By Graef Crystal
(1,002 words; posted Thursday, Oct. 16)
(Note: "Maximum Wage" is a monthly column about the compensation of top corporate CEOs.)
Question: If a CEO owns a ton of his company's stock, like, say, $1-billion worth, does he 1) pay himself hardly anything, recognizing that he already has plenty; 2) pay himself like other CEOs who are basically working stiffs and don't own a ton of shares; or 3) use his high percentage of company ownership to push his board into giving him a far larger pay package than other less stock-heavy CEOs receive? Well, if you picked Choice 1, you'd be correct. But you'd also be correct if you picked Choice 2 or Choice 3.
For most CEOs, it turns out, Choice 3 is the favored pick. Other things being equal, the more company stock a CEO holds, the higher his total pay is. (I discovered this in a study I did recently of 1,000 large- and mid-market capitalization companies in which, having first taken account of differences in company size and performance, I compared the value of company shares owned by a CEO with the size of his total compensation package.)
| But the relationship doesn't hold up as you move up the scale of holdings. An increase in company shareholdings--say, from $5 million to $10 million--does tend to lead to higher CEO pay. But as the shareholdings move into the $15-million to $20-million range, the pay premium begins to disappear. By the time we get to CEOs owning shares valued at $500 million or more, their pay packages are, on average, no different from those of CEOs who own far fewer shares of their company's stock. So score one for Choice 2 here.|
In fact, there is very little rhyme or reason in the pay of the very top shareholding CEOs. Among the 14 CEOs who owned the largest amount of their companies' shares, I discovered that--judging from the size and performance of their company, and the pay practices of the 986 other companies in the study--not one was paid what they "should" have been paid. Six were paid above the market, one as much as 394 percent above. And the remaining eight were paid substantially below the market.
And how about Microsoft's Bill Gates? His salary is a more substantial $340,600 but, after taking account of Microsoft's size, he is still paid 59 percent below the market. Unlike Buffett, Gates received a bonus, albeit a relatively small one of $222,000. The combination of his base salary and bonus, after giving recognition to Microsoft's size and tremendous performance, left him 77 percent below the market. And when you take account of the fact that, like Buffett, Gates received no stock-option grants last year, the $562,600 total package left him underpaid by 92 percent. But no tears for Gates either; the value of his shareholdings at the end of his 1996 fiscal year were $37.4 billion.
Other fine billionaire (and near-billionaire) buys included: Donald Graham of the Washington Post Co. ($900 million in shares; 86 percent underpaid); William Wrigley of the firm that bears his name ($1.2 billion in shares; 80 percent underpaid); Laurence Tisch of Loews and formerly of CBS ($1.8 billion in shares; 79 percent underpaid); Peter Nicholas of Boston Scientific ($1.2 billion in shares; 74 percent underpaid); Charles Johnson of Franklin Resources ($680 million in shares; 67 percent underpaid); and Leslie Wexner of The Limited ($1.1 billion in shares; 36 percent underpaid).
| So, if you're a fan of Choice 1, the theory that says billionaires know when enough is enough (at least when they've already got more than enough), you'd derive some comfort from looking at the pay packages of these eight conscience-driven CEOs.|
On the other hand, there's Lawrence Ellison of Oracle. Ellison runs a company that is smaller than Microsoft, although its performance in recent years has been about as good. Even so, Ellison's base salary in 1996 was $1 million, compared with the $340,600 Gates received, and his bonus was $1,850,000. After taking account of Oracle's size, that put his pay package 31 percent above the market. But the centerpiece of Ellison's banquet table was his humongous stock options. Although he already held $8.4 billion in Oracle shares, he nonetheless took options on 2.4 million more shares, worth an estimated $28.2 million on the date of their grant. That boosted his total pay for the year to $31 million, which, after taking account of company size and performance, positioned him 394 percent above the market.
| Sharing the high-pay spotlight are five other billionaires: Sumner Redstone of Viacom ($3.2 billion in shares; 187 percent overpaid, although his 1996 pay package consisted only of stock options); Charles Schwab of the firm that bears his name ($985 million in shares; 151 percent overpaid, although he has been shown to be underpaid in earlier years); Michael Dell of Dell Computer ($1.2 billion in shares; 56 percent overpaid); Maurice Greenberg of American International Group ($790 million in shares; 44 percent overpaid); and Alfred Lerner of MBNA ($1.4 billion in shares; 25 percent overpaid).|
So here's still more proof that when it comes to executive pay, we are not dealing with an efficient market. Indeed, we are probably not even dealing with a rational market. Face it, CEOs, who select the very board members who regulate their pay (and who then repair to the nearest golf course with them after board meetings), are in a position to dictate not only how they are going to be paid, but how much, too. Links For more on CEO pay in general, check out the Crystal Report Online. Buffett Watch tracks the investor's doings. The Berkshire Hathaway Inc. site includes Buffett's letters to shareholders. The Bill Gates Personal Wealth Clock keeps tabs on Gates' expanding fortune. PC Week posts a Q & A with Lawrence Ellison. Graef Crystal, an expert on executive compensation, writes a monthly column on the subject for SLATE.
Illustrations by Michael Sloan.