Excessive CEO compensation is a big reason the Occupy Wall Street movement struck a chord in 2011. Politicians like Newt Gingrich clearly are out of touch with the average American’s lot in life. While Gingrich was busy accepting $1.6 million in consulting work from Freddie Mac between 1999 and 2008, the average American worker’s pay was stagnating. From 1979 through 2007, the top 10% of income earners, those making more than $118,200, captured 63.6% of the overall growth in income. In 1980, the average CEO earned 42 times median pay. By 2010, the disparity had grown to 343 times. Things are definitely out of whack.
In the fourth in an ongoing series about CEO compensation, today we’ll look at CEO pay for two companies involved in the mineral resources industry: Freeport-McMoRan Copper & Gold (NYSE:FCX) and Cliffs Natural Resources (NYSE:CLF). In 2010, Freeport CEO Richard Adkerson made $39.5 million, or 1,168 times the median worker’s pay. Joseph Carrabba, CEO for Cliffs Natural Resources, made $5.6 million, or 165 times the median worker’s pay.
In the first three articles, I looked at CEO compensation in relation to each company’s financial and investment returns. In the final two, I’ll dwell a bit more on the nitty gritty of compensation and the sensibility of CEO pay packages.
In 2010, the gold and copper producer generated $635,381 in revenue per employee and $145,138 in net income per employee. (Because the CEO compensation data is from 2010, I’m using financial numbers from the same year.) According to the Society for Human Resource Management, 22% of a mining-related business’s operating expenses are for salaries. Using this guideline, Freeport McMoRan would have spent $2.18 billion on salaries at both the head office and in the mines in 2010. That translates into an average salary of $73,000 per employee.
More important is the realization that CEO Adkerson made an estimated 541 times the company’s average salary in 2010 and an even higher multiple in 2008, when he took home $77.3 million including stock awards worth $66.5 million — despite an $11.3 billion loss that year.
In a recent article in The Globe and Mail, Margaret Wente makes an argument for bringing executive pay back down to earth. Some noted academics have specific recommendations for doing so. Roger Martin, dean of University of Toronto’s business school, believes stock options should be eliminated entirely because they put the focus on stock performance and not financial performance. Henry Mintzberg, a management professor at McGill University in Montreal, goes one step further, calling for the elimination of all executive bonuses, whether they’re paid in stock or cash.
Freeport-McMoRan’s situation is a prime example why CEO pay needs to return to the pre-Clinton era when companies could write off more than $1 million in non-performance based compensation for named executives. It seems clear by now that the government’s move to limit the tax deductibility of executive compensation backfired because it created the current stock option/awards mess along with deferred compensation and all sorts of other ways around it.
After all, the CEO is not solely responsible for the success of a company, nor is he or she usually the sole cause of its failure. Therefore, long-term performance-based compensation would seem to reward executives arbitrarily with little proof their efforts contribute to the growth in share price or profitability of the company.
In Freeport-McMoRan’s DEF 14A, it declares that base salaries should attract and retain executive officers. In the same breath it states that the company hasn’t increased base salaries since May 2007. However, don’t feel sorry for Adkerson. While only receiving $7.5 million in salary in the years 2008-2010, his performance-based compensation totaled $63 million. The company justifies this based on the board of directors’ belief in the executive’s ability to develop and implement a winning business strategy.
That might be so, but I find it hard to believe there isn’t someone in the U.S. equally as talented and willing to work for less. Shareholders are not getting their money’s worth.
Cliffs Natural Resources
Some like Cliffs’ CEO Joseph Carrabba could fit the bill. He joined Cliffs in May 2005 as chief operating officer after more than 20 years with London-based mining and materials company Rio Tinto (NYSE:RIO). Like Freeport’s Adkerson, Carrabba is a seasoned veteran. In the past three years, his total compensation in descending order is $5.6 million, $5.4 million and $4.5 million. That’s $15.5 million compared to $144.4 million for Adkerson over the same time.
Without getting into each company’s financials and stock performance, doesn’t the pay disparity between the two seem excessive? Could Carrabba be a mediocre executive, or is Adkerson is overpaid? With 20 years at one of the world’s largest mining company’s, I’m guessing Carrabba know’s what he’s doing.
Even the current CEO of Rio Tinto, Tom Albanese, who was at the center of the storm in 2011 when shareholders protested his 31% increase in total compensation to $8.5 million — looks like a relative bargain. Albanese makes one-fifth the compensation of Adkerson despite running a company whose revenues and net income are almost three times higher than Freeport-McMoRan’s.
If you’re a Freeport-McMoRan shareholder, you might want to get out the protest placards. Your CEO is overpaid.
More from this series:
- Lorillard Getting More Bang Than Altria for Its CEO Buck
- Occidental CEO’s Outlandish Pay Has Brought Outstanding Performance
- Don’t Gripe About Viacom’s $84M CEO
As of this writing, Will Ashworth did not own a position in any of the stocks named here.