My perennial near-hero Mark Cuban recently examined the issue of CEO pay, over on his handy soapbox, The Blog Maverick. In his blog post titled "My 2 Cents on CEO Pay," Mr. Cuban outlined his position on the subject and tossed some ideas around. The post makes a good read, and the author makes some good points. Additionally, the 65 or so comments by the readers are well worth the time to cruise them.
I'd like to discuss and expand upon an idea someone presented in addition to those discussed by Mark Cuban. It's actually a reverse scenario to what Mr. Cuban describes as moving chief executive officers into "the cash zone." In the Cuban scenario, the CEO would be paid cash, without additional compensation through stock grants, in order to make their pay more tangible and visible as a business expenditure. Mr. Cuban also asserts that this might more closely align CEO compensation with company performance. It's an admirable idea, but I doubt that it will ever happen.
In this alternate approach, we give the CEO all the stock certificates he or she can swallow. Then we provide an equal number to be divided among all other employees of the company. In this manner of compensation, all employees have their hands on the ball. The concept of laboring to line the pockets of someone else with gold would become extinct. The CEO would suddenly become a real person in the eyes of the rank-and-file laborers. Likewise, the labor force would be inextricably linked to the financial success of the CEO. If labor is to share the risk, they should also share the reward.
A further stop-gap to this scenario would be if upper management deemed that labor cuts were needed to create profitability, or for any reason other than "cause," they and the CEO would be required to surrender share holdings equal to the holdings of the displaced workers. These surrendered shares would then be distributed to the pink-slipped workforce members, with the company paying all applicable taxes on the transfer. Additionally, no party would be allowed to liquidate more than 5% of their holdings in any one year, as long as they were employed by the company, and upper management would be required to maintain holdings at least equal to those of the workforce.
I know it's a lofty scenario, but it sure would beat the heck out of what we have going on now.
No one much liked Mr. Bernanke's comments, which were read as saying the U.S. is on its way into a recession. Results from Best Buy NYSE: BBY) were better than expected, but the Fed news overshadowed it.
The Dow dropped 50.41 points to 12,603.95. The Nasdq sold off 1.35 to 2,361.40. The S&P gave back 2.78 to 1,367.4.
Notable today:
VeriFone Holdings Inc. (NYSE: PAY) was hit after overstated profits led to the resignation of CFO, Barry Zwarenstein, and removed CEO, Douglas Bergeron, from his place as Chairman today. The income was overstated by $36.9 million, much higher than the estimated $29.6 million in overstated income.
Constant Contact, Inc. (NASDAQ: CTCT) soared today after Intuit Marketing Tools Center chose Constant's email marketing service as one of its tools. Intuit's center provides marketing tools to small growing business.
Looking to get more information for investors about how companies calculate their executive pay packages, the SEC sent 350 letters to companies last summer asking them questions about how they paid executives.
But according to (subscription required) The Wall Street Journal, "A majority of the companies have now received second letters, according to an SEC official, and of 26 companies whose cases were closed, 21 were chided for not giving enough information about the role of individual performance in their pay decisions."
I certainly applaud the SEC for trying to get more meaningful disclosure for us but, sadly, none of it will matter unless big institutional shareholders decide to step up to the plate.
It's a pretty well-known fact that compensation consultants are a joke. It's hard to imagine any metric that gives CEOs raises and eight-figure paydays while their share prices tank and their companies bleed red ink. But that happens all the time.
More disclosure is great and should help to expose just how terrible compensation practices are at so many public companies. Maybe, just maybe, it will embarrass some companies into reforming how they calculate executive pay.
But with institutional investors and pension fund managers who, with notable exceptions, sit on their hands while executives like Angelo Mozilo reap hundreds of millions in compensation as their companies sink to the brink of bankruptcy, not much is going to change.
Dateline, January 3, 2007: Bob Nardelli steps down as CEO at Home Depot (NYSE: HD). In leaving, Nardelli, who had been at the head of Home Depot for six years, scooped up a severance package valued at about $210 million, kindly tipped his hat, and slid his resume across the desks of Chrysler. Does this make the man an opportunistic corporate blood sucker, an overcompensated leadership figurehead, or just plain shrewd? My answer to that question would be, none of the above.
