Investors, Get What You're Paying For

In an ideal world, people would get paid in proportion to the value of their work. Unfortunately, in today's corporate America, the opposite often proves true.

The general public has responded to the financial crisis with a chorus of disapproval about the profligate spending practices of rich executives. Corporate jets, box seats at sporting events, and glitzy meetings in exotic locales have gotten a lot of attention lately, especially among companies that have taken advantage of taxpayer bailout money just to stay afloat.

It's unfortunate that it took such a dramatic downturn in both the economy and the stock market to call attention to this battle between shareholders and company managers. Yet the saddest thing about the problem is that there seems to be almost no connection between what a corporate executive receives in compensation, and how shareholders do.

Pay for performance? Hardly!
As an example, take a look at how much top executives at these five companies received in the most recent year available, according to Yahoo! Finance:

Stock

CEO Compensation*

5-Year Stock Performance

Hartford Financial (NYSE: HIG  )

$17.15 million

(86.5%)

Centex (NYSE: CTX  )

$7.42 million

(84.6%)

Capital One (NYSE: COF  )

$19.24 million

(81.5%)

Eastman Kodak

$4.42 million

(81.3%)

Jabil Circuit

$15.3 million

(79.9%)

Source: Yahoo! Finance.
*Yahoo! data on CEO compensation includes salary and bonuses, as well as value of options exercised during most recently available year.

Now, I'll admit that these numbers don't come close to the compensation packages awarded to some of the business world's best-paid executives. For instance, you can single out Oracle's Larry Ellison, who Yahoo! reports pulled in $555 million primarily from option exercises, and argue that even a $20 million package is peanuts in comparison. Nevertheless, in a market where many investors have seen their portfolios cut in half, seven- and eight-figure paychecks seem like a high price to pay for such poor stock performance.

Even worse, the effect that various types of executive compensation have on shareholders isn't always as obvious as salaries taken directly from the bottom line. For instance, back in 2005, accounting rules went into effect that required companies to start including the expenses of stock options on their financial statements. Yet even today, many firms continue to report earnings numbers that exclude those expenses, and those numbers can mislead investors.

Bargain-basement leaders
Luckily for shareholders, the practice of overpaying corporate executives isn't ubiquitous. In fact, you can find a number of strong-performing companies that have definitely gotten their money's worth from their top managers. For example, take a look at these five companies:

Stock

CEO Compensation

5-Year Stock Performance

Denbury Resources (NYSE: DNR  )

$4.37 million

257.6%

FPL Group (NYSE: FPL  )

$3.21 million

81.8%

Questar

$3.99 million

78.9%

Apache (NYSE: APA  )

$3.34 million

62.7%

Akamai Technologies (Nasdaq: AKAM  )

$0.91 million

35.7%

Again, some of these figures may be misleading. Salaries get paid as you go, but at least as Yahoo! calculates it, the value of options doesn't get included in compensation until the executive exercises them. So it's entirely possible that these executives will see a big payday sometime in the future.

Yet given how well they've treated shareholders, few would argue about these executives' pay hikes. Shareholders will gladly pay up for strong managers who create shareholder value. Only those who destroy that value earn investors' ire.

Stand up for your rights
As we enter the season during which many companies' annual meetings take place, remember that you have a voice. Don't just throw away the proxies you receive, or blindly vote according to management's recommendations. Take a close look at the companies whose shares you own, and judge whether your board of directors is acting in your best interest with regard to executive compensation.

If your board's keeping CEO paydays in check, that's one argument that you've made a good investment. If not, however, first vote with your proxy, against managers who aren't fulfilling their fiduciary duties. If that doesn't work, vote with your feet, and find a stock that will treat you right.

More on the perils of investing:

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Fool contributor Dan Caplinger always tries to get his money's worth. He doesn't own shares of the companies mentioned in this article. Akamai Technologies is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't let you down.


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  • Report this Comment On April 02, 2009, at 3:54 PM, F00LISHINCOME wrote:

    This article is ridiculous. Let's take a look at HIG before the recent economic condition and then in the last year and see what the climb was in stock performance. Just shows numbers can be manipulated for stupidity.

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