Does High CEO Pay Translate to Higher Stock Performance?

Joel Anderson  |

Those members of the 99 percent love nothing more than to grumble about the excessively high compensation being offered the country's top CEOs. With the economy still lagging, the housing market still tanking, and unemployment stubbornly remaining high, the idea that some men are receiving tens (and in a few cases hundreds) of millions of dollars just for doing their day jobs is an anathema. Major corporations, though, counter that the payment is just part of the competitive nature of the business. Getting a top tier CEO is essential to remaining competitive and high compensation is the best way to attract the best candidates.

So is there any truth to that? A more complicated way of assessing CEO performance overall might be impossible, but a simple look at the five highest-paid CEOs in the country and the performance of their company's stock is a good place to start. So here are the five highest-paid CEOs of 2011 according to the AFL-CIO and the performance of their company's stock over that same period.

1. Tim Cook, Apple (AAPL)

2011 Total Compensation: $377,996,537   2011 Stock Performance: +25.56 percent

It should be noted that Apple's stock performance since the start of 2012 would make Tim Cook's pay seem more warranted. Year-to-date in 2012, the company's shares are up an additional 37.77 percent, and that was at 57.09 percent before Apple started a swoon on April 9th. However, no matter how one cuts the cake, the massive pay-out Cook has gotten between stock options and salary set the bar pretty high. The real test for Cook will come over the next year as he tries to prove that the company's current success isn't just residual momentum from the stewardship of Steve Jobs.

2. Larry Ellison, Oracle (ORCL)

2011 Total Compensation: $77,556,015   2011 Stock Performance: -18.05 percent

It was not a strong year for Oracle in 2011 as the company lost nearly one fifth of its total value over the course of 12 months. Larry Ellison is one of the company's co-founders who has served as the CEO since the company existed and was the Chairman of the Board until Jeff Henley replaced him in 2004. Some might look at Ellison's pay and the sagging share price and cry foul, but the truth is more complicated and raises another interesting point about the question of CEO pay.

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The vast majority of Larry Ellison's fortune comes from his 22.5 percent stake in Oracle. As such, whatever compensation Ellison might accept for being CEO is dwarfed by the returns he'll see from the stock improving over time or the losses he'll incur if share prices decline. Many if not most CEOs are compensated with large blocks of stock and have holdings that represent a significant stake in the company they're leading. So, more often than not, the question of CEO pay vs. company performance is more complicated than it appears at first blush as the CEO's financial position will improve with better company performance regardless of that year's compensation. That being said, Ellison did receive more than $75 million in stock and salary in a year when his company took a serious hit in its share price. What's more, with the CEO holding such a large stake in the company, one could also raise serious questions about the relative independence of the Board.

3. Ron Johnson, J.C. Penney (JCP)

2011 Total Compensation: $53,281,505   2011 Stock Performance: +8.79 percent

There isn't really much reason to dig too deep into these numbers as Johnson was only hired at J.C. Penney in November of last year. As such, Johnson's pay was clearly part of a package used to attract the man who engineered the success of the Apple store while he was an executive at Apple. And Johnson also, clearly, can't be blamed or lauded for J.C. Penney's stock performance in a year where he only served as CEO for two months. However, this is a case where one should clearly check back next year. With traditional brick-and-mortar stores on the decline, Johnson has been brought in to reverse the fortunes of the flagging J.C. Penney. If Johnson can't turn the company's performance around, there could be storm clouds gathering this time in 2013.

4. John H. Hammergren, McKesson Corporation (MCK)

2011 Total Compensation: $46,149,360   2011 Stock Performance: +10.7 percent

McKesson's 10.7 percent growth last year is a satisfying if modest jump in share price, and share holders also benefit from a 0.88 percent dividend yield, but it starts to look a bit more meager when one considers the nearly $50 million in compensation enjoyed by Hammergren. Certainly, there were other companies that did much better last year while paying their top executive a lot less.

5. Philippe P. Dauman, Viacom (VIA)

2011 Total Compensation: $43,123,552   2011 Stock Performance: +16.29 percent

Dauman is overseeing a media empire that enjoyed a pretty good year in 2011 with better than a 15 percent jump. Viacom also recently won an appeal that reopened its massive lawsuit against Google (GOOG) and YouTube over copyright infringement. It's a heady time in his business as streaming internet content could redefine the way Viacom's portfolio of cable stations get content to consumers, and Viacom is clearly hoping that the wealth they lavishly heap on Dauman will inspire him to keep the company on the cutting edge.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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