When trying to judge the departure of Robert Nardelli relative to his compensation and performance, two things need to be considered right on the front end. First, our jealousy factor must be removed from the equation. Second, we need to remember that compensation packages at this level are negotiated on the front end. Bob Nardelli didn't "get away" with anything. He executed the terms of an employment contract, plain and simple. How many of the ambitious persons reading this blog wouldn't have done exactly the same when given the same circumstances?
Most of the negative sentiment surrounding Nardelli's well-heeled departure emanated from shareholders who were hurt by a slow yet significant decline in HD's share value. But the fact is that within the past four years of Nardelli's tenure, HD's shares provided more consistent performance than the four years prior. Granted, investor's haven't seen Home Depot shares approach the past high of nearly $70, but in light of today's economy they probably won't see anything like that in the near future, and that's certainly not Nardelli's fault.
MOST NOTEWORTHY: Oracle, VeriFone and Air France were today's noteworthy downgrades:
JMP Securities said checks indicate Oracle's (NASDAQ:ORCL) business is slowing along with enterprise software spending. The firm downgraded shares to Market Outperform from Strong Buy.
VeriFone (NYSE:PAY) was downgraded to Neutral from Buy at Merrill Lynch following its announcement it would restate 2007 financials due to errors.
Goldman lowered its rating on Air France (NYSE:AKH) to Neutral from Buy to reflect lower revenue and higher fuel cost assumptions.
Ouch. I hate it when stocks I hold lose half of their worth in one day. Thankfully, I don't own VeriFone (NYSE: PAY), but I used to own Israeli firm Lipman Electronic Engineering, back when I was at the hedge fund. It was a value play and it paid me handsomely.
I don't think VeriFone would say the same thing.
You see, VeriFone bought Lipman in 2006 and announced yesterday that it believes it overstated its profit for the first three quarters of this year by $30 million. To gauge how big a gaffe this really was, $30 million is equivalent to 80% of their total profit.
VeriFone Holdings (NYSE: PAY) is recently down $22.37 to $25.68 after announcing it will restate 1Q, 2Q and 3Q results related to in-transit inventory. PAY's technology enables electronic payment transactions and value-added services at the point of sale. Wachovia says, "we would be buyers into the weakness." PAY set a $200 million private placement of equity on Nov. 27; the sale was expected to close on December 11.
Dow Jones reported on November 30 that PAY's Chairman Douglas Bergeron sold 43,300 shares in four separate sale transactions on November 26, 2007. PAY option volume was heavy on November 29, with 6,505 contracts trading. PAY January option implied volatility of 96 is above its 6-month average of 41 according to Track Data, suggesting larger risk.
Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
While women still earn a fraction of a man's wage in the United States, there is one niche where women are eking out an advantage -- and please check your stereotypes at the door. It's not fashion, or child care, or as spokespeople for psychic hotlines (though I think someone should look into that...). It's the boardroom.
Unbelievably, a report by Corporate Library that looked at pay data from more than 25,000 directors at 3,200+ companies found that women were paid more, on average, then men; $120,000 for women versus a median of $104,375 for men. Of course, given their much smaller numbers -- female directors are outnumbered by males, eight-to-one -- it's not exactly reason to take out our party hats, ladies.
The report doesn't theorize as to why, exactly, women are paid more. I wonder if it's due to the demand for a "product" in limited supply -- directors tend to be officers for other corporations, judges, or other highly-ranked folks. Far fewer of these are women. Hence, the women who are available to serve as directors must be paid more to lend their female presence.
Alternatively, it could be the simple fact that larger companies are more likely to desire diversity on their boards; and it is the larger companies who pay more. I wonder where newly-appointed News Corporation board member, 27-year-old Natalie Bancroft, fits on the director pay scale?
MOST NOTEWORTHY: Circuit City, Best Buy, COTT Corp and o2 Micro were today's noteworthy initiations:
Wachovia started shares of CircuitCity Stores Inc(NYSE: CC) with a Market Perform rating, citing low visibility into near-term fundamentals and low conviction in EPS.
