CEOs Made Out Like Bandits in 2011

by Will Ashworth | April 4, 2012 10:10 am

Did you get a 10% to 20% raise in 2011?

According to David Wise of human resource consultant Hay Group, the take-home pay of CEOs in 2011 grew 10% to 20% — and that’s just the beginning. Many CEOs received low-priced options during the market collapse in late 2008, and now those options are worth much, much more. So the true pay packages of CEOs in 2011 is much higher. Let’s look at some of the worst offenders.

According to James Reda, an expert on executive compensation, any list of worst offenders would have to include McKesson‘s (NYSE:MCK[1]) John Hammergren. In the past 13 years, Hammergren has pulled in $500 million in total compensation, or $38.5 million per year.

In January, I wrote about Hammergren’s pay[2] in comparison to AmerisourceBergen (NYSE:ABC[3]) CEO David Yost‘s. Despite earning one-sixth the pay, Yost has managed to add just as much value for shareholders as Hammergren has over the past 10 years. In terms of stock performance, their annual total returns are identical.

Now imagine that instead of owning a few hundred shares, you owned the entire company and Hammergren was your CEO. In 2011, you would have taken approximately $120 million out of your own family’s pockets and put it in his instead. On the other hand, if you had Yost as your CEO, you’d have kept the entire amount.

McKesson shareholders should be livid. Don’t think so? Over at Starbucks (NASDAQ:SBUX[4]), Howard Schultz’s total realized pay in fiscal 2011 — including exercised options — was $41.2 million. They could have hired Schultz for one-third Hammergren’s pay. That’s insane.

J.C. Penney‘s (NYSE:JCP[5]) stock is up 34% since former Apple (NASDAQ:AAPL[6]) executive Ron Johnson joined the company last August, versus 16% for the S&P 500. Johnson arrived with great fanfare and even greater expectations, and though the verdict is still out on Johnson’s pricing policy, I think the onetime Target (NYSE:TGT[7]) employee and his new team will ultimately be successful in its turnaround. That, however, is in the future.

What rankles me is the size of his pay package in 2011.

Specifically, I’m concerned about the “inducement award” of 1,660,578 restricted stock units that was given to Johnson when he joined the company. This ostensibly was to replace slightly less than two-thirds of his 2012 options vesting at Apple. Now, I know you can argue that he gave up a lot when he left Apple, but $52.6 million worth? I don’t think so.

Executives don’t get many chances to lead such an important turnaround. Further, after the board agreed to Johnson’s request to purchase $50 million in warrants entitling him to buy 7.3 million shares at an exercise price of $29.92 sometime after June 13, 2017, I wonder whether it was necessary to dole out all 1.66 million shares.

Let’s say Johnson indeed does a bang-up job, and by the time 2017 rolls around, they’re worth $100. That $52.6 million inducement becomes $166 million, which more than pays for the cost of the warrants. He then pays $218 million to exercise the shares, which are now worth $730 million. Five years down the road, J.C. Penney’s stock has grown by 186%, while Johnson has made $628 million — plus salary, bonus, stock awards, etc.

Great move on his part, but I’m not so sure it’s good for shareholders. I generally like CEOs paying their own way, but in this instance it seems like he held up the board for a king’s ransom.

At the end of 2011, The New York Times ran an article about the worst CEOs of the year. One of the candidates was William Weldon, chief at Johnson & Johnson (NYSE:JNJ[8]). Under Weldon’s watch, 2011 was a year of litigation and recalls that cost J&J $2.7 billion in operating profits. Despite this comedy of errors, Weldon’s total compensation in 2011 was $26.8 million.

At first glance, you’ll notice that this amount is $2 million less than the year before. However, if you subtract the changes in pension value and nonqualified deferred-compensation earnings, which many do, he actually made an additional $1.7 million last year.

Most of this gain came in the form of nonequity incentive-plan compensation — specifically, from certificates of long-term compensation and long-term performance, neither of which Johnson & Johnson grants any more. Weldon received more than $11 million in compensation the company saw fit to do away with.

Lastly, despite being at the helm when the company racked up the largest amount of unexpected expenses in the past 10 years, Weldon received an annual performance bonus of $3.1 million. All this for a stock that underperforms rival major drug manufacturers by almost 600 basis points. I guess mediocre results are bonus-worthy at Johnson & Johnson.

In the next few weeks, more of the largest companies will file their annual DEF14s, and it will become abundantly clear that corporate boards found something else to do with their cash hoards in 2011.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

  1. MCK:
  2. Hammergren’s pay:
  3. ABC:
  4. SBUX:
  5. JCP:
  6. AAPL:
  7. TGT:
  8. JNJ:

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