Nothing frustrates investors more than companies failing to deliver for shareholders but managing to pay the CEO of those companies a King’s ransom.
On April 18, I covered 7 Companies That Are Closing the CEO-Worker Wage Gap in America. These are the kind of companies I like to write about. The ones that aren’t sacrificing the financial happiness of the rank-and-file employees to keep the chief executives in a lavish lifestyle.
The reality is that companies who pay their CEO significantly more than the salaries of the workers tend to experience poor shareholder returns. A recent study reported by Bloomberg and quoted in my previous article showed that the 100 S&P 500 companies with the lowest CEO pay outperformed the 100 with the highest by more than double between 2008 and 2018.
So, whether you want to focus on the seven companies who’ve paid their CEOs outrageous sums in relation to the average employee or just the seven that have spent too much, the names in this article have unacceptable CEO-Worker wage gaps.
Ultimately, this skewing of compensation will result in their stock’s demise.
American International Group (AIG)
Pay Ratio: 697:1
Earning almost 700 times American International Group’s (NYSE:AIG) median pay of $64,186, CEO Brian Duperreault is doing alright for himself.
The company will argue that the CEO’s 2017 pay was only that high because it had to pay $12 million to Duperreault to make up for the unvested equity awards he left behind when joining the insurance company in May 2017.
Assuming the median pay at AIG didn’t move much in 2018, Duperreault made a more pedestrian $16 million this past year or 249 times the average employee.
How’s AIG stock done since Duperreault was hired in 2017?
AIG stock is down 21.5% in the 23 months since. If AIG doesn’t get going soon, 249 times the median pay is going to appear more outrageous than it already is.
CBS (CBS)
Pay Ratio: 595:1
Once upon a time, former CBS (NYSE:CBS) CEO Les Moonves was considered a bit of a CEO celebrity, having turned the network into a TV powerhouse. And then the sexual harassment claims came out that painted the picture of a lecherous man using his power to hit on women.
CBS investigators interviewed as many as 300 people about Moonves last December as part of its investigation into Moonves’ actions and whether they breached the CEO’s employment contract. The company found that they did, terminating him with cause and withholding Moonves’ $120 million severance package.
However, don’t feel bad for the man. Between 2016-2018, Moonves made $186 million in total compensation over those three years, an average of $62 million — 531 times the company’s very high median pay of $116,654.
CBS employees aren’t exactly starving and yet they still made considerably less than Moonves over those three years. In that same period, CBS stock went sideways, delivering annual total returns of 36%, -6%, and -25% in 2016, 2017, and 2018 respectively.
If you were a CBS shareholder over the past three years, you got royally hosed, as did the employees.
Discovery Communications (DISCA)
Pay Ratio: 522:1
I remember when Discovery Communications (NASDAQ:DISCA) launched the Oprah Winfrey Network (OWN) in January 2011. The 50/50 joint venture between the television broadcaster and one of America’s wealthiest women was thought to be a slam dunk despite the more than $500 million DISCA invested in the cable network in the first two years of its existence.
CEO David Zaslav, who’s been the CEO for more than 12 years, was thought to be a brilliant judge of talent. However, OWN never really hit the big time when it comes to cable networks, and in December 2017, Winfrey sold half of her stake for $70 million, leaving Discovery with 75% control.
However, that puts the value of OWN at approximately $280 million, much less than the amount invested by Discovery to get it up and running.
And for that, Discovery shareholders paid Zaslav $208.9 million between 2016-2018, including a staggering $129.4 million in 2018, much of it ($102 million) in stock awards this past year. Also, Zaslav had $21 million of Discovery stock vest in 2018 in addition to the $129.4 million in total compensation.
Over the past three years through April 18, DISCA shareholders have received an annualized total return of 1.8%, well behind the S&P 500 and other peers in the media business.
