Larry Ellison's Pay Isn't the Problem With His Compensation Packagehttp://www.fool.com/investing/general/2013/10/09/larry-ellisons-pay-isnt-too-high.aspx Paul Hodgson
October 9, 2013
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: GOOG) also have never received any stock awards.
At each of these companies, ownership is what drives the CEOs to better p