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Larry Ellison's Pay Isn't the Problem With His Compensation Package

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As you may have noticed, there's been a bit of a kerfuffle about Larry Ellison's pay lately. And it's not his $1 salary they are complaining about.

When you regularly earn over $100 million a year, and people think that $78.4 million is a pay cut, you tend to get in the news relatively frequently. In fact, Ellison has earned well over $1 billion in the last 10 years, mostly in option profits. So as far as targets of shareholder ire about CEO excess go, he seems like a good one, despite a solid return on his company's investment during that period. The question is: could investors have got that return for less?

Investment firm Change to Win (or CtW) has been a little critical of the CEO and founder of Oracle's (NYSE: ORCL  ) compensation package, and are planning to protest his pay, and the compensation committee that awarded it, at the annual meeting on Oct. 31.

To take the spat even further into the public domain – if that were possible, I've received nothing but stories about Ellison's pay in my CEO compensation news alerts for five days now – Dorian Dailey, Oracle's general counsel, in an extremely patronizing letter replying to CtW, says that its objections seem to be based on the fact that Oracle lost its Say on Pay vote, the vote when shareholders get to approve or disapprove the CEO's pay.

But, he claims, this was not a definitive vote (more on this later). He also notes that since the vote is an advisory one, the board can choose to take no action. And that's precisely what happened here, a rarity in failed Say on Pay votes.

Two takes on 'definitive'

But this was a definitive vote. Yes, only 59% of shareholders voted against the company's executive pay policies. But given an average of 98% support for companies' Say on Pay votes in the rest of the economy and the fact that Ellison directly owns 25% of the company's stock (and presumably supported his own compensation package), that sounds pretty definitive to me.

Actually 59% of 75% (the non-Ellison shares) is actually 78%, almost four-fifths of publicly owned shares. And that's not even excluding the 18% of equity reserved for share awards, which is also not available for public ownership or voting.

Ellison paid primarily in stock options

Dailey adds: "Mr. Ellison's compensation consists primarily of at-the-market unvested stock options that put his compensation in direct alignment with Oracle's shareholders..."

You can't argue with that. This is precisely what the proxy says and has been saying since the basic structure of Ellison's pay was established in 2000. Stock options are awarded "to further incentivize and retain him and align his interests with those of Oracle's other stockholders."

Since he's the founder of the firm and inextricably linked with it, I don't see the need to use option awards to retain Ellison, but maybe I'm wrong.

However, the fact is that Ellison, as the principal shareholder of the company and already owns 25% of the outstanding shares. Annually awarding him 7 million or 8 million additional shares as options would appear to be a complete waste of shareholder resources. How could he be more aligned with shareholders than he already is?

Founder CEOs who are major owners should not receive stock awards

Wiser heads have considered such a situation at other tech companies and decided not to make any kind of stock awards to founder executives with substantial ownership. Neither Bill Gates nor Steven Ballmer ever received any kind of stock award from Microsoft  (NASDAQ: MSFT  ) , and neither certainly ever received a $1,000,000 base salary, which was the case for Ellison during the mid-2000s. Most of the founder executives at Google  (NASDAQ: GOOGL  ) also have never received any stock awards. 

At each of these companies, ownership is what drives the CEOs to better performance, not stock options. It is likely that ownership also drove the long-term gains at Oracle, with the stock options being the icing on the cake. It's just that the icing at Oracle is thicker than most CEOs' cakes.

Larry Page and Eric Schmidt at Google don't really receive any compensation at all, certainly no additional equity, but this does not seem to have harmed their desire to have the company thrive. Huge ownership levels appear to have had a significant effect on the company's returns.

Microsoft's recent woes have nothing to do with Ballmer's and Gates' lack of stock options. Indeed, Ballmer's drop in bonus level in 2013 is a clear reflection of the drop in operating income at the company. But again, the company's steady blue chip performance over the long-term has everything to do with the founders' existing investment.

Not the best use of capital

At Oracle, although the latest quarterly profits are down, return on equity is down, operating margin is down, and stock price is down in the short term, long-term investors can hardly complain about their returns. But that is hardly the point.

It would seem obvious that with a 25% ownership level, Ellison could be expected to have provided this level of performance regardless of the stock options, and shareholders would have saved a considerable amount of money.

That's what's wrong with Oracle's compensation policy. It's not that he's paid too much (although realized pay of well over $1 billion over the last 10 years is quite a lot), but that they are paying him in stock at all. 

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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 October 09, 2013, at 12:56 PM, spmccullough wrote:

    What kind of garbage commentary is this. There is only one thing that matters, does the return on investment for shareholders justify the extremely high compensation package of Ellison or not? It seems to be that it has. Could the shareholder have gotten a cheaper CEO...probably. Is it worth the risk to put the future of Oracle in the hands of a new guy...probably not.

    Thinking that Ellison or any other founder/CEO should work for free simply because they have a substantial ownership in the company is reprehensible. They took the risks and suffered for years before they achieved success. I'm guessing the author of this article never started/owned his own company, because if he did, there would be a bit more consideration for an entrepreneur who has become succesful.

    Also consider that if a hired gun was brought into the company as CEO, they would most certainly get paid a hefty salary plus stock why would you ask Ellison to do it for free. The only fair way to approach this is to provide a market conform compensation package. Consider hiring someone as CEO with equal capabilities and then answer the question of what their compensation package would be like. Or consider the opposite, if Ellison would leave the company and join a different Fortune 100 company, what would his compensation package look like there.

    Another interesting question is, what would happen if Ellison left the company today? How would the market react...I don't suppose the shareholders would be better off then, do you?

    I agree that Ellison's compensation package is astronomical, but his success and return to shareholders has also been fantastic. So why not?

  • Report this Comment On October 09, 2013, at 1:56 PM, Ssmokes wrote:

    Where is the information for those years (well really year), where the options were worthless, and expired under water?

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