Over the past five years, 11 CEOs have been rewarded with a total compensation of $865 million, while their companies lost a total of $640 billion in shareholder value. Yikes.
This news comes to us from the folks at The Corporate Library, a corporate governance watchdog group. They've just released a study on executive incentive compensation practices and the gap between pay and performance. The 11 companies in question are:
- AT&T
- BellSouth
- Hewlett-Packard
- Home Depot (NYSE:HD)
- Lucent Technologies (NYSE:LU)
- Merck (NYSE:MRK)
- Pfizer
- Safeway
- Time Warner (NYSE:TWX)
- Verizon Communications (NYSE:VZ)
- Wal-Mart (NYSE:WMT)
The list was especially interesting (and slightly alarming) to me because I hold shares in four of the firms. Here's what the companies have in common:
- Each received a high-risk rating from The Corporate Library.
- Each paid its CEO more than $15 million in the last two available fiscal years.
- Each had a negative return to stockholders over the last five years.
- Each underperformed its peers over the same period.
The Corporate Library had this to say about its findings: "The study examines in detail the incentive policies at each of the 11 companies; finding high proportions of fixed pay, poorly chosen performance metrics, and rewards for below-median performance."
Berkshire Hathaway's (NYSE:BRK-A) Warren Buffett has frequently criticized executive overcompensation. In his most recent letter to shareholders, he said: "Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay. The upshot is that a mediocre-or-worse CEO -- aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet, and Bingo -- all too often receives gobs of money from an ill-designed compensation arrangement."
This is indeed a sorry state of affairs. But does it mean that you should run out and sell any shares you have in the above companies? Not necessarily. It is important to evaluate how managers are being compensated, though, to get an idea of what their incentives and motivation might be. (Note that Berkshire Hathaway recently held more than $900 million in Wal-Mart stock, and it likely still does.)
But given The Corporate Library's factors contributing to companies making its list, I think some of the firms might still end up as long-term winners, despite an admittedly lengthy stagnant period. These firms did have lackluster results over five years as measured by stock prices. But stock prices don't always tell the whole story.
A CEO isn't necessarily a bad CEO if his or her company's stock price doesn't advance regularly and significantly. Heck, it can be a bad thing if a CEO focuses mainly on advancing the share price in the short run -- especially if it's done at the expense of long-term positioning and growth.
This report shouldn't pressure you into any immediate action, but it may be a good reason to review your own holdings. Take a closer look at compensation, and ask yourself whether the CEOs of the companies you own are earning your respect and confidence -- or just earning more than they deserve.
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Longtime Fool contributor Selena Maranjian owns shares of Pfizer, Wal-Mart, Time Warner, and Home Depot. Time Warner is a Motley Fool Stock Advisor pick; Pfizer and Home Depot are Motley Fool Inside Value selections; and Merck is a Motley Fool Income Investor pick. The Fool's disclosure policy works for peanuts.
