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The $1.1 billion (pretax) stock award, issued in June 1998, ushered in a storm of controversy and lawsuits on executive pay and compensation. It's not surprising that shareholders flipped out. CEO Charles Wang took home $650 million from the deal that year. At the time, it was the biggest award by a public company ever.
The axe fell last fall when a Delaware federal court judge ruled the executives should return 9.5 million shares -- nearly half the shares awarded -- because the plan didn't adjust for stock splits.
Under terms of the agreement announced today, the executives -- Charles Wang, COO Sanjay Kumar, and Executive Vice President Russell Artzt -- will return 4.5 million shares out of the total 20.25 million shares issued in one fell swoop.
What are shareholders to make of this messy affair?
On one hand, it's not that far out of whack relative to other compensation packages -- it's just that it was handed out to the executives all at once. For example, Apple (Nasdaq: AAPL) CEO Steve Jobs, who's been working for $1 per year since returning to the company in 1997, was just awarded options to purchase 10 million shares, which represents about 6% of the company's roughly 162 million shares outstanding. The company added a Gulfstream V jet into the deal as a sweetener. How sweet it is!
For Computer Associates, on the other hand, it makes good sense to put this blunder in the rearview mirror by returning shares (which will result in a noncash, one-time gain). For starters, it's mighty hard to justify a $675 million aftertax charge in Q1 '99 when the company reported net income of $194 million on sales of $1 billion. For the full fiscal year, Computer Associates earned $626 million and generated $1 billion in free cash flow. It was a huge one-time award relative to the company's earnings. Those 20.2 million shares represented 4% of the company's 573 million (diluted) shares outstanding at the time.
More importantly, it's hard to think much of a compensation committee that awards a highly lucrative package to executives based on such a flimsy benchmark. Under the 1995 agreement, the remaining 13.5 million shares vested after the company's stock price exceeded $53.33 for 60 trading days within a 12-month period. That occurred in June 1998, and the executives walked off with the shares.
Frankly, who cares if the stock closed above X price for Y consecutive days? What does that have to do with increasing the intrinsic value of a company's shares? Managements of all publicly traded companies have levers at their disposal to boost earnings and stock price in the near term, methods that don't necessarily increase value for shareholders.
This is not to say Computer Associates did this; it's just a criticism of a compensation policy that isn't geared to real performance. Management should be handsomely rewarded for achieving high marks in areas that matter, such as generating a high return on invested capital.
Uber-investor Warren Buffett loves writing big checks to managers that perform well -- and share price has nothing to do with it. It wasn't a great year for the property/casualty industry, but Berkshire Hathaway (NYSE: BRK.A) paid out $113.3 million in compensation to GEICO associates in 1999 because the company grew its percentage of policyholders, and grew earnings from policies that have been in place more than one year. No argument there, plus Buffett goes out of his way to explain his thinking on executive compensation in his shareholder reports.
But as long as managers tie compensation to arbitrary measures, shareholders have a right to complain.
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