by Will Ashworth | March 29, 2013 6:00 am
This is the second of two articles examining CEO compensation and stock performance. Previously, I looked at CEOs who earned their keep. Now, I’ll look at the biggest offenders — CEOs who were paid outlandish sums of money in 2012, yet whose stocks underperformed the S&P 500.
On one hand, only seven of the 25 highest-paid CEOs in this Wall Street Journal report outperformed the index in 2012. However, the very best-paid CEOs have mostly done well — four of the top five beat the S&P 500, with only Medtronic (NYSE:MDT) unable to meet the index’s 16% return.
At the very least, this shows pay for performance has some merit.
While the idea is to pick the stocks that performed the worst in 2012, some companies — like Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL) — have bounced back nicely in 2013. Therefore, I’ll look beyond 2012 performance, instead finding those who also have carried last year’s underperforming ways into 2013.
The Pennsylvania-based supplier of hydrogen, helium and other specialty gases has been in business since 1940, with annual revenues approaching $10 billion and earnings of more than $1 billion. McGlade earned total direct compensation in 2012 of $9.07 million, yet Air Products & Chemicals (NYSE:APD) stock has achieved a total return of just 6.4% since the end of 2011. Dividends accounted for half that.
Since McGlade became CEO on OCt. 1, 2007, APD’s stock has achieved a total return of 3.1%, one-fifth the return of the SPDR S&P 500 ETF (NYSE:SPY). In that time, he has earned total direct compensation of $52.4 million, which averages out to slightly more than $10 million per annum. That’s a lot of money to pay for almost no performance.
Air Products’ 2012 proxy states the following: “… directly tying compensation to total shareholder return can be a very ineffective way to pay. Although stock-price movements can be expected to reflect company performance over the long-term, on any given measurement date there can be aberrations that have little to do with the performance of the company or its management team.”
In APD’s case, it’s been a five-year aberration.
George Barrett became CEO of Cardinal Health (NYSE:CAH) on Sept. 1, 2009, after the spinoff of CareFusion (NYSE:CFN), its medical equipment business. Prior to becoming CEO, he was in charge of the company’s Healthcare Supply Chain Services segment, and had been with the company for 20 months before his promotion.
Barrett’s 2012 total direct compensation was $11.1 million. For that outlay, shareholders received a total return of 3.8%, or about one-quarter the performance of the S&P 500. Even worse, its former stable mate, CareFusion, managed a total return of 12.5% — 930 basis points higher than its former parent.
Since the spinoff, CareFusion has achieved a total return of 86.6% — 420 basis points higher than Cardinal Health. It’s not unusual for the spinoff company to outperform the parent; there’s plenty of empirical evidence suggesting this phenomenon has existed for a very long time. What makes Cardinal Health and CareFusion so frustrating is that, despite both companies underperforming the index in 2012, they combined to dole out $21 million in CEO compensation.
In 2011, CareFusion paid incoming CEO Kieran Gallahue more than $25 million in total direct compensation, most of which was stock and option awards used to recruit Gallahue away from ResMed (NYSE:RMD). Since Gallahue’s hiring, its stock has been able to keep ahead of the index, but only barely. Both companies — and especially Cardinal Health — are guilty of paying for non-performance.
If you’re wondering why I ranked Cardinal Health ahead of Air Products when APD’s performance has been even worse, it’s because Cardinal Health pays out $2 million more to its CEO, which in my mind makes it a worse offender.
OK. I can’t help myself. I’m breaking away from the charge of picking offenders whose stocks have underperformed over the last 15 months.
Larry Ellison’s $95 million payday in 2012 is so obscene it doesn’t matter how much his stock has gained since the end of 2011. (It’s up 24.7%, with all the performance achieved in 2012. Year-to-date, it’s actually down 5.4%.)
Over the last 10 years, you could have invested with a frugal company like Whole Foods (NASDAQ:WFM) who paid its co-CEOs the sum of $1.2 million between them in 2012, exactly 1.3% of the Oracle founder’s total direct compensation. And you would have made more money.
Ellison, who is the world’s sixth-richest man, shouldn’t need such a grandiose level of compensation. But hey, when you own more than a dozen properties on Carbon Beach, the world’s most expensive sandbox, you have a lot of upkeep. Let’s also not forget that Larry’s a dollar-a-day guy; his annual salary is set at $1.
According to Oracle’s compensation discussion in its proxy, 98% of its named executive officers’ compensation is variable and “at risk” in nature, aligning their interests with those of its shareholders. That’s fine for the hired guns who don’t own $36 billion in company stock, but there’s nothing “at risk” in Ellison’s situation. If he were truly magnanimous, he’d do what John Mackey does and pay himself $1 per year, and nothing more.
But he won’t. And for this reason, he’s my worst offender for 2012.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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