% annually compared to 5.2% for Murdoch & Co.
Since 2005, Viacom’s return on assets have increased from 6.7% to 9.4%, a 40% improvement. Meanwhile, News Corp.’s have remained flat around the 4.7% mark, while its total assets grew from $56.6 billion to $62.0 billion. Over approximately the same period, Viacom’s total assets went from $19.1 million to $22.8 billion. Viacom grew its assets by 19.4% or twice the rate of News Corp. while also managing to improve its return on assets.
In my opinion, this is probably the most significant of the three metrics presented because it indicates the increase in assets led to meaningful growth in revenue and profits. There appears to be very little that News Corp. brings to the table that suggests Murdoch has done anything to outshine the Viacom CEO.
In terms of financial metrics, Viacom clearly is the winner. Not only is it performing at a much higher level, it’s doing so with much less fanfare and media scrutiny.
However, since Viacom’s separation from CBS at the end of 2005, its stock’s average annual return is 9.6% compared to 9.9% for News Corp. From a shareholder perspective, it’s a virtual tie.
There are a couple of ways you can interpret this information. You could come to the conclusion that financial performance is nice to have, but it doesn’t necessarily translate into superior investment returns. Despite being a clear winner over News Corp. when it comes to financial metrics, a significant advantage hasn’t translated into greater long-term returns.
Another way to look at this is to interpret Viacom’s superior investment returns in recent years as proof investors jumped onboard as soon as it implemented a dividend for the very first time in June 2010. Viacom has crushed News Corp. stock during the past two years, and it could very well do the same for years to come.
At the end of the day, this might be the best example I can find where excessive CEO compensation seems irrelevant to investors. As long as they make their 6% or 8% a year over the long haul, they couldn’t care less whether Philippe Dauman or Rupert Murdoch make more in a day than many of us do in five years of work.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned stocks.
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