The firm also started shares of Best Buy Incorporated(NYSE: BBY) with a Market Perform rating, citing low visibility into holiday sales and product margin trends and valuation.
Gabelli started COTT Corporation (NYSE: COT) with a Hold rating, as they believe the company's Q3 was disappointing. The firm thinks COTT lacks pricing power, and would look for margin improvement and successful non-carbonated soft drink penetration from the company before recommending the stock
Thomas Weisel started shares of o2 Micro International Limited (NASDAQ: OIIM) with an Overweight rating and $24 target. The firm believes the company is in good position to compete in the high growth markets of power management, advanced lighting and security and surveillance
As investors, corporate governance experts (What does that even mean?) and the SEC debate proposals that would give shareholders greater say over executive pay, there's compelling evidence that the time is right. First, chief executives themselves think they are heinously overpaid. If you need more evidence that CEO pay has gotten out of control, I'm not really sure what to tell you.
Anti good-governance zealots are decrying proposals to give shareholders greater say meddlesome, arguing that it could ruin companies' ability to attract good executives. Happily, The Financial Timessees through this nonsense: Even if chief executives' pay is entirely justified by the value they add, however, it still makes sense to give investors more influence over it. If the present stratospheric levels are needed to attract good CEOs then shareholders will pay up, but if high CEO pay is simply a function of executives' insider power then giving investors control will produce restraint. Either way, plans now afoot to let investors nominate directors are a good first step. They deserve support.
And that's exactly what this is about. Greater shareholder rights is always a good thing -- letting the people whose money is being sent have a greater say in how it's spent makes sense. It's a shame that we even have to have an argument about this.
Warren Buffett has said that you should never ask a barber if you need a haircut. But if a barber tells you that you don't need a haircut, that probably means you really don't need one.
And while most people would agree that top executives at publicly traded companies are overpaid, we now have all the evidence we need to end this debate: They think they're overpaid too! A survey of 70 presidents and chief executives conducted by the National Association of Corporate Directors found that 2 out of 3 top executives thought chiefs were given high compensation relative to their performance. Only 2.2% thought the pay was too low!
It's time for corporate directors to be taken out to the woodshed. They have failed mightily in their duty to shareholders. They're supposed to be representing our interests, but instead serve as lapdogs, paying CEOs amounts of money that they themselves consider obscene!
Some have attempted to frame this as a populist issue, pointing to the fact that the gap between the rich and poor has reached its widest point in 60 years. But I'm more concerned about it as a corporate governance issue. Directors are pretty obviously wasting shareholders' resources on excessive compensation, and it needs to stop.
Microsoft Corp.'s (NASDAQ: MSFT) CEO, Steve Ballmer, received what could be considered a mere pittance of a paycheck for the world's largest software company in its most recent fiscal year. In Microsoft's 2007 fiscal period, profit at the company rose about $14 billion on over $50 billion in sales. Ballmer's pay for leading the company during that period? $1.3 million.
Yes, in a salary that would make most hedge fund managers wince, Ballmer scored a $620,000 in salary and another $650,000 in bonus pay. While stock options are generally the most prudent way to pay some executives these days (to the tune of tens of millions of shares), the tiny pay Ballmer received sounds like a mistake until once reads that it is true.
In perfect employee fashion, Microsoft also matched Ballmer's 401k contributions with $6,750 in matching funds as well as spending $3,000 on life insurance and athletic club memberships for the CEO. Even a billion-dollar paycheck would be a bargain for a company whose profit reached $14 billion in the latest fiscal year, although Ballmer received a fraction of that amount.
Now, why Microsoft shares has hovered in la-la-land during one of the most profitable years in the company's 30-year history is the largest question mark. My guess? Google, Inc. (NASDAQ: GOOG) is stealing the thunder from every tech company with its constantly expanding revenue every quarter.
If you are like most of us, you can probably count on one hand the number of times you have paid cash for something recently. Secure electronic payment technology is ubiquitous. The outfit that has installed more such systems than any other company in the world is headquartered in San Jose, California.
