Linking overpaid CEOs to overpaid directors

FindTheCompany recently released a story on the 25 worst performing CEOs in the United States, naming Mark Ellis, CEO of Linn Energy, as the worst of the worst. The author looked at US companies whose CEOs took home over $10 million in 2014 despite the company’s stock price dropping by more than 20%. Topping the list, Mark Ellis took home just over $10 million while Linn Energy’s stock price dropped by 67%.

Recently, the Boston Globe wrote an article that questioned whether skyrocketing director pay can be linked to skyrocketing executive pay, stating that “escalating compensation could create a disincentive for directors to challenge executives.” Do directors have an incentive to sign off on high pay even during a bad year in order to protect their own financial interests?

There might be something to this theory. In it’s article, the Boston Globe compiled a chart that shows the median pay awarded to directors within various sized companies. Directors of companies with revenue between $2.5-$10 billion are paid a median of $214,283, while directors of companies with revenue over $10 billion are paid a median of $258,000. If you look at the companies with the top five worst performing CEOs according to the FindTheCompany study, you will see that directors are being paid well in excess of the market median for comparable companies.

For example, let’s look at how directors are paid in comparison to the market median at FindTheCompany’s top five worst performers:

  1. Linn Energy – Mark Ellis took home over $10 million while the stock price dropped by 67%. The median pay of non-executive directors during 2014 was $296,387, well over the $214,283 median paid by comparable companies. This doesn’t even include a unit award paid to seven Linn directors in January of 2015 worth over $146,219.
  2. Chicago Bridge and Iron Company – Philip Asherman took home $14.3 million while the stock price dropped 49%. Chicago Bridge’s revenue is significantly higher than Linn Energy’s and thus it’s comparable market median director’s pay is $258,000. Chicago Bridge, on the other hand, paid its non-executive directors $288,140.
  3. Ensco PLC – Carl Trowell took home $10.3 million while the stock price plunged 47%. Non-executive directors were paid a median of $393,112, which is significantly higher than the comparable market median of $214,283.
  4. Cobalt International Energy – Joseph H. Bryant took home $10 million while the stock price dropped 45%. Cobalt’s median director pay was $277,500. The company had no revenue, making it difficult to compare to those companies with revenue. However, it pays more than the $258,000 median income paid to directors of companies with revenue over $10 billion. Pretty handsome for a company with no revenue.
  5. Avon Products – Sherilyn McCoy took home $10.2 million while the stock price dropped 45%. Avon’s non-executive directors were paid a median of $225,574, slightly higher than the market’s median of $214,283.

The Boston Globe could be on to something. Further research into this area could produce fascinating results. The bottom line is this – don’t just pay attention to what the CEO is pocketing. Look at who is making the decision to pay him that amount and see what they are being paid to keep quiet.







Across the Pond: A Pay Gap Worth Widening

Just a quick note of interest this week. The Financial Times has reported that European bank CEOs are paid less than half of what bank CEOs in the United States earn. CEOs at the top nine European banks earned an average of £4.8 million pounds, while those at the big US banks earned an average of £10 million. The Financial Times and PWC attribute these findings to two causes: the weak performance of European banks, combined with EU rules that limit bonuses to two times salary. Although the EU’s banker bonus cap regulations were not perfectly drafted (see my earlier blog post on this), at least they can be credited with having some impact.

It is not entirely surprising that this transatlantic pay gap is widening. For one, the American executive pay culture is far more out of control than it is in Europe. Secondly, American banks tends to be significantly bigger than European banks, “justifying” bigger pay cheques in the minds of remuneration committees. Finally, European banks have had an all-around poor year. It would be shocking to find the pay gap narrowing given recent performance.

While this should be seen as a partial measure of success to advocates of reining in executive pay, I am sure it will cue predictable cries of a looming brain drain from other circles.