In the almost seven years that Johnson & Johnson (NYSE:JNJ) CEO Alex Gorsky has been in the top job, JNJ stock has achieved a cumulative total return of 155.5% (through Feb. 12). Gorsky took charge of the large-cap healthcare company on April 26, 2012. He’s managed to deliver an annualized total return of 14.7%.
Shareholders must be pleased with their returns. Does that mean Gorsky’s earned his pay as CEO?
Maybe. Maybe not.
If we lived our lives in a vacuum, Gorsky’s performance would be enough to answer “yes” to the question. However, we don’t. Johnson & Johnson, like all publicly traded stocks, have benchmarks to live up to. No, I’m not saying that it has to beat the S&P 500 index and its peers every year, but over the long haul, JNJ stock ought to at least keep up with them.
So, in terms of performance, JNJ stock has easily met and exceeded shareholder expectations. From that vantage point, It’s easy to how shareholders might view Gorsky’s compensation as irrelevant, but it’s not.
What happens if JNJ stock underperforms over the next seven years relative to the index and its peers? All of a sudden paying a person $29 million a year doesn’t seem so smart; especially when you consider that Johnson & Johnson could get a similar result at half that fat paycheck.
Big corporations like to throw out the rationalization that they have to provide this level of compensation to remain competitive. It’s a bald-faced lie. There are plenty of qualified candidates in the U.S. that could handle the job at half the compensation. I’m sure of it.
The truth is, if CEO compensation were an investable stock, anyone who invested in those shares between 1978 and 2017, would be wealthy.
“CEO compensation has grown far faster than stock prices or corporate profits. CEO compensation rose by 979% (based on stock options granted) or 1,070% (based on stock options realized) between 1978 and 2017,” Fast Company reported in August 2018. “The corresponding 637% growth in the stock market (S&P index) was far lower.”
You can debate the relevance of these numbers all you want but Alex Gorsky, like most CEOs, is replaceable.
How Much Does Gorsky Make?
I won’t bore you with the details regarding salary, cash bonuses, pension plans, etc. I’m merely going to provide a table that shows how many of Gorsky’s stock and option awards have vested since becoming CEO in 2012. You can decide if the largess amassed is worth it.
Alex Gorsky’s Stock Vested 2013-2017
|Year||Stock Awards||Value Today|
Source: SEC Corporate Filings
I guess $50 million doesn’t seem like a lot over six years for a CEO of a $360 billion company. And it isn’t. However, when you consider there are several candidates at JNJ who could do the job, it’s a lot of money going out the door for someone who essentially won the CEO lottery.
Oh, and one last thing.
As of fiscal 2017, Gorsky had 2.8 million stock options, both exercisable and unexercisable, at prices between $62 and $116, so they’re all in the money. Were he to exercise all of the options at today’s stock price, they’d be worth $376 million.
Is Gorsky Earning His Pay?
As I noted in kicking off this piece, shareholders probably don’t care about overpaying Gorsky, given the returns of JNJ stock since he became CEO.
However, like America, if you don’t speak up about what’s wrong with the country, you get what you deserve.
Eventually, Johnson & Johnson stock is going to revert to the mean and when it does, Alex Gorsky won’t be sitting nearly as pretty.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.