Sunday, March 30, 2008

What's next -- the company pays for the CEO's home utility bills too?

Boeing Company, the leading maker of commercial and military aircraft, released the Proxy Statement for its upcoming shareholders' meeting in April. The proxy includes disclosures regarding compensation to executive officers for the year ended December 31, 2007

Boeing paid its Chairman and Chief Executive, W. James McNerney, Jr., just about $19 million last year. Mr. McNerney will need the cargo capacity of a 747 airliner to carry home his pay. Here are the highlights:

* Salary of $1.8 million
* Cash bonus of $4.3 million
* Restricted stock awards valued at $4.8 million
* Stock options worth $3.7 million
* An increase in his pension valued at $3.5 million
* And, about $1 million in "other" compensation

No matter what you think about Boeing, its performance last year or McNerney's contribution to this performance, what is most striking is the $1 million in other compensation. The SEC now requires companies to disclose far more details about the perks provided to the CEO and other executives. The "other" category includes personal benefits, life insurance premiums, tax reimbursement and company contributions to retirement plans.

Most of McNerney's personal benefits are standard CEO issue. $556,000 for the use of Company aircraft, a car and driver, home security service, country club memberships, financial counseling advice, and this last item that caught my attention -- about $90,000 to install a back up generator at McNerney's home to restore power should the electricity be lost. The reason Boeing paid for the generator is to ensure "business continuity." In other words, so McNerny can work during a power outage.

Anyone who makes $19 million in any one year, should be able to afford a generator --even the top of the line model -- on their own. The McNerney family will get as much if not more benefit from it than Boeing -- unless of course, the generator will be used to only power McNerney's PC and fax machine and the electricity in his study.

The logic of "business continuity" could easily extend to many other items. Why not just go ahead and pay all of McNerney's utility bills? And to be really safe, Boeing should put some shelf stable food in the pantry in case McNerney gets hungry while doing all that work during the natural catastrophe he's expecting.

Saturday, March 15, 2008

The Seven Deadly Sins

Three big names were dragged into the legal spotlight this week.

Soon to be ex-Governor of New York, Eliot Spitzer, fell from defender of the moral high ground to "Client Number 9."

Richard Scruggs -- the lawyer behind the 1998 $206 billion tobacco company settlement -- pleaded guilty to conspiring to bribe a judge.

Media mogul Barry Diller, who is wrestling in court with financial backer John Malone for full control of his media empire, took the stand.

So, what brings these three and many others like them to their judgement day? Governor Spitzer risked everything -- his political ambition and his family -- to spend a couple of hours with a hooker. Scruggs, who made over $200 million from the tobacco settlement, bribed a judge to avoid paying a fair share to an attorney who worked with him on the settlement. Despite mega wealth, a jet setting life and a secure place in the media hall of fame, Diller lacks what he most covets -full control over his own media empire.

It's easy to say that Spitzer suffered from lust. Or, Scruggs from greed. Or, Diller from envy (of Rubert Murdoch). But often the root cause appears more complex. To illustrate, take the Sptizer poll adjacent to this post -- How many of the deadly sins did Eliot Spitzer commit? One, three or all? As a reminder, here is the complete list:

1. Lust involves obsessive or excessive thoughts or desires of a sexual nature.
2. Gluttony is the over-indulgence of anything to the point of waste.
3. Greed is a sin of excess applied to the acquisition of wealth in particular.
4. Sloth represents the failure to utilize one's talents and gifts.
5. Wrath is an inordinate and uncontrolled feelings of hatred and anger.
6. Envy is an insatiable desire for something that someone else has.
7. Pride, is the self-loving desire to be more important or attractive than others.

Sunday, March 9, 2008

And now, for the less rational side of executive compensation....

General Motors Chief, Richard Wagoner, is receiving a 33% raise for 2008. His base salary is jumping from $1.65 million to $2.2 million and he is also receiving another $1.68 million in equity compensation for his performance in 2007. To refresh your memory, GM lost $38.7 billion in 2007 -- the largest annual loss ever recorded by an American company. And in early February, in an effort to trim ongoing losses, the company offered buyouts to 74,000 employees - its entire US hourly workforce.

