1/17/2012 7:39 PM ET|
The myth of the $1 CEO
New Apple chief Tim Cook took some heat for taking $378 million in stock, compared with Steve Jobs' fabled $1 a year salary. But how much compensation do dollar CEOs really get?
When Apple announced last week that Tim Cook got $378 million worth of stock when he became CEO in 2011, commentators quickly took shots at him, reminding us that Steve Jobs, by contrast, made just $1 a year.
That comparison was like hearing fingernails on a chalkboard to anyone who follows CEO pay levels closely.
While it's true that Jobs' salary was just $1 a year, he was worth an estimated $6.7 billion at the time of his death, in large part because of a huge stock grant he received from Apple (AAPL, news) in 2003.
Now, with proxy season -- that time of the year when companies hand shareholders annual meeting packets stuffed with fresh details on CEO pay -- around the corner, we're about to hear a lot of companies bragging about CEOs who make only $1 a year. In fact, for many if not most CEOs, salary is a relatively small part of compensation.
So I thought it would be fun to take a look at how much some of these "$1 CEOs" actually make. Because, trust me, it's always way more than a dollar. And some $1 CEOs are perennially the highest-paid CEOs around when you count all their earnings.
In short, you'd love to make a buck the way these CEOs do.
In theory, it's not entirely public relations
CEOs who accept a dollar salary deserve some credit.
After all, shareholders are saving about $1 million a year, the typical CEO salary at a large company. A $1 salary can also be a bold statement of confidence, since the only reward for a dollar CEO may come if the value of his or her stock and options grants goes up. "It's the CEO putting his (or her) money where his mouth is, saying, 'If the stock doesn't perform, I am not going to make any money,'" says Paul Hodgson, an analyst at GMI, an independent corporate governance analysis company.
But the latter is true only in theory. As with a lot of CEO pay questions, the devil's in the details with dollar pay, says Hodgson. As you are about to see, dollar pay is typically a myth, since the CEOs getting $1 in salary often get huge stock-and-option grants. And those grants often come without the strings that would tie them closely to their stock's performance.
Let's take a look at some examples where $1 pay means little -- and one case where it's meaningful and actually part of an attempt to create egalitarian pay inside a company.
Oracle: When $1 means $77 million
In his company's most-recent fiscal year, Oracle (ORCL, news) founder and CEO Larry Ellison took a pay cut of sorts; his salary dropped to $1 from $250,000 the year before, and $1 million the year before that. The company says he got just $1 in salary in part so that the board could focus on types of pay that might motivate him more -- like stock options.
That sounds nice in theory. Oracle shareholders save almost $1 million a year. And those options motivate Ellison to work harder to raise the stock's value, helping all shareholders.
But in fact, from a CEO pay perspective, Oracle's CEO compensation plan is "ridiculous for a number of reasons," says Hodgson.
Here's one I'd point out right away. Though Ellison has an estimated net worth of $33 billion because of all the Oracle stock he owns as founder, Oracle's board still makes shareholders pay more for his home security than what most CEOs at big companies get in salary for a year. In 2010-11, Oracle gave Ellison $1.53 million to cover home security costs, whereas CEO salaries typically cap out at $1 million. (Unless otherwise noted, the pay numbers here are from 2010, the most recent year available. They most likely haven't changed much.)
But what really irks pay experts like Hodgson and Brandon Rees, the deputy director of the AFL-CIO Office of Investment, is that Ellison gets any stock options at all. And their complaints are not merely the "politics of envy," as conservative presidential candidates like to say of anyone who criticizes excessive CEO pay.
What they mean is that Oracle's board, like any board, should design and grant options to motivate Ellison to work harder for shareholders. Remember, boards are supposed to deploy company money in ways that ultimately help shareholders, not just managers.
Yet Oracle's option grants to Ellison don't seem to do that, for two reasons. First, they contain no performance metrics. They are "pay for pulse," says Rees, meaning that even if Ellison does nothing and Oracle stock simply goes up as much as the market, Ellison is rewarded. Secondly, Ellison already owns so much stock -- 1.1 billion shares -- that it's hard to imagine that a few more will motivate him more.