TripAdvisor (TRIP)
Pay Ratio: 481:1
Any day now, TripAdvisor (NASDAQ:TRIP) is going to release its 2018 proxy showing CEO Stephen Kaufer’s total compensation for the past year. In 2017, Kaufer was paid a total of $47.9 million in total with 98% in stock and option awards.
If you exclude the stock and option awards, Kaufer only made a little over $1 million in 2017, around the same amount as the two previous years.
So, if you’re wondering why TRIP made the list, consider that Kaufer co-founded the company in February 2000. He would have a made a significant amount of money when TripAdvisor was sold to Expedia (NASDAQ:EXPE) in 2004 and then some more when it was spun-off in December 2011.
Over the past three years, TRIP stock’s delivered an annualized total return of -7.5% through April 18. And for that, Kaufer got almost $50 million in stock options and awards in 2017.
It hardly seems worth it. That’s especially true if you’re one of the hardworking TripAdvisor employees earning just under $100,000 a year.
Johnson & Johnson (JNJ)
Pay Ratio: 452:1
It seems odd that I would pick on Johnson & Johnson (NYSE:JNJ), a stock that’s delivered an annualized total return of 10% over the past three years through April 18, but that’s what I’m going to do.
In the past three years, CEO Alex Gorsky brought home cumulative total compensation of $76.8 million; not exactly Les Moonves territory, but much more substantial than the company’s median pay of $66,000.
In February of this year, I wondered if Gorsky was earning his pay. I argued that because JNJ shareholders had done well since he became CEO in December 2012, they probably wouldn’t care. However, like America itself, if you don’t speak up about what’s wrong, you’ll have to settle for whatever you get.
Oh, and don’t forget that Gorsky also made $43 million in 2018 through the CEOs stock options and awards that vested during the year. That’s on top of his $20.1 million in total compensation. If you add that in, the pay ratio jumps to almost 1,000:1.
Do you still think Gorsky’s worth it?
AT&T (T)
Pay Ratio: 366:1
I’ve never been a fan of the AT&T (NYSE:T) purchase of Warner Media. To me, it was adding too much debt to a company that already had a significant amount. Some would call this type of acquisition by CEO Randall Stephenson a vanity project. I wouldn’t disagree.
Since AT&T closed the Warner Media merger in June 2018, T stock’s appreciated by 5.8% including dividends. Considering its dividend is currently yielding 5.9%, most if not all its gains are from dividends.
In the last three years (2016-2018), Randall Stephenson earned $86.2 million in total compensation and another $40.6 million in stock awards for an annual average of $42.3 million for a media ratio of 539:1, 47% higher than the ratio listed above.
Until Stephenson gets the debt down, you can assume that the CEO will continue to deliver underwhelming returns for shareholders.
Regeneron Pharmaceuticals (REGN)
Pay Ratio: 215:1
The Regeneron Pharmaceuticals (NASDAQ:REGN) pay ratio is the least offensive of the seven companies on this list. I picked Regeneron primarily because it had one of the S&P 500’s highest median annual pay at $123,418.
It’s one thing to have a pay ratio over 200 when your employees make $40,000 a year, but when they make three times that, to crank up the CEO-Worker wage gap by more than 200 times median pay is quite the accomplishment.
So, how did CEO and founder Dr. Leonard Schleifer do it?
Salary, a little bit of non-equity compensation, a $2.9 million cash bonus, and a whole lot of option awards. Over the past three years, Schleifer’s been awarded $89.9 million in options. Also, in 2017 alone, Schleifer realized $90.8 million on the exercise of 250,000 shares.
That right there doubles his compensation over the past three years, and I haven’t even taken into account 2016 or 2015. If you add those in, the Regeneron pay ratio also balloons into the stratosphere.
With almost six million shares of Regeneron stock, you would think the board and founder could come to some agreement as Warren Buffett has at his company that doesn’t reek of greed.
You know what they say, “If you own a successful business and want to relate to your staff, don’t drive to work every day in a Bentley.”
I guess option awards is the good doctor’s version of a Bentley.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
