Enriching a Few at the
Expense of Many
SOME people say it doesn’t really matter how much companies pay their
executives, at least as far as the shareholders are concerned. Whether
investors prosper depends on the executives’ management skill, not on
penny-ante items like pay, this argument goes.
Nager for The New York Times
Meyer, a money manager with a background in forensic accounting,
sees high pay as a sign that companies are not putting
this, Albert Meyer, a money manager at
Capital in Plano, Tex., responds with a resounding “phooey.”
Executive pay is not only a sign of how a company views its duties to
shareholders, Mr. Meyer says, but it is also a crucial tire to kick when
making investment decisions.
“When compensation is
excessive, that should be a red flag,” Mr. Meyer says. “Does the company
exist for the benefit of shareholders or insiders?”
As investors scan corporate
proxy statements this spring and prepare to vote in annual elections for
company directors, executive pay is again moving to center stage. After a
few years in the wilderness, top executives are getting hefty raises,
according to Equilar, a compensation analysis firm in Redwood City, Calif.
But while outrage over executive pay has been eclipsed in recent years by
anger over the causes and consequences of the financial crisis, compensation
issues still resonate among many investors.
Of course, pay is just one
item that Mr. Meyer takes into account when analyzing companies. In his
search for shares he can own “forever,” he also hunts for companies with
high-quality earnings — that is, those that don’t depend on accounting
tricks — as well as generous cash flows and management integrity. Companies
he avoids include those that award oodles of stock or options to their
executives. Such grants vastly dilute the earnings left over for a company’s
owners: its shareholders.
plans are often nothing more than legalized front-running, insider trading
and stock-watering all wrapped up in one package,” Mr. Meyer says.
A former professor of
accounting, he earned recognition when he identified a
Ponzi scheme in Philadelphia that had scammed nonprofits out of hundreds
of millions of dollars. It was called the Foundation for New Era
Philanthropy, and it went bankrupt in 1995. As an equity analyst, he has
identified aggressive accounting at Tyco,
Enron and other companies over the years.
At Bastiat Capital, a money
management firm he founded in 2006, Mr. Meyer oversees $25 million in
private clients’ capital. About $8 million of that is invested in the
mutual fund, which he manages. It is up an annualized 4.5 percent, after
expenses, since its inception in August 2007. It is up 4.57 percent this
His interest in executive
pay has led Mr. Meyer to a raft of international companies whose pay and
other corporate governance practices are, in his view, more respectful of
shareholders than those of similar companies in the United States. He cites
as good stewards Statoil, the Norwegian energy company;
Telefónica, the Spanish telecommunications concern;
CPFL Energia, a Brazilian electricity distributor; and Southern Copper
of Phoenix, a mining company with operations in Peru and Mexico. These and
other companies he favors have performed well, while paying relatively
modest amounts to executives, he says.
Mr. Meyer’s favorite
pay-and-performance comparison pits Statoil against ExxonMobil. Statoil,
which is two-thirds owned by the Norwegian government, pays its top
executives a small fraction of what ExxonMobil pays its leaders. But
Statoil’s share price has outperformed Exxon’s since the Norwegian company
went public in October 2001. Through March, its stock climbed 22.3 percent a
year, on average, Mr. Meyer notes. During the same period, Exxon’s shares
rose an average of 11.4 percent annually, while the Standard & Poor’s
500-stock index returned 1.67 percent, annualized.
According to regulatory
filings, Statoil paid Helge Lund, its chief executive, 11.5 million
Norwegian krone in 2010 (roughly $1.8 million at the exchange rate last
year). There were no stock options in the mix, but Mr. Lund was required to
use part of his cash pay to buy shares in the company and to hold onto them
for at least three years.
Rex W. Tillerson, the chief executive of ExxonMobil, received $21.7
million in salary, bonus and stock awards in 2009, the most recent pay
figures available from the company. Mr. Tillerson’s pay is more than double
the combined $8.3 million that Statoil paid its nine top executives in 2010.
OTHER aspects of Statoil’s
governance also appeal to Mr. Meyer. Its 10-member board includes three
people who represent the company’s workers; management is not represented on
the board. In addition, Statoil has an oversight group known as a corporate
assembly, something that is required under Norwegian law for companies
employing more than 200 workers. This 18-person group oversees the company’s
directors and the chief executive’s management and makes decisions about
Statoil’s operations that affect its work force. The assembly members are
elected for two-year terms; shareholders elect 12 and workers elect 6.
“That second layer of
corporate governance protects the shareholders and the employees,” Mr. Meyer
says. “They are really doing it as a civic duty to oversee the actions of
Another company whose
approach to pay is commendable, Mr. Meyer says, is Telefónica. Based in
Madrid, it dispenses stock options to employees but eliminates the dilution
to existing shareholders by buying a call option in the amount of shares
given out as compensation.
At CPFL Energia in Brazil,
financial statements routinely compare the highest level of executive pay
with that of the lowest-paid workers. In 2010, that ratio was 79 to 1.
(Comparable multiples for United States companies range from 100 to 300,
depending on the size of the company.) CPFL Energia also discloses the
number of “complaints and criticisms” it receives each year — whether from
customers, employees or others — and how many are resolved.
“This is an ideal for
disclosure,” Mr. Meyer says.
He also rejects the argument
that sky-high pay is necessary to attract talented managers. “Look at some
of the pay at the companies my fund owns,” he says. “They prove that you
don’t have to pay nosebleed compensation to attract good people.”
FEW money managers seem to
share Mr. Meyer’s view that pay should be factored into investment
decisions. His background as a
forensic accountant made him train his eye on corporate proxy
statements, where pay practices are outlined. Indeed, he says he first
became interested in how executive pay affects shareholder returns during
the early 1990s, when companies began issuing boatloads of stock options
that they did not have to deduct as compensation costs.
The fiction that options
should not be counted as a business expense finally changed in 2005, when
Financial Accounting Standards Board required that companies recognize
the costs of options in their financial statements. But options had become
the drug of choice for those addicted to excessive compensation, whether on
the receiving end or delivering it as directors on a corporate board’s
experienced a lost decade in their retirement accounts, whereas executives
enjoyed record compensation packages through the subterfuge of stock option
programs,” Mr. Meyer says.
“There has been a massive
wealth transfer from middle-class America’s retirement accounts to the bank
accounts of the privileged few. The social consequences of this wealth
transfer bear scrutiny.”
A version of this
article appeared in print on April 10, 2011, on page BU1 of the New York
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