After all, options come at a cost to investors. Companies have to create new stock to back options; this means lower earnings per share, which generally lowers a stock's value. Plus shareholders foot the bill for CEO profits on options, since the money doesn't come out of thin air. And Ellison's options grants are enormous. He got 7 million shares in 2010, which the company valued at $62.7 million. That, plus some other pay, took his total pay to $77.5 million, as calculated by the company.
Not bad for a guy with a $1 salary.
This has been going on for years. As of the start of 2012, Ellison had 44.4 million options that would be worth $396 million in profits assuming they were all exercisable, according to Equilar, an executive compensation data firm. And because those options grant him the right to buy shares for years to come, their potential value is much higher. "As founder, he has substantial ownership, and yet he continues to extract large options grants that dilute company shareholders year after year," says Rees.
Oracle declined to comment. But in Ellison's defense, I'll say two things. First, without him, there'd be no Oracle, since he founded the company in 1977 and has worked hard to develop it since. He deserves credit, and reward, for that. Second, he's signed the Giving Pledge agreeing to eventually give away most of his wealth to charity.
2 more $1-or-less CEOs
Ellison certainly isn't the only CEO whose annual salary figure seems irrelevant because he still takes big stock and options grants.
At Duke Energy (DUK, news), for example, CEO James Rogers doesn't even take a buck. He gets zero a year in salary. But throw in generous stock and options grants, and his pay was really $8.8 million in 2010 and $6.9 million the year before. The company says he is paid only in stock to align his interests with those of shareholders, and that he is the largest individual shareholder at the company.
And consider Richard Fairbank, founder and CEO of Capital One Financial (COF, news), who earns $1 a year in salary. In 2010, Fairbank owned, or had exposure to via options, about 9 million Capital One Financial shares, according to company filings, which seems like it ought to be enough to motivate him to drive the company's stock higher.
Yet part of that position came from a large 2010 grant of shares and options valued by the company at $14.7 million at the time. And while taking only $1 in salary that year, he also got $48,886 to cover the cost of a driver and home security -- which is about the typical income for a U.S. household. Some of the stock Fairbank received was linked to performance. Capital One's total return of 11.6% in 2010 beat the S&P Financials Index for the third year in a row, a spokesperson for the bank said.
Google: Saying no to the options bonanza
You might think by now that being a company founder -- like Ellison or Fairbank -- gives someone the clout or the right to regularly extract tens of millions a year in the form of stock options grants. Or you might think those grants are necessary to keep the CEO working and the company growing.
But this isn't so.
Google (GOOG, news) co-founder and CEO Larry Page, along with co-founder Sergey Brin, asked that their salaries be reduced to $1 in 2004, and they have stayed there since. By 2013, they'll have earned just 10 bucks each.
But they've also declined options and stock grants for years. So did Eric Schmidt, who served as CEO for several years until April 2011, when Page took over.
In other words, unlike Ellison at Oracle and Fairbanks at Capital One, Page, Brin and Schmidt don't regularly use their sway over the board to keep extracting more options. And yet, they seem adequately motivated; Google has done OK under their leadership.
It's easy to argue that this is because they already have enough stock. Page and Brin have about 27 million shares each. And that's after some hefty selling. Since 2004, for example, Page has sold 9.6 million shares, or $3.3 billion worth. Schmidt has about 9.1 million shares. (He did go off the no-options policy in 2010, taking about 250,000 shares in stock and options grants last year. And for the past three years, Schmidt has gotten about an additional $300,000 shares a year, mostly as reimbursement for personal security.)
And here's an odd and fun fact: Along with their $1 salaries, these three also get an annual holiday bonus of about $1,700 each. You have to wonder what these billionaires do with that windfall; perhaps it's their Christmas club account.
The most underpaid CEO?
In 2007, Mackey voluntarily reduced his annual salary to $1 and elected to forgo bonus and options awards. His total pay for 2010 was $45,968, about the median household income in the U.S. He got the $1 salary, and the rest was for "accrued paid time off."
Mackey's decision to decline new options might surprise you, because unlike our other $1 CEOs, he doesn't have that big a stake in the company. He has 1.2 million shares. And he had only about 66,000 options, all exercisable, with a paper value of $1.5 million at the start of the year, according to Equilar.
