CEO compensation is a hot topic, especially now that the Dodd-Frank Act requires say-on-pay votes at public companies. Here is just one example of a company where pay and performance seems to disconnect; judge for yourself whether this company's CEO is worth it.
When I don't understand something, I tend to get fascinated by it. This typically happens with absurd things like the mindset of Raj Rajaratnam, the widespread fraud in Chinese reverse-merger stocks, and TLC's Extreme Couponing.
Thanks to lavish pay packages and a seeming band-of-thieves mentality on the board of directors, you can add Chesapeake Energy (NYSE: CHK ) and CEO Aubrey McClendon to that list.
Co-founded by McClendon and current SandRidge (NYSE: SD ) CEO Tom Ward (who appears to have brought Chesapeake's pay practices with him), Chesapeake is a pretty interesting business. The company is one of the industry giants when it comes to natural gas. Though natural-gas prices have been in the dumps for a while, many have high hopes that it will have a bright future thanks to its relative abundance and cleanliness.
Not convinced? Just ask energy superpower Exxon Mobil (NYSE: XOM ) why it was willing to cough up $41 billion to buy the gas-focused XTO Energy.
And although Chesapeake is primarily known as a nat-gas player, it's also aggressively moving toward producing more oil -- which isn't a bad plan, given the high price that crude is commanding. Take all of this together, and it's not surprising that my fellow Fools at Motley Fool Alpha have made Chesapeake a recommendation.
However, even in light of the positives for Chesapeake, I still find myself uncontrollably dry-heaving as I look at the pay packages that the company has given McClendon. In 2010, McClendon's total compensation was $21 million, which included a $975,000 salary, a $2 million cash bonus, $17 million in stock awards, and roughly a million more in perks that included personal use of the company jets, retirement contributions, and personal security services.
The total package puts McClendon's pay in the same league as -- or above! -- the CEOs at Chevron (NYSE: CVX ) ($16 million), GE (NYSE: GE ) ($21 million), and ConocoPhillips (NYSE: COP ) ($18 million). And that's pretty outrageous, considering that those companies are, respectively, 10, 10, and five times the size of Chesapeake.
And this is far from a fluke. For the five years ending in 2010, Chesapeake handed over $193 million in total pay, including a gargantuan $112 million jackpot in 2008. And if all of this isn't enough to make your blood boil, consider that the massive 2008 payday was during the same year that McClendon got battered for idiotically stacking up his stock holdings on margin. It was also in 2008 that the company infamously spent $12 million to buy a set of historical maps from McClendon and became a founding sponsor of the Oklahoma City Thunder -- an NBA team that McClendon owns nearly 20% of.
If the stock had produced outstanding returns over the past five years, perhaps we could shake all of this ickiness off and explain why some shareholders have put up with this. Well, it hasn't. During the five-year stretch that Chesapeake shoved nearly $200 million (not including map money) in McClendon's direction the stock lost 17% of its value.
At the beginning of 2006, $1,000 would have done better if it was invested in an S&P 500 index.
But I get it. Try as he might, McClendon can't control the stock price. And as a long-term investor myself, I understand that some of the best investments take time to play out from a stock-price perspective.
So let's leave stock price aside for a moment and look at some fundamental metrics.
Fiscal Year 2006
Fiscal Year 2010
|Revenue||$7.3 billion||$9.4 billion||29%|
|Operating profit||$3.5 billion||$2.7 billion||(23%)|
|Shareholders' equity||$11.3 billion||$15.3 billion||35%|
|Simple free cash flow*||($3.8 billion)||($4.1 billion)||NM|
|Return on capital||14.3%||6.4%||(7.9%)|
Source: Capital IQ, a division of Standard & Poor's. *Calculated as cash flow from operations less capital expenditures and net acquisitions.
Again, I get that natural-gas prices have fallen, an uncontrollable factor that has a huge impact on the company's financial performance. I also understand that there's a definite "the best days are yet to come" flavor to the Chesapeake story. But at least for me, nothing excuses that fact that the metrics we've reviewed simply don't justify the slap-yourself-to-see-if-you're-dreaming pay that Aubrey McClendon has received over the past five years.
I obviously have some strong feelings about the governance practices at Chesapeake. A big part of my interest stems from the fact that I believe in the natural-gas story and I really want to like this company. However, I just don't feel that I can trust a company that appears to be run primarily for the benefit of its CEO -- who, by the way, is a relatively small shareholder these days.
If you are a shareholder, there are a few things that you can do. The Chesapeake annual meeting is on June 10. Before that date, if you're not planning to attend, you need to grab the proxy card that was mailed to you or use the telephone or online voting options (more info in the proxy here) to show how you feel about the company's governance practices. You can:
- Vote against in the advisory vote on compensation.
- Vote for an advisory vote on compensation every year.
- Vote for an advisory vote on director compensation.
- Withhold your vote for the directors up for re-election.
No. 3 is particularly important. Though I've focused on McClendon, the compensation for Chesapeake directors is also ludicrous. In 2010, they were paid an average of $527,000. That's just … wow. Unsurprisingly, the board recommends that shareholders vote against this proposal and backs up its stance with a ridiculous "Total Non-Employee Director Compensation vs. Enterprise Value" graph.
And if that's not enough action for you, you can always contact the company's investor-relations department and let the people there know how displeased you are with the company's compensation practices.
Bottom line: There's an interesting business case here at Chesapeake, but the company is badly in need of more accountability at the top.