Is Adobe's CEO Worth It?

CEO compensation is a hot topic, especially now that the Dodd-Frank Act requires say-on-pay votes. With CEO pay and performance seemingly disconnected at the following company, the Fool invites you to judge for yourself whether this business's boss actually deserves such a hefty paycheck.

Few things are worse for investors than owning a piece of an "oh yeah" tech company. These are the Rodney Dangerfields of their industries. They've been around forever. They've even done impressive work in years past. But lately, whenever their names come up in conversation, it's almost always with the caveat, "oh yeah, I forgot about them." Adobe (Nasdaq: ADBE  ) has become that kind of company, but you wouldn't know it from CEO Shantanu Narayen's pay package.

More on that in a minute. First, let's cover the business. Adobe is best-known for a series of popular business software franchises. You know the names:

  • Illustrator
  • Photoshop
  • Reader
  • PageMaker
  • Flash

Taken together, these apps comprise one of the most-used software suites among creative professionals such as photographers, website builders, and graphic designers. Annually, they help Adobe bring in close to $4 billion in revenue and almost $900 million in profit.

The pay
Looking only at short-term performance, you'd have no choice but to conclude that Narayen is worth the reported $12.2 million in cash and stock compensation he received last year. Revenue rose better than 30% last year while normalized profit -- net income adjusted for one-time items and other unusual items -- zoomed more than 50%. Talk about impressive.

And better than peers in some cases. Symantec (Nasdaq: SYMC  ) achieved just 3% revenue growth while net income fell 16% in its last fiscal year. Intuit (Nasdaq: INTU  ) , another compensatory peer named in Adobe's proxy statement, improved revenue by 12% and normalized earnings by 26%.

So why would Governance Metrics name Adobe a company of "high concern"? The group sees a lack of correlation between executive pay and short- and long-term performance. That has to sting given the language of Adobe's proxy, which included a "say-on-pay" provision backed by the board of directors.

"We have structured our executive compensation program so that the compensation of our executive officers, including our [named executive officers], is substantially tied to the achievement of our key business objectives and the success of our stockholders," Adobe says in its proxy.

The performance
Great sentiment, right? Sure. Trouble is, Narayen has done exactly nothing for shareholders. Since December 2007, when he took the reins as CEO, Adobe's stock has slid 19% versus an 11% drop for the S&P 500. Both Intuit and Symantec have risen over the same period, with Intuit rallying sharply.

Financial performance isn't the problem; product design and decisions are. Consider its strained relationship with Apple (Nasdaq: AAPL  ) . Once its closest partner, the Mac maker has distanced itself from Adobe software after CEO Steve Jobs called the company "lazy" and Flash "buggy" in an open letter.

I don't know whether that's fair. But I do know that Adobe's products – Flash, especially -- have become a favorite of hackers. Last month, the company issued multiple patches for Flash Player, Reader, and Acrobat. Each found hole erodes trust a little more, lending credence to Jobs' withering assessment of Adobe.

What now?
Which brings us back to Narayen. CEOs are stewards in every sense of the word. They oversee operations. They manage the financials. They set strategy. And, most of all, they're responsible for returning capital to shareholders. Narayen has failed on this last point.

Not that any of this matters to him, mind you. He owns just 0.04% of the business and tends to sell shares when they're converted from option exercises, and although he usually hangs onto some of those shares, he made a big outright sale worth more than $2 million earlier this year. There's nothing wrong with that, of course, but it means he doesn't hold onto much risk while having skin in the game.

My guess is investors would like to see Narayen share more of the risk. One way to accomplish that would be to base a portion of his cash pay on how well shareholders do. Call it the I-win-you-win compensation plan. Sound good? Tell Adobe's investor relations department about it.

Will the rise of cloud computing help or hinder Narayen's efforts to bring growth to Adobe? Take a minute to watch this free video right now, and you'll walk away with a richer understanding of the cloud model. It's 100% free.

Want to read more about Adobe? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Adobe Systems, creating a bull call spread position in Apple, and creating a diagonal call position in Adobe Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2011, at 5:12 PM, treedonkey wrote:

    Your article makes some good points, but the fact that you mentioned "PageMaker" as part "one of the most-used software suites among creative professionals" makes be doubt your credibility. Pagemaker was discontinued in 2004. InDesign became the industry standard nearly a decade ago. Also, the free 'Reader' is only one part of the Acrobat family, which is the brand most people recognize.

  • Report this Comment On May 27, 2011, at 10:43 AM, TonyV125 wrote:

    I agree with the comment above.

    But I'd also like to clarify that for anyone in a creative field (which is where Adobe's focus is), there are no "Oh Yeah"s regarding Adobe. Many of their apps are the most popular apps in their category.

    I've had difficulty with Jobs' statement of Adobe being "lazy". They constantly move forward with great improvements to their products, though I will admit, not fast enough for Flash player improvement on Mac OS vs. Windows OS. That has since changed, thankfully.

    As for becoming a favorite of hackers... yes, hackers always target what will give them the most return on their investment. Flash and Acrobat reader are installed on a great majority of desktops/laptops, and many mobile devices, even if not iOS. Windows has suffered the same attention from hackers for the same reason, even though the results from hacking contests show that Macs get hacked even faster.

    Now, back to the point of the article... Narayen's pay package. This IS a problem, and it's a problem for many companies, as well as the priorities of some of these leaders. Most are probably just focusing on hitting the marks that ensure receiving that package, instead of looking at a broader picture,

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