Comp Cop

{Q} Doesn’t ‘the market’ set the CEO’s compensation?

{A} The chairmen . . . go out and hire consultants, and they all come in and say, ‘Here are the prevailing rates.’ But it’s totally out of control. The consultants are for sale; they’ll tell you whatever you want them to. And I said, ‘What about just reality, how about common sense?’ I tell CEOs to their face—I had a conversation with one just last week. I hate doing this; it’s no fun. The guy was making $975,000 a year and got a $1.2 million bonus for 3 percent growth. And I said, ‘You should be embarrassed.’ And he said, ‘I don’t have anything to do with my comp.’ Come on.

{Q} What would bring such companies into line?

{A} Well, I say, ‘You change it or the market’s going to discipline you. It always does. Another one I’ll leave nameless because we own it, but I’m fighting with them. I wrote a letter to them a year ago. Let me enlarge this: Not only is the CEO comp too high, but the options programs are too generous. And on top of it, typically these wonderful companies don’t pay dividends and they have huge cash flow. And they’re buying their shares of stock in!

So one, I detailed—looked at the prior five years—and said, ‘You know, you’re taking the excess cash and buying your shares in to offset the dilution for your options. You’re paying more for the stock than you get for your options—so $800 million went into keeping those shares at the same price to cancel out the dilution for the options. How does that help the long-term holder? The number of shares is the same and you keep bragging about all these share-repurchase plans.’

Well, the CFO said, ‘You took the wrong time frame. If you had used seven years, the numbers look better.’ And then he said, ‘We polled all of our shareholders, and they said we don’t like dividends.’ And I said to him, ‘I don’t know about that. Studies show that 30 to 50 percent of the returns from stocks are dividends.’ And he said, ‘Well, we polled them.’ And I said, ‘Why don’t you look at our track record and theirs and see who has done a better job for their clients?’

{Q} So this is still the company you sent the letter to?

{A} Yes. By the way, my contention was, because these people are very stock sensitive, ‘Your stock is not going up as fast as your earnings. The price-earnings ratio is dropping—Wall Street is figuring it out.’ So I just sent another letter off, a year later. I haven’t gotten a reply yet. I said, ‘It’s a year later; how are you doin’? The stock is down; it’s underperforming the Nasdaq, underperforming the S&P. And here’s your pro forma earnings, which you’re all trying to get us to believe now—but your pro forma earnings keep going up. What’s going on here?’ This time, I sent it to the chairman and I sent copies to all the board members.

So I’m going to shake that tree pretty hard. I said, ‘Why don’t you consider a dividend?’ So the directors are going to get this letter—and we own a lot of stock. This stock has been sliding. Fortunately, the other stocks in our portfolio are picking up the slack. But I said, ‘Hey, it’s your turn.’