Friday, May 3, 2013

CEO Compensation - A Pay Ratio Travesty

With Main Street America struggling to regain employment prospects lost during the Great Recession, it is intriguing to see how those who live in the "corporate clouds" have fared since the so-called recovery began four years ago.  A recently published interactive webpage by Bloomberg exposes the ratio of CEO compensation to the median pay of the sweaty masses, a key indicator of financial health among the fraction of the one percent.  

Way back in 2010, Dodd-Frank Wall Street Reform and Consumer Protection Act contained Section 953(b) which required the disclosure of both United States and global employees' average compensation in comparison to CEO pay.  The Securities and Exchange Commission has been working on this provision and still hasn't quite got there yet, three years later.

Here is the pertinent section from the Act:


(a) DISCLOSURE OF PAY VERSUS PERFORMANCE.—Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n), as amended by this title, is amended by adding at the end the following:

‘‘(i) DISCLOSURE OF PAY VERSUS PERFORMANCE.—The Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the share- holders of the issuer a clear description of any compensation required to be disclosed by the issuer under section 229.402 of title 17, Code of Federal Regulations (or any successor thereto), including information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The disclosure under this subsection may include a graphic representation of the information required to be disclosed.’’.


(1) IN GENERAL.—The Commission shall amend section
229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)—
A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;
(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and
(C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).

(2) TOTAL COMPENSATION.—For purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act."

Now, let's get to the meat of the matter.  Here is a chart showing the top 15 American companies with the highest CEO to worker pay ratio:

Here is a graphic showing the five decade history of the same ratio with CEO pay both including and excluding those valuable (sometimes) stock options:

While the ratio in 2011 was just over half the level that it was in 2000, at an average of 231 times (including options), it is close to ten times the rate that it was through much of the 1970s.  The situation began to get out of control in the early 1990s when executives figured out that their efforts were worth much more than the efforts of their workers, in fact, as we repeatedly read in annual reports, companies have to pay competitively to attract quality talent to the top floor corner office.  It is also common practise for Executive Compensation Committees to compare their compensation to their industry peers, however, as a group, they can effectively raise each other's level of compensation.  Here's a quote from Abercrombie & Fitch's 2011 Annual Report showing just what I mean:

"Target long-term incentive award levels are set by position level based on the Company's assessment of what is required to attract and retain critical talent as well as information on compensation levels paid for comparable positions within the compensation peer group identified on page 53 and industry survey data."

That pretty much explains the state of executive compensation in 2013.

Now that we know who the biggest CEO pay ratio offenders are, let's take a detailed look at the number two company in the listing, Abercrombie & Fitch (ticker symbol ANF) since number one, JC Penney has had a very unusual and rather bad year with the recent departure of their CEO and their mounting losses.

Here is the five year stock price chart for ANF:

Note that over the five year period, the stock is down 36.8 percent from its five year high of $77.14 in July 2011, a level that it has not seen since and has only seen for brief periods since 2008.  On a 52 week basis, the stock is down 33.3 percent from its year high of $53.28.  Now that's a modest performer at best!

Here's a graph showing how ANF's stock has performed compared to its peers:

Again, ANF really lags its apparel retail peers, doesn't it?  Investors that spent $100 buying ANF stock in 2008 would have seen the value of that stock drop by nearly a third over the five year period to 2013.

Now, let's look at the 2012 compensation package for Mr. Michael Jeffries, from ANF's Proxy for fiscal 2011 and, lest we forget, included is the compensation for the other "cloud dwellers" as well:

While Mr. Jeffries' base salary is "only" $1.5 million, his options of $43,210,893 more than make up for his "paltry" cash component.  His total compensation of $48.069 million for 2011 was up 107 percent from the previous year.  I can only imagine that Mr. Jeffries' raise was similar in stature to the size of raises gained by his front line staff!  During 2011, Nr. Jeffries exercised 1,379,248 options and SAR awards worth $44,639,803.

Here is a chart showing what comprised the "All Other Compensation" component for each Named Executive Officer, noting the $118,315 paid for security and the $200,000 personal use of the company wings by Mr. Jeffries:

Here is a chart showing Mr Jeffries' outstanding equity awards at the end of fiscal 2011:

That's a total of 7.022 million exercisable shares with prices ranging from $20.75 to $67.83 noting that 820,000 shares were exercisable in 2011.

Here are two charts showing the value of Mr. Jeffries' pension benefits and the value of his deferred compensation:

The deferred compensation plan allows executives to defer up to 75 percent of base salary each year and up to 100 percent of cash payouts that are received from the company's incentive plan.  The company then matches the first 3 percent on a dollar-for-dollar basis plus makes an additional matching contribution equal to 3 percent of the amount by which the executive's base salary and cash payouts exceed the annual maximum compensation limits imposed on the company's 401(k) Plan ($245,000 in calendar 2011).  For fiscal 2011, all of these funds earned interest at the annual rate of 4.5 percent.

Lastly, here is how Mr. Jeffries will benefit under the Jeffries' Agreement if he is dismissed either in the normal course of business or if control of ANF changes:

Note that if control of the company changes and Mr. Jeffries is dismissed either for good reason or "not for cause", his total golden handshake will hit $105,582,762.  To put this amount into perspective, it is 370 times the compensation paid to an average Abercrombie & Fitch employee.

While ANF's sales and net income numbers look generally good, the stock performance lags its peers and shareholders have done poorly over the past five years unless they happened to be fortunate enough to buy on a price dip.  Interestingly, at the company's 2011 Annual Meeting, only 56 percent of the votes cast supported the advisory resolution on the compensation of the company's Named Executive Officers suggesting that shareholders of ANF are hardly enamoured with the performance of the executive team or the stock.

In closing, as they say, that's how the other half lives.  Perhaps I should restate; that's how the other fraction of a percent lives.  Think about that when you read the latest employment statistics.


  1. Welcome to the no-leverage economy.

  2. Thanks for sharing, I will bookmark and be back again

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