VeriFone Holdings (NYSE: PAY) makes and services transaction automation systems that enable electronic payments between consumers, merchants, and financial institutions. Products include point-of-sale software and terminals, smart card/check readers, receipt printers and Internet commerce software. The firm also makes gas station electronic payment systems that combine card processing and fuel dispensing. Further, it offers a range of client services and customized application development. VeriFone was once a division of Hewlett-Packard (NYSE: HPQ).
The company surprised the Street last week, when it reported fiscal Q3 EPS of 42 cents and revenues of $231.9 million. Analysts had been looking for 40 cents and $226.7 million. Management also guided Q4 EPS to 41-42 cents (41 cent consensus), Q4 revenues to $231-$233 million ($235.2M consensus) and FY07 EPS to $1.59-$1.60 ($1.56 consensus). Wedbush Morgan subsequently reiterated its "strong buy" recommendation on the issue. The stock popped above 200-day moving average support on the news and then passed into a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.
Brokers recommend the stock with six "strong buys" and two "holds." Analysts expect a 20% growth rate through the next year. The PAY Sales Growth rate (57.13%) and EPS Growth rate (75%) compare favorably with industry, sector and S&P 500 averages. Institutions own about 82% of the outstanding shares. Over the past 52 weeks, the stock has traded between $27.20 and $42.72. A stop-loss of $34.90 looks good here.
A number of high-profile CEOs must not have provided enough information on their compensation packages. The SEC is sending them letters asking for a little more detail. The agency has already sent out about 300 letters.
Among the things that interest the SEC is how pay consultants make calculations for corporate boards. The Journal quotes the SEC's director of corporation finance, John White, saying, "We're seeing a lot of really vague disclosure" about individual performance goals and targets.
The issue can't really be that hard to resolve, especially at very big companies. They know full well how their CEO's pay is set, who is involved, who is consulted from outside the company, and what the final comp numbers are. It is not rocket science.
It is, however, another area of friction between the SEC and big companies.
Shareholders of British grocer Tesco are none-too-pleased with the proposed bonus package for Sir Terry Leahy, which would pay him as much as £11.5 million, or $23.1 million, in addition to his regular salary. 17% of shareholders declined to support the pay package. According to TimesOnline, "Sir Terry, who received £4.62 million in cash and shares last year, would pocket up to 2.5 million shares under the New Business Incentive Plan if Tesco cracks the US market. The shares would gradually vest between 2011 and 2014. The scheme only applies to the chief executive."
Now there's an incentive for global expansion!
While the pay package certainly seems excessive, it's a relative pittance compared to the amount that Tesco is wagering on a successful foray into key U.S. markets including Las Vegas and Phoenix. The company will be investing over half-a-billion dollars per year in the effort, so why not offer Sir Terry a big chunk of change if all goes well?
Compared to some of the pay packages CEOs here are receiving, it just doesn't seem that bad. The gradual vesting of the restricted stock means he will only stand to get really really rich if the company grows well. If it does, shareholders will have little to complain about.
Dateline, January 3, 2007: Bob Nardelli steps down as CEO at 
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Ouch. I hate it when stocks I hold lose half of their worth in one day. Thankfully, I don't own 
VeriFone Holdings
While women still earn a fraction of a man's wage in the United States, there is one niche where women are eking out an advantage -- and please check your stereotypes at the door. It's not fashion, or child care, or as spokespeople for psychic hotlines (though I think someone should look into that...). It's the boardroom.
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Analysts had been looking for 40 cents and $226.7 million. Management also guided Q4 EPS to 41-42 cents (41 cent consensus), Q4 revenues to $231-$233 million ($235.2M consensus) and FY07 EPS to $1.59-$1.60 ($1.56 consensus). Wedbush Morgan subsequently reiterated its "strong buy" recommendation on the issue. The stock popped above 200-day moving average support on the news and then passed into a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.
A number of high-profile CEOs must not have provided enough information on their compensation packages. The SEC is sending them letters asking for a little more detail. The agency has already sent out about 300 letters.
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