I wonder if the GM Board authorized the employee buyouts in the same meeting during which it approved the Compensation Committee recommendation to increase Wagoner's pay. Let's hope there was at the very least a coffee break between these two Board agenda items.

In other compensation news, the Boards of home builders KB and Toll Brothers are inventing new methods to richly reward their CEOs, even as their operating profits and stock price drop amidst an industry slump.

In direct contrast to General Electric -- which ties CEO pay to shareholder returns, Toll has decided to replace a similar performance plan with a bonus method based entirely on subjective criteria. This kind of bonus plan can be summarized as, "Our company performance sucks but we like you and don't want to penalize you...."

The same lack of pay-for-performance rigor is occurring at KB. Its Board awarded KB CEO, Jeffrey Mezger, a "discretionary" bonus of $6,000,000 for 2007. Under the Company's official bonus plan, which is tied to operating performance, he would have not received any bonus for last year. KB stock fell almost 60% in 2007.

Friday, March 7, 2008

I Can't Quit You Babe!

The price of oil hit a new high this week -- over $104 per barrel. What did our leaders have to say?

President Bush responded, "It should be obvious to all that the demand is outstripping supply... We've got to get off oil." What is obvious to many is not always obvious to all... like a 3rd grader "discovering" gravity.

And, Exxon Mobil Chief Executive, Rex Tillerson, offered, "It's pretty crazy, isn't it?" I believe Jed Clempett of the Beverly Hillbillies uttered a similar remark when he unexpectedly struck oil while hunting opossum on his farm in the Ozarks.

There is a lot of finger pointing going on. What's driving up the price? The weak dollar. OPEC production controls. Commodity speculators. Developing countries like China and India.

Like gravity, the underlying principle is very simple. As demand increases and supply dwindles, the price of oil will go up. And up. When it hits $150/barrel, I will offer my own pithy insight, "I told you so."

Wednesday, March 5, 2008

A Bargain for $14.2 Million!

The huge, global conglomerate – General Electric - reported this week that it paid its CEO, Jeffrey Immelt, $14.2 million in total compensation for the year just ended. In an extraordinary move, GE also cancelled $7.3 million in previously awarded stock incentives because the company failed to meet internal benchmarks for total shareholder returns. So, in effect, Mr. Immelt's take home pay was cut in half to $6.9 million.

In exchange for Immelt’s services, GE is getting a bargain. While Immelt does not have the public profile of his predecessor, Jack Welch, he generally receives high reviews from analysts, stockholders and business professors.

To put this in perspective, the median CEO compensation for S&P 500 companies was $8.5 million in 2006 (the most recent year results are available). How does GE compare to the typical S&P 500 company? It is bigger ($170 billion in revenues). It is more successful ($22.5 billion in net income and 20% return on equity). And, GE is far more complex – 327,000 employees across the globe operating in a wide spectrum of businesses. GE is a technology, media, and financial services company -- producing everything from jet engines and light bulbs to the NBC Nightly News.

Experts point to market forces (CEO pay is linked to the availability of suitable talent to assume the role) and pay for performance schemes (As the company performs, so goes the pay of the CEO). But by these measures, Immelt’s compensation should be significantly higher. It appears that the compensation committee of GE has another principle at work in setting Immelt’s pay – a “fair and reasonable” principle that often is missing in the boardroom as deliberations unfold about executive compensation.

How may CEO candidates could actually run GE as well as Immelt? Not many. The question is not how many think they can but how many actually can.

What is extraordinary is how little Immelt makes compared to the celebrity CEOs – who usually lead smaller, less complicated and diverse businesses. Steve Jobs of Apple made $647 million in 2006. Terry Semel, who failed to transform Yahoo, still made $174 million in his final year as the CEO of Yahoo. And, the CEO of AT&T made $49 million. It is hard to understand why Ed Whitacre of AT&T is worth seven times more than Immelt.

The critics have good reason to complain about CEO compensation, which often defies the logic of long-term success, company scale or operating complexity. The same critics should argue for a pay raise for Jeffrey Immelt.

