Should CEOs Fear Their Phones?

Amid a recent spate of CEO changes at major companies, some goodbyes will be far fonder than others. Bidding farewell to Apple's (Nasdaq: AAPL  ) Steve Jobs and Costco's (Nasdaq: COST  ) Jim Sinegal could be bittersweet for investors, since both bosses' decisions to step down nonetheless leave their companies strong and well-positioned to compete in the future. But Yahoo!'s (Nasdaq: YHOO  ) ouster of CEO Carol Bartz is an entirely different story, fraught with high drama and decidedly NSFW language.

The cuss jar overfloweth
Bartz's profanity-laced diatribe about Yahoo!'s board's decision to fire her by telephone makes titillating headlines. But given the disparity between their pay and performance, many of corporate America's CEOs might want to think twice before picking up their own phones these days.

Bartz has a reputation as a particularly well-compensated U.S. CEO. She scored high last November in a Wall Street Journal profile three of handsomely paid chief executives. Although much of her $44.6 million in 2009 compensation was tied to stock options and restricted stock grants, she received nearly $1 million in straight-up base salary that year.

That money went to a brand-new CEO who had proven nothing at Yahoo! when the employment agreement was drawn up. (A Foolish poll last November revealed that 42% of readers believed Bartz was the most overpaid CEO, amid a list of formidable contenders including Oracle's (Nasdaq: ORCL  ) Larry Ellison and Occidental Petroleum's (NYSE: OXY  ) Ray Irani.)

Let's give Bartz credit where it's due: She requested that she not receive a base salary increase in 2010. Her total compensation also ended up being a lot lower than it was during her first year on the job, at about $12 million.

Even though Bartz's tenure at Yahoo! isn't considered a success, she could receive a massive golden parachute. If it matches the terms of her original employment agreement, her payout will likely total around $10.4 million in cash and stock.

However, observers now wonder whether Bartz's spectacularly profane comments in her first post-firing interview with Fortune magazine -- "These people [bleeped] me over," she now-infamously said -- will endanger that handsome severance package. Dropping the f-bomb to a major business magazine, and referring to the board as "doofuses," could violate the anti-disparagement clause in her agreement.

911, this is an emergency
The financial incentives Yahoo!'s board lined up when it brought Bartz onboard haven't led to any real improvement for the company and its investors.

Since January 2009, Yahoo!'s stock has hardly budged. On an operational level, the company's weak. In 2009, total sales fell 10.4%, and they dipped 2.1% in 2010. Things haven't improved this year; in the 12 months that ended June 30, Yahoo!'s sales have fallen 14.4%.

Granted, Yahoo!'s been increasing profits and boosting margins, but flagging sales indicate an unhealthy core business. It faces serious competition from the Internet's eyeball-drawing rivals, including Google (Nasdaq: GOOG  ) , AOL (NYSE: AOL  ) , and Facebook.

Yahoo!'s board's not out of the woods yet, either. Bartz has indicated a desire to stay on as a director. (Awkward!) She also claims that the board's trying to save face after having refused a Microsoft (Nasdaq: MSFT  ) deal before she took the helm. At least one major investor now says it wants Yahoo!'s board replaced.

Talk about cold calls
Again, to be fair, corporate governance experts GMIRatings point out that much of Bartz's "golden hello" stock options had difficult targets attached, and that her cash severance is actually modest according to general American standards. The group also points out several positive elements of Yahoo!'s board, including its truly independent chairman.

Regardless, this situation should reminding investors that corporate boards hold the keys to CEO pay. Too often, chief executives get way too much credit for their assumed merit, however much that perception may differ from reality. Rather than getting distracted by Bartz's colorful comments, we investors should focus on how well boards monitor CEO compensation and performance.

Bartz allegedly accused Yahoo! Chairman Roy Bostock of lacking certain, uh, manly accoutrements when she began to suspect he was firing her via a lawyer-approved script. But regardless of Yahoo!'s board's past mistakes, letting Bartz go was the right thing to do in the face of the company's continued competitive malaise.

The firing may not have been artful, but it can't be easy for boards to discipline, disappoint, or even fire a chief executive who probably feels like a close business associate, if not a friend. Directors are supposed to look out for shareholders, and resist buddying up to management. But that's often easier said than done, especially when business gets tough.

I can only hope that more boards metaphorically "man up" -- in a gender-neutral sense, anyway -- and make sure that their chief executives deliver real performance in exchange for their handsome pay. Shareholders should expect nothing less. Let's hope that in the wake of Bartz's firing, ringing phones make more mediocre, performance-challenged CEOs a wee bit nervous.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Costco Wholesale, Yahoo, Oracle, Microsoft, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Yahoo, Apple, Microsoft, and Costco, as well as creating bull call spread positions in Microsoft and Apple. 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 (10) | 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 September 09, 2011, at 4:05 PM, cbuffool wrote:

    Could someone explain a bit more about executive stock options? "Although much of her $44.6 million in 2009 compensation was tied to stock options and restricted stock grants" sounds very exact, but the value of options can swing wildly. I guess Black-Shoales (sp?) puts a value on an option when it is given based on the trend and volatility of the underlying stock, but the actual value should be much clearer two years later when the actual stock price is known. And if the stock price hasn't budged, then I would think the options are probably worthless, unless they were in the money to begin with. Or is the $46M a measure of how much they were in the money at the time?

