Why CEO Pay for Media Companies Is on the Rise

Media CEOs are among the highest paid in the U.S., but it's not because they're better. The industry is.

May 29, 2014 at 7:34AM

Although banking CEOs saw some of the biggest pay raises last year, Wall Street is nowhere to be seen in the lists of the top 10 highest paid CEOs from two pay surveys out this week from Hay Management Consultants and the Wall Street Journal and Equilar and the Associated Press.

Which industry has taken its place? Media.

Five out of the top 10 highest paid CEOs in the Journal list are media CEOs, and six out of the top 10 in the AP list. They are Leslie Moonves at CBS (NYSE:CBS), Michael Fries at Liberty Global (NASDAQ:LBTYA), Phillippe Dauman at Viacom (NASDAQ:VIAB), Robert Iger at Walt Disney (NYSE:DIS), and Jeffrey Bewkes at Time Warner (NYSE:TWX) from the WSJ list. Moonves, Dauman, Iger, and Bewkes are also on AP's list, but instead of Fries, it adds Brian Roberts at Comcast (NASDAQ:CMCSA) and David Zaslav at Discovery Communications (NASDAQ:DISCA).

The differences in the two lists are due to the way pay is calculated in the surveys, but what is extraordinary is that, however you calculate it, seven media CEOs are among the highest paid in the U.S., with pay ranging from around $65 million at the top, for Moonves, to around $30 million for Bewkes, Iger, Dauman, and Zaslav. That's a lot of money by any calculation.

Are they worth it?

On the face of it, the answer to the question "are they worth it" would seem to be: yes. Over the past five years, the S&P 500 has appreciated just over 100%. In comparison, Discovery's stock has grown by over 300%, Comcast's by 260%, Viacom by 286%, Disney by 245%, and CBS by 718%. The problem is, if you drop the stocks into a comparison chart, they track each other almost perfectly, stock price rises moving in parallel.

Why is this important? Because as an investor, if you are looking at a basket of competitors in a particular industry, you are going to invest in those companies that are outperforming their peers. That's what makes the difference. Take the industry influence out of it and you are left with a more effective management or better products or some other measure of superiority. What we have here, however, is an industry that is outperforming others. And these CEOs are being paid for that, not for their individual contributions or excellence.

Peer comparisons vital

This kind of overpayment due to the "rising tide lifts all boats" effect can easily be avoided, though, of course, there is little impetus from companies to introduce this policy. It can be avoided by making sure that incentives only pay out if the company, and therefore the CEO, has outperformed his or her peers.

I checked, just in case, the two highest paid CEOs – Moonves at CBS with $65.4 million and Michael Fires at Liberty Global with $45.5 million.

For its annual cash bonus, CBS measures its operating income and free cash flow performance against internal targets. Stock options and restricted stock are influenced by stock price in isolation, regardless of peer performance, and its performance shares measure ... operating income and free cash flow performance against internal targets. The company recognizes it outperformed its peers, but without that being built into performance measurement, Moonves is paid for the industry's outperformance as well as his own.

At Liberty Global, the annual bonus is based on revenue and cash flow growth. Stock appreciation rights are based on absolute stock price rise, and performance shares on ... cash flow, all measures regardless of peer performance.

All of the companies compare their performance to their peers, but if that doesn't influence incentive pay, there's not a lot of point.

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