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Market Commentary
 

Evaluate a company by looking at the rewards of its top executives

by Milo Georgiev    04/02/2002

As the market plunged down in the past 2 years, many companies have gotten into a lot of problems. Some of them even filed for Bankruptcy protection. I wander what is the trigger for a company to start falling down, and after doing some research I found that one of the main reasons is the money squandered to attract top executives to join the company, and then pay them huge salaries and bonuses, even when the stock is not performing.

John Legere pocketed a $3.5 million signing bonus to take Global Crossing’s CEO position. The troubled company gave the new leader a $1.1 million salary and a $1.3 million potential annual bonus. Under his old employment agreement, the affiliate company, Asia Global Crossing forgave $10 million dollar balance of a $15 million interest-free loan and agreed to pay at least $2.75 million in spread-out severance payments through October 2004. Once it declared bankruptcy, Global Crossing stopped paying severance to already laid-off workers. As the stock price tank, many workers’ retirement savings became nearly worthless. The real question here is why a company should pay so much money to an executive to get it out of trouble? A company that looks for a real turnaround should try to save the shareholder’s money and propose a contract that will compensate well the executive when the turnaround process is completed. Most of the compensation should come from granting options and warrants, not real cash, but this was not the case with Global Crossing's CEO John Legere and the negative results occurred – the stock is currently trading at $0.11 a share, down from $60. The shareholders filed class action lawsuits.

Lucent’s CEO Richard McGinn was granted severance package of $12.50 million in cash in stock, after the company missed numerous revenues and earnings targets (all this happened under his leadership). Mr. McGinn also has $870,000 annual pension. A sweet deal…Lucent (NYSE: LU) is now trading at $5 a share, down from $80, with no signs for turnaround and long-term recovery.

Carnival’s (NYSE: CCL) Chairman and CEO, Micky Arison, realized a profit of $36.7 million from the exercise of stock options in fiscal 2001. He earned a bonus of $1.7 million for the year ended Nov 30 2001, up from $1.5 million the previous year. He received 120,000 stock options in 2001. Carnival also paid $72,000 for Mr. Arison’s personal use of a corporate aircraft in 2001, up from the $51,500 the company paid in 2000, the filing with SEC said. While Mr. Arison was cashing in his options and bonuses, the Carnival’s stock (NYSE: CCL) plunged down 60% to $20 a share. All investors who bought the stock in the beginning of 2000 are still praying to break-even.

Coca-Cola’s Chairman and CEO Douglas Daft received a $3.5 million bonus in 2001, up from $3 million in 2000. Mr. Daft’s bonus was based on his achievement of financial goals set by the board’s compensation committee, which said in the proxy that he has “demonstrated highly effective leadership.” Mr. Daft now stands to receive $47.9 million in restricted stock if the company achieves annual growth of 16% in earnings per share through 2005. He also had a salary of $1.5 million last year, up from $1,268,750 in 2000 and received 1 million stock options, which expire in 2016 and are exercisable at $48.21. At the same time the Coca-Cola’s stock (NYSE:KO) dropped 45% in the last 2 years and is trading in the low $40’s. The stock has been in terrible downtrend since 1998. All investors who bought shares at $90 a share at that time are suffering now – their investments are down 50%! What kind of leadership are we talking about here?

Sanford I. Weill, Chairman of Citigroup, Inc. (NYSE: C), was paid $26.7 million in 2001, excluding options. Though his compensation, fell from $28.6 million in 2000, Mr. Weill still made much more last year than he did in 1999, when his compensation, excluding options, was $14.5 million. Let’s see the performance of the stock – if an investor purchased Citigroup’s shares in June 2000, he/she would break even today, i.e. the stock has been in a trading range for months, going nowhere…What is the justification of the double increase of Mr. Weill’s salary if the stock did not perform well? Don’t forget, under the leadership of Mr. Weill, Citigroup became one of the biggest lenders to Enron Corp., and the bank has been forced to write off much of its exposure to the collapsed Enron.

The stories with all of the above companies teach us how to evaluate a business by looking at the reward of its top executives. Should we invest long-term in the above companies based on this criteria? I don’t think so. If you are uncertain in your decision to invest in a company, you might want to look at its corporate executives’ compensation packages. If they still received big money while the company’s stock was plunging down, you should think twice before you put your hard-earned money into it for long term!