CEO compensation is a hot topic, especially now that the Dodd-Frank Act requires say-on-pay votes. With CEO pay and performance seemingly disconnected at the following company, the Fool invites you to judge for yourself whether this business's boss actually deserves such a hefty paycheck.
Earlier this week, while examining the ugly pay practices at Chesapeake Energy (NYSE: CHK), I noted that Chesapeake co-founder Tom Ward has brought the same lavish pay schemes to the company he's now running, SandRidge Energy (NYSE: SD).
From a business perspective, SandRidge and Chesapeake make similar cases. SandRidge is a natural gas player headquartered in Oklahoma City, and an active driller in its onshore U.S. holdings. The company has also made a strategic move to increase the amount of oil in its production mix. One primary difference between the two is that SandRidge focuses largely on conventional -- that is, easy-to-tap -- resources, whereas Chesapeake goes after unconventional fields. With a $4.5 billion market cap against Chesapeake's $20 billion, SandRidge is also a good deal smaller.
From an investor's standpoint, the investment case for SandRidge is also somewhat similar to Chesapeake's. Investors anticipate that the company's aggressive development and acquisitions in recent years will pay off down the road.
The pay
Unfortunately, the egregious pay situation at SandRidge looks all too familiar for anyone who's perused a Chesapeake proxy filing. Let's peek at just how much moola the board of directors is pushing in Tom Ward's direction:
|
Year |
Salary |
Bonus |
Stock Awards |
Total Compensation |
|---|---|---|---|---|
| 2010 | $1.5 million | $1.5 million | $17.3 million | $21.8 million |
| 2009 | $1.2 million | $1.4 million | $9.4 million | $13.7 million |
| 2008 | $1.2 million | $1.1 million | $15.8 million | $19.3 million |
Source: SandRidge 2010 proxy filing. Total compensation includes other compensation not listed under salary, bonus, and stock awards.
Note that the total compensation includes a variety of fun perks for Ward that are strikingly similar to what McClendon gets over at Chesapeake, including personal use of the company's jets, personal security, club membership dues, and accounting services. The last one may be my favorite: SandRidge must just pay Ward so much that figuring out the accounting for all of that money is supremely expensive. They couldn't possibly leave him high and dry there, right?
As with Chesapeake, stacking up SandRidge's pay against that at many other major energy companies gets downright scary:
|
Company |
Market Cap |
Total 2010 CEO Compensation |
|---|---|---|
| Chevron (NYSE: CVX) | $211 billion | $16.3 million |
| Schlumberger (NYSE: SLB) | $116 billion | $15.6 million |
| ConocoPhillips (NYSE: COP) | $104 billion | $17.9 million |
| Apache (NYSE: APA) | $47.8 billion | $19.3 million |
| Halliburton (NYSE: HAL) | $45.9 billion | $14.9 million |
Source: SEC filings.
While Ward's pay package may seem nuts on its own, it looks even crazier when we consider that he's getting paid more than the CEOs of companies that are between 10 and 47 times SandRidge's size. Ward's pay even looks lofty compared to McClendon's $21 million, when we consider how much larger Chesapeake is.
And of course, we don't want to forget related-party transactions, which can often be a lot of fun as well. As with Chesapeake, SandRidge is a sponsor of the Oklahoma City Thunder, paying a $3.3-million-per-year sponsorship fee. Is anyone surprised that Ward happens to be a 19% owner of the Thunder? The company has also done business with and purchased interests in assets owned by Ward and his family. That includes a $1.8 million purchase of a working interest in leases owned by a trust set up for Ward's children.
As of yet, I don't believe that SandRidge has bought any map collections from Ward -- an infamous move from Chesapeake in 2008. However, the company did spend $321,000 buying sports and entertainment tickets from Ward last year.
The performance
All I can really do here is repeat what I said for Chesapeake: If the company had been producing unquestionably outstanding returns over this period, I would have much less of a problem with the pay package for Ward. But that was hardly the case.
Over the three years ending in 2010, while Ward was compensated $55 million, shareholders endured a stomach-churning collapse of the stock. At the close of 2010, a $1,000 stake in SandRidge purchased at the beginning of 2008 would have been worth $210. A similar investment in the S&P 500 index would have left the investor with $869.
But of course, it's nearly impossible for a CEO to do much about the stock price for anything but the shortest of timeframes. So we also need to look at some of the fundamental performance metrics for the company.
|
Metric |
2007 |
2010 |
Change |
|---|---|---|---|
| Revenue | $678 million | $932 million | 37% |
| Operating profit | $185 million | $31 million | (83%) |
| Diluted share count (dilution) | 110 million | 315 million | 186% |
| Simple free cash flow* | ($1.0 billion) | ($578 million) | NM |
| Total debt | $1.1 billion | $2.9 billion | 164% |
| Shareholder equity | $2.2 billion | $1.5 billion | (32%) |
| PV-10** | $3.6 billion | $4.5 billion | 25% |
Source: Capital IQ, a Standard & Poor's company, and company filings. NM = not meaningful.
*Calculated as cash flow from operations less capital expenditures and net acquisitions.
**The estimated present value of future cash flows from proved oil and natural gas reserves, less development and production costs and discounted at 10% per year.
I guess there are a couple of areas that SandRidge can crow about: Revenue has grown, and the PV-10 measure is also up. And while the operating profit measure looks awful, we can potentially give the company somewhat of a pass due to the crash in natural gas prices. However, looking at this table as a whole -- from the lack of profit growth and positive free cash flow, to the huge share growth and debt load -- it doesn't seem like performance that merits any sort of outsized payday for the CEO.
What now?
SandRidge investors still have time to vote their 2011 proxy -- but you've got to hurry, since the annual meeting takes place June 3. You can vote by telephone, Internet, or by showing up at the meeting in Oklahoma City. (You'll find more info in the proxy here.)
To let management know how you feel about Tom Ward's ridiculous compensation, I would recommend the following:
- Vote "against" in the vote to approve the executive officers' compensation.
- Vote for "1 year" in the vote on how often a compensation advisory vote should be held. (The board recommends three years -- the longest stretch.)
- Withhold your vote from the board members up for reelection.
In addition, you can write or email SandRidge's investor relations to let them know how you feel about the compensation being doled out to Tom Ward.
And, finally, don't overlook the compensation of SandRidge's directors. Like Chesapeake, SandRidge pays its non-employee directors a ridiculous amount, particularly when considering the size of the company. The SandRidge directors received, on average, $387,506 in 2010. For sake of comparison, the directors at ExxonMobil -- which is 91 times the size of SandRidge by market cap -- paid its directors an average of $318,381.
Thanks to the risky capital structure at SandRidge, I'm a good deal less excited about the company as compared to Chesapeake. However, I find myself no less repulsed by the way it compensates its CEO.
