Paul Jacobs, CEO of Qualcomm (QCOM 0.03%), earned twice the pay of Cisco's (CSCO 3.57%) CEO John Chambers and delivered half the revenues. Jacobs realized almost $40 million in fiscal 2013, with revenues of $24,866 million, compared to $48,607 in revenues at Cisco for fiscal 2013 and $16.8 million in pay for Chambers. Much of Jacobs' pay – $20 million – comes from stock options granted 10 years ago, a period that saw the stock price double. Of late, however, stock price growth has been less spectacular, as the company admits in its proxy statement: "our 1- and 3-year TSRs were 9.8% and 16.2%, respectively. This TSR does not align with our financial performance growth rates; and compared to our peer companies, our relative 1- and 3-year TSRs ranked 16th out of 20 and 12th out of 20, respectively."
Not that Cisco's stock price performance is better, either in the long term or the short term. Ten years ago the stock hit a high of around $24, and today it is ... around $23. Chambers may be less expensive, but even at that price, does not present a very good return for shareholders.
But if Qualcomm's stock, as measured by total stockholder return (stock price growth plus dividends), does not reflect true performance, as the company claims, one wonders why so much compensation is in the form of equity, tied solely to the stock price. For example, CEO-in-waiting Steven Mollenkopf was awarded $50 million in restricted stock units on promotion to CEO-elect. These depend merely on Mollenkopf remaining with the company for five years, without any other performance requirements. If the stock price is stagnant during that period, he would still earn $50 million, but investors would be less than content with their returns. Such awards do too little to provide executives with an incentive to grow the company's value.
Since both CEOs are rewarded largely in stock – Chambers made just over $11 million from stock option profits and restricted stock – both companies' shareholders might be wondering what they are paying for.
Is revenue a better measure of performance?
Let's return to revenues. Annual bonuses at Qualcomm are based on non-GAAP operating income and non-GAAP revenues. These non-GAAP figures exclude the Qualcomm Strategic Initiatives (QSI) segment and certain share-based compensation, acquisition-related items, and tax items, "because we view such items as unrelated to the operating activities and performance of our ongoing core businesses."
Excluding share-based compensation – clearly a considerable expense – certainly has the effect of boosting both those figures, as do several of the other exclusions. And since all are based on management decisions, I remain unconvinced about their exclusion. Furthermore, I'm not sure shareholders would consider that these performance measures accurately reflect the company's performance either.
On the other hand, at Cisco, where operating income and revenue are also the annual targets, these are unadjusted, and at-target performance in 2013 required an increase in these items of 7% over 2012. Both targets were exceeded and Chambers was rewarded with a $4.7 million bonus.
Qualcomm investors unhappy about executive pay
Executive pay is important enough for shareholders to be allowed to voice an opinion on it. The annual Say on Pay vote – an advisory vote on compensation practices – is the avenue for that opinion. Qualcomm investors have already indicated discontent about its pay practices. Support for them fell from 95% in 2011 to 69% in 2012. Minor changes were made to the annual bonus plan – in my view inadequate given the level of discontent – but shareholders were mollified and support returned to 95%.
Given the pay levels this year, and Mollenkopf's promotion award, I would guess that support would go down again. At Cisco, on the other hand, support for pay policies has been in the mid 90s for the last three years, so moderation – if $16.8 million can be called moderate – does have its effects.