  • Report this Comment On September 10, 2011, at 1:18 PM, lowmaple wrote:

    Was she the person who upset the China boss of yahoo's investment in China. IF so then she certainly deserves the boot and perhaps should pay yahoo for that gaff. However trying to keep up to google is a tall order.

  • Report this Comment On September 12, 2011, at 7:57 AM, TMFLomax wrote:

    cbuffool,

    I do believe many of her options are worthless, because to Yahoo!'s credit they did tie some of them to a very exact performance goal -- that some of those "hello" options could only be exercised by the CEO if the stock price climbed by a very significant amount in a particular time frame. So although they were worth a lot at the time, some were untouchable.

    Stock options in "total compensation" can be confusing given restrictions, but it's good when they are tied to certain performance goals.

    lowmaple, trying to keep up with Google is a tall order, I will grant you that!

  • Report this Comment On September 12, 2011, at 9:15 AM, catoismymotor wrote:

    I also think that CEOs have much to fear from their smart phones from a legal point of view. Smart phones are just tiny computers that happen to let you use it like a telephone. Smartphones and carriers can store and track all kind of browsing history, calls made, where you've been and such. If a company finds itself in the crosshairs of a SEC investigation or the CEO finds herself/himself in the middle of a nasty civil lawsuit the information that could be uncovered could cause headaches gallore.

  • Report this Comment On September 12, 2011, at 11:23 AM, TMFLomax wrote:

    Cato... you just keyed into something I've believed for a very long time... that phones, particularly smart ones, are actually evil. ;) (Kidding... very, very good point.)

  • Report this Comment On September 12, 2011, at 12:51 PM, cbuffool wrote:

    TMFLomax,

    Are the specifics of executive packages public knowledge? You think the options were worthless, but can we find out the actual case from the specifics of the options or restricted stock? Would it be in an annual report?

    I'm not sure any specific restrictions are needed to make a stock option only exercisable if the stock went up a lot in a specific amount of time. Placing a high strike price and a short exercise period on an option has the same effect. But those options shouldn't be considered worth much at the time of the grant.

    I will respect Yahoo's board a lot more if the actual value of Bartz's compensation is just her $1m/year base salary, than if she's gotten $50M+ in spite of her poor performance.

  • Report this Comment On September 12, 2011, at 2:36 PM, TMFLomax wrote:

    cbuffool,

    Yes, these specifics are public knowledge, found in the proxy statements (DEF 14A) documents which can be found at SEC.gov.

    Here's a clip from the proxy for the year she was hired, with the restrictions on 5 million options:

    "Ms. Bartz was also granted an option to purchase 5,000,000 shares of the Company’s common stock at a per-share exercise price of $11.73 (the closing price on the grant date) and a maximum term of seven years (the “Inducement Option”). Vesting of the Inducement Option will be dependent on whether the average closing prices for the common stock exceeds certain levels that range from 150% to 300% ($17.60 to $35.19) of Yahoo!’s closing stock price on the date of grant of these options for twenty consecutive trading days prior to January 1, 2013 (or the price immediately preceding a change in control of the Company if it occurs pursuant to an agreement signed before that date). Any shares acquired by Ms. Bartz upon exercise of the Inducement Option must be held until January 1, 2013, except in the event of her death or a change in control."

    So, it appears that you can respect Yahoo!'s board a lot more, since a great deal of the total compensation as noted at the time was contingent on some measure of real future performance.

    Is this helpful?

    Alyce

  • Report this Comment On September 12, 2011, at 2:39 PM, TMFLomax wrote:

    Oh and here's a link to that proxy:

    http://www.sec.gov/Archives/edgar/data/1011006/0001193125090...

    If you wanted to read the full discussion, which is on page 52.

  • Report this Comment On September 12, 2011, at 5:42 PM, cbuffool wrote:

    Alyce,

    Thanks, that does help. It doesn't have all the details, so we can't pin down the exact value of what she gets, but it does give us some details. The Inducement Option appears worthless (but I wonder if she'd still get it if the stock price hits the targets AFTER she's left). However, she would appear to get her Make-up grant ($10M) and some additional grant from February 2009 that's "worth $8M" in options and restricted stock grants.

    I still wonder how the $44M in 2009 compensation was calculated. You can get kind of close to it using 2009's closing price of $17 to value the Inducement Option package at $30M total, but it hadn't qualified at all yet, nor would more than 25% of it vested in that first year. I can only account for $10M makeup + $8M February grant +$1M base salary + maximum $4M bonus (which seems unlikely, since 2009 wasn't a spectacular year for them) + $7.5M of Option package = $30M. Of that, the Option package should be worthless, but the rest probably isn't. That February package is a bit of a mystery.

    I assume she wasn't terminated "for cause" (ie because she committed a crime), so the claw-back provisions on the make-up grant don't apply.

  • Report this Comment On September 12, 2011, at 6:11 PM, TMFLomax wrote:

    Well, a lot of this brings up a lot of gray areas too. Hinging performance on stock price isn't generally perfect -- it's better than nothing, but all of us who have been watching investing for a long time know that sometimes stock prices do weird things and don't always reflect what's going on with the business, especially in the short term (in this case, I believe it did though). It's good that the SEC requires disclosure on stock options in compensation, but it also gets very complicated to account for them. Gets sticky for sure.

    At that time though, she really was entitled to quite a massive amount if things had gone the way everybody hoped they would.

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