Since 1993 he has sold 1.3 million shares, grossing $19.4 million, according to Thomson Reuters. Not all of that was profit, since a lot of those shares were converted from options.
Why is Mackey's pay so low, even though he seemingly could extract much more wealth as a co-founder of Whole Foods? The company says it's part of a philosophy of "egalitarian" pay -- a policy that has Whole Foods capping salaries for execs at 19 times the average annual wage of all full-time employees. That average was about $37,000 in 2010, which means execs can't make more than around $700,000 a year in salary. (For a look at CEOs earning the most compared with their own employees, read "7 CEOs pulling in outsized paychecks.")
Though annual pay for two execs topped $4 million in 2010 when options and stock grants are included. Mackey takes only that $1 salary, and no options. This makes him "somebody who is being altruistic for philosophical reasons," says Hodgson, and not just for PR purposes.
So the next time you joke about "whole paycheck," at least remember that considerably less of the profit from your spending goes to the executives at Whole Foods than goes to their counterparts at other companies where you spend money. Even $1-a-year CEOs are usually taking a lot more off the top.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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With all due deference, no one's labor is worth $378 million dollars. The obscenity of CEO salaries while millions of Americans are out of work, and billions of people around the world go hungry every night is completely unacceptable. When is enough wealth enough, especially when money made from money it is taxed at 15% ? When is it OK to then pass all of that wealth on to heirs who did nothing to earn it, tax free ?
I say the time has come for common sense and profit sharing to workers. The only way real wealth is created is through human labor. It is time that kind of human labor is rewarded the way it used to be.
Jess Gayer, the idea that wealth is created solely through labor ignores the billions of people that work hard in third world/developing nations that will remain impoverished. You mention that human labor should be rewarded the way it used to be. What period of human history are you thinking of? Hunters and gathers did not accumulate much neither did early agricultural settlements. I cannot think of a society that had any significant accumulation of wealth without significant disparity. I also cannot think of a society in history in which so many people accross the economic spectrum enjoyed such relative comfort as modern day America. We truly are fortunate to live in a country with a median household income of approximatel $46k.
It's kind of silly to fret over sky-high CEO pay because it's just a product of a free market economy.
If you don't like the way CEOs are rewarded, just don't patronize the business and take your business elsewhere. This is not as hard as you think.
You don't have to be a slave to these people. Even I shun the oil companies as much as possible by living close to work and making other wise choices. And I have yet to buy anything made by Apple and I have survived.
Executive compensation has been a bit of a topic since the recession. Don't know about you, but I need more than $1 a year to live off of. Are some executive packages way too big - you bet! Ultimately corporate boards must be the overseers of this issue. Pay executives a minimal salary and then pay them stock options that can't be converted for several years. This provides a means for the exec to live, but also incentivizes him/her to perform. With options being worthless until they mature 3- 5 years later, the exec can't just focus on quick quarterly gains and "cash out".
Make no mistake, really good executives are hard to come by. Lots of good to mediocre ones are out there. Companies should pay these individuals very well, as they will need to earn it. Long hours, lots of anxiety, little vacation and shareholders that want to see profits. A tight rope to walk.
Remember, we live in a capitalist society. The ugly reality is that there will be HAVEs and HAVE NOTs. The example of hunter gatherers not accumulating wealth is not necessarily true. Really good ones would survive the winter and have lots of kids, while the not so good ones would starve/freeze. It is just a matter of what "wealth" we are looking at.
Jess Gayer, the idea that wealth is created solely through labor ignores the billions of people that work hard in third world/developing nations that will remain impoverished.
Ah yes, it must all be venture capitalism.
The 2000s proved that you cannot just "create" wealth with financial engineering. Which is mostly what equities, commodities, and most stock markets tend to be doing today.
You mention that human labor should be rewarded the way it used to be. What period of human history are you thinking of?
Post US depression. 30 years of GDP gains were shared fairly equally.
While national income rose, those in the bottom 90% shared (which includes many successful people like lawyers, doctors, engineers, scientists, etc).
10% cumulative growth 30 years after that. Again, adjusting, many lawyers, doctors, scientists, etc are not seeing income gains. Shouldn't that labor be rewarded?
