The Atlantic magazine recently analyzed data from Standard and Poor’s ExecuComp database that shows CEOs made 949 times as much money as the average employee in 2014; more than double the AFL-CIO figures which themselves are outrageous. Investors should be seriously ticked, and also consider some of these companies as stocks to sell.
All too often this excessive compensation fails to translate into above-average shareholder returns. Much like portfolio management, where higher fees don’t necessarily translate into higher investment returns, CEOs are being overpaid and underdelivering; and the practice has got to stop.
The discrepancy between ExecuComp’s figures and those of the AFL-CIO is the result of how both groups analyze a CEO’s stock-based pay. The AFL-CIO uses the estimated fair value of this pay, while ExecuComp’s data reflects the actual realized gains on that stock-based pay.
So, when a CEO’s total executive compensation in a given year is $12 million, it’s more likely $20 million or more; that’s especially true in a bull market like the one we’ve been in for the last eight years.
Who are the worst culprits? These are three stocks to sell that overpay and underdeliver.
Stocks to Sell: Chipotle Mexican Grill, Inc. (CMG)
Chipotle Mexican Grill, Inc. (NYSE:CMG) is down 45% through Sept. 21, a direct result of the E.coli outbreak in late 2015 that plagued the company’s locations in several states.
The Wall Street Journal reported in March that Chipotle Co-CEO’s Monty Moran and Steve Ells saw their 2015 total compensation drop by half. The duo’s combined total compensation in 2015 was $27.4 million down from $57 million the year before.
However, that’s based on fair-value estimates of stock-based pay rather than actual realized gains.
How did they actually do?
For that, you need to slide down its 2016 proxy statement a few pages to the section entitled “Option Exercises and Stock Vested in 2015”. This is where you’ll find their actual take home pay. Together, Moran and Ells realized gains of $154 million on top of the $27.4 million mentioned in the “Summary Compensation Table”.
So, while the WSJ was reporting declining compensation of its top executives, an expected result given such a flagrant abuse of customer trust, the company did the exact opposite.
Is this really the best way to show contrition? It’s these types of examples that demonstrate why stock-based pay isn’t all that it’s cracked up to be. Shareholders definitely lose in this instance.
Stocks to Sell: Liberty Global plc (LBTYA)
CEO Michael Fries was one of the 100 highest paid CEOs in 2015 according to the AFL-CIO’s Executive Paywatch. Fries took home a cool $28 million this past year; not bad for the CEO of a cable operation.
The last 12 months haven’t been kind to Liberty Global plc – Class A Ordinary Shares (NASDAQ:LBTYA) whose stock is down 22% through Sept. 21. Working on a second straight losing year on the markets — down 8% in 2015 and 13% year-to-date — Liberty Global really has no excuse paying Fries top 100 wages, but here we sit.
Yet, he didn’t take home $28 million, the Liberty Global CEO took home $70 million once you include the $42 million actually realized from vested stock awards last year.
$70 million for two losing years? A bargain at half the price.
Stocks to Sell: Gilead Sciences, Inc. (GILD)
I know what you’re thinking. How can anyone question the performance of Gilead Sciences, Inc. (NASDAQ:GILD), a stock that has achieved an annualized total return over the last five years of 32.8%? That’s a fair question.
Now here’s my answer.
Over the last two years, Gilead CEO John C. Martin took home $37.8 million in total compensation according to Gilead’s summary compensation table. In reality, Martin actually took home $425 million or roughly 10 times the reported amount.
Even worse, Martin’s fair-value compensation over the last 19 years as top dog at Gilead was $209 million, while his actual realized gains over that time were $1 billion or $52.6 million annually.
That’s a king’s ransom.
In April 2014, Martin Sosnoff, a money manager who owned 400,000 shares of Gilead at the time, wrote about this excessive compensation. While not happy with it, citing an ever-widening gap between executive compensation and the median income for employees, Sosnoff’s firm didn’t unload Gilead stock until the second quarter of 2016. So, he obviously wasn’t that unhappy about Martin’s compensation.
Here’s the thing.
Martin’s actual compensation in 2015 was $232 million. Likely his highest annual pay in the 19 years referenced above. Not coincidentally, Gilead’s stock topped out at $120.37 in July of last year. Anyone who bought at that time is down 26%, while Martin’s a billionaire.
And before you go pointing to the stock’s long-term performance, consider that Canadian convenience store operator Alimentation Couche-Tard Inc (USA) (OTCMKTS:ANCUF), who owns Circle K, delivered a five-year annual total return of 38.2%, 540 basis points higher than Gilead without resorting to overpaying its executives.
For $1 billion, I expect bigger returns than 32%.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.