Thursday, February 28, 2008

Little Italy's Last Barber

At the turn of the 20th century, a growing tide of Italians, largely from the south, immigrated to the United States. Out of a population of 14 million southern Italians, an estimated five million left by the outbreak of World War I. Those who left Italy apprenticed stereotypically as tailors, bakers, masons and barbers.

A man named Sal came to the United States during the next immigration wave just before the second world war. He was born in Sicily and became a barber after settling in New York. Today, according to his own census, he is the very last working Italian barber in Manhattan's Little Italy.

A few months ago, needing a haircut, I reasoned that there had to be a good barber in Little Italy. After walking just a few blocks from my office, I happened on Sal's barber shop. When I arrived Sal was giving a haircut to an older gentleman as they conversed in Italian. When it was my turn to take the chair, Sal introduced himself and then explained that the gentleman before me was Arturo Di Modica, the noted sculpture of the 7,000 lb. Charging Bull on Wall Street. When I asked if he cut the hair of other celebrities, he said no because of the distraction of the paparazzi. He cut Robert DeNiro's hair once and that was all it took to establish the shop's rule.

Sal's Sicilian accent is still very thick and it takes all of my powers of concentration to keep track of the meaning and direction of our dialogue. While I struggle with his speaking, he has no difficulties at all with mine. I learned that his grandfather lived to be 105 and died of a heart attack after an argument with his 93 year old wife, who had complained about him coming home drunk! His 85 year old aunt just came over for a two week vacation and insisted on seeing all of the New York sights on foot, despite the January cold. Sal apparently has very good gene stock.

After my first haircut, Sal charged me $15 even though the sign in the shop indicated that the price of a gentleman's haircut was $20. The next time I visited the shop, I asked Sal for a restaurant recommendation -- someplace with great food off of the tourist grid. I figured who better to ask than the man who has cut hair at the same location for over 50 years. Two days later, I visited the restaurant and mentioned that Sal had sent me. Within minutes, Sal was at my table -- having walked over from his shop to say hello to the friend (me) having his lunch.

I now give Sal $20 for my haircut plus a $5 tip. But the money I give him doesn't last long in his pocket. After cutting my hair, Sal insists that I join him for a quick espresso and pastry at Ferraro's down the street. He refuses to allow me to pay.

If you are in New York and need a classic haircut, stop by Sal's Shop located on Grand Street just off of Mulberry. The shop is located directly opposite the Italian Food Center identified in the photograph above. He just might buy you an espresso as well. Fluency in Italian is not a requirement.

Wednesday, February 27, 2008

Pay the fine already!

Believe it or not, Exxon Mobil is still contesting the $2.5 billion punitive fine it was levied for the Valdez oil spill -- almost twenty years after the event! Exxon Mobil will argue in front of the Supreme Court today that under maritime law it owes nothing to the fisherman, residents and Native Alaskans harmed by the massive oil spill. Exxon states that it has already been punished enough by paying $3.4 billion in clean up costs. For more on the story see link

If you find this hard to believe, let me illustrate it with a hypothetical anecdote. Suppose you have a party in your home. One of your guests has a bit too much to drink and backs his car into your above ground heating oil tank, which is adjacent the garage. Luckily no one is hurt. Your neighbor witnesses the accident and immediately calls the local police. The municipal services unit of your town, in cooperation with the EPA, arrives on the scene the day after to clean up the oil -- which has seeped beyond your backyard and into a stream about 100 feet from your house. Two days later, the oil spill is cleaned up and you have a new oil tank installed by your heating oil company. It's hard to gauge the environmental impact of the accident and you hope for the best.

Your guest receives a six month license suspension and pays a $500 fine. A month later, you receive a summons to appear in court and after a brief hearing are ordered to pay the town $6,800 in clean up costs and a fine of $5,000. Since you earn about $80,000, the fines will sting but not bankrupt you. Your attorney successfully files a motion allowing you to pay for the clean up costs but appeal the fine. 20 years later, through appeals and legal maneuvers, you still haven't paid the fine. Most of your neighbors no longer speak to you out of principle.

This is exactly what Exxon Mobil has done. The numbers are proportionate. The company made $40 billion in profits last year. A $2.5 billion fine would sting but not bankrupt. Exxon Mobil doesn't seem to care what most people think of it.