Hunters and gathers did not accumulate much neither did early agricultural settlements. I cannot think of a society that had any significant accumulation of wealth without significant disparity. I also cannot think of a society in history in which so many people accross the economic spectrum enjoyed such relative comfort as modern day America. We truly are fortunate to live in a country with a median household income of approximatel $46k.
Well, as true as that is. It should have been the global goal. To have large segments of society who could enjoy the benefits of advancement.
The opposite happened. Starting with executive compensation transforming from real salaries to equity salaries in the 70s. Now, the only drive of society globally is to pay people less and sell it at a difference. Of course, this is driving something not sustainable. Can't keep paying people in developed nations less and expect them to continue to buy the cheap goods (which must gradually get more expensive).
A) A society of all equals is not efficient economically, however, what most "business people" fail to see is the opposite
B) A society of extreme wealth disparity is even more economically inefficient (think Fuedalism and basically the entire period from 500ad-1500ad).
The balance is where you see tremendous gains in the areas of society (culture, education, expansion, technology, etc).
WhoaManWtF did you actually read this article? ...most of these CEO's get stocks and option no matter how well or bad the company is doing! Naturally if the stock rises it makes them even more money versus if it drops; but in the end they profit doublely because they only have to pay 15% in capital gains taxes on the stock and options they are compensated.
I wish they paid my (upper middle class) salary in stocks so my tax rate would only be 15% instead of my current 33% rate!!!
I worked for a company that had 150 years under its belt when we got a new CEO that worked for no salary. He was given stock options instead and, oh, did I forget to mention the $200K bonus?
Within a few years the company was bankrupt and folded its tent. He never exercised the stock options even though they were renewed at a lower target price as the stock fell like a dead cat with no bounce.
I guess we got what we paid for.
This is what I don't understand. How can you be the CEO of a company, AND a major stockholder? If you're the CEO, you are trying to steer the company into the future. If you're a stockholder, you're looking at immediate dividends on those shares and because you're the CEO, you have thousands, if not millions of shares. That's how the company I was working at for 13 years got bought out. Our CEO had millions of shares and boom, the other company makes a stock offer. Of course you're going to accept it if you have millions of shares. Also, as a shareholder, you may be tempted to steer the company in the wrong direction solely to inflate the stock for your own gain. This needs to be outlawed. You either run the company or you are a stockholder. You can't be both.
"I also cannot think of a society in history in which so many people across the economic spectrum enjoyed such relative comfort as modern day America."
No need to go to history, and you apparently are not thinking very hard. America does not rate first among modern industrialized countries in average citizen wealth, and it rates rather low in equality of wealth distribution. It also rates relatively low in economic upward mobility.
Can anyone here find any CEO that is paid more than 1% of the profits their company makes for that year?
Every company in the S&P500 that is *not* earning a profit this year. Seriously? This question above begs to be criticized. CEOs are paid millions against their compay *losing* money. So they are paid well above 1% of "profits"
But just to erk you even more.
Mr. Cook at Apple just pulled in 378 million dollars (single year). Apples *PROFIT* is 25.92 billion. Quick. Do some math and tell me what 378 million of 25.92 billion is? It's more than 1%.
Just STFU cause you don't know what you're talking about.
How about dissecting what the CEO's do to supposedly earn all those millions a year?
The ability to make smart decisions that mean the difference between millions of dollars in gains or total bankruptcy means that CEO's are obviously not going to get paid as much as your local cashier.
No one argues that.
What everyone who continually defends CEOs fails to see (for what reason is beyond me) is that it's the proportion of pay.
The proportion has increased to a level more dramatic than any time in modern economic history. 40 years ago, average CEO pay was in the 30-40 times range of the average employee of their company. Now it's 300-400 times.
A) This is irresponsible, concentrating capital into fewer hands is a sure fire way to sabatoge economic progress (just like putting the money in everyones hands equally is).
B) They aren't *WORTH* more today than 40 years ago. THEY AREN'T. It's really theft by use of the equity markets. To leverage them against the value of the company and extract the wealth to a limited few.
Paper wealth is far different than tangible wealth. Cash, securities, bonds, and other instruments are all faith based, the foundation of financial engineering, and a natural result of government distortion of markets.
All wealth is faith based.
There is an intrinsic value to a home but only in the form ofnshelter. Or food. Water supplies. And maybe weapons.
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