Ellison’s Paycheck Is $103 Million and He's Still a BargainCaleb Melby
Larry Ellison has had a hard time persuading investors like Catherine Jackson he’s worth his $103 million paycheck.
The billionaire’s compensation is creating a culture at Oracle Corp. that’s “bad verging on toxic,” Jackson, a senior adviser at pension manager PGGM, which owns 5.7 million shares of the company, said by phone. The company’s board “looks like they’re in Larry’s back pocket,” she said.
Oracle’s total return has trailed the Standard & Poor’s 500 Index over the last five fiscal years ending in May, a performance that prompted the software maker’s shareholders to majority-vote against its pay plan three years in a row, even though about 25 percent of the votes are Ellison’s. With a fortune approaching $45 billion, the 70-year-old has received 7 million options every year from 2007 to 2013.
It turns out Ellison may be a pretty good deal. While Oracle’s stock lagged, a different measure of performance -- economic profit, which is defined as after-tax operating profit minus the cost of capital -- shows the company has on average outpaced 98 percent of companies in the S&P 500 over the past three years.
“I think economic profit is just about the best single measure of company performance,” David Harper, a financial analyst and former compensation consultant, said in an e-mail. “The striking advantage of economic profit is that you get to pay executives for the results under their scope.”
Pay for Performance
Investors grapple with how to measure pay for performance because executive compensation is sometimes a factor in deciding to buy or sell shares. Economic profit better pinpoints whether management’s decisions are producing positive returns after subtracting the costs of debt and equity. A metric such as total stock return can be affected by factors outside an executive’s control.
Ellison’s $103 million pay for fiscal 2014 equates to 2.1 percent of Oracle’s three-year average economic profit, which is better than 52 of the CEOs at companies in the S&P 100 index, according to data compiled by Bloomberg.
Deborah Hellinger, a spokeswoman for Oracle, declined to comment on Ellison’s pay.
“The federal funds rate, whether or not Russia is invading Crimea, the price of oil -- it makes it very difficult for management to determine total shareholder return,” said Jon Lukomnik, executive director of the Investor Responsibility Research Center Institute in New York.
For Oracle, the distorting factor in its stock price has been the belief that the Redwood City, California-based company was late to enter the cloud computing market, Richard Davis Jr., an analyst at Canaccord Genuity Group Inc., wrote in a January letter to shareholders.
The company fell 35 cents, or 0.8 percent, to $41.47 yesterday in New York.
Focusing on Oracle’s stock returns may be short-sighted, Davis said, given its recent growth and investments. The company’s revenue surged 43 percent from fiscal 2010 through 2014 and its net income margin improved by almost 6 percentage points, according to data compiled by Bloomberg. It increased its research and development budget by $1.9 billion to $5.2 billion and spent $19 billion acquiring more than 40 companies, the data show.
“Larry has done extraordinarily well,” said Bill George, the former chief executive officer of Medtronic Plc and a member of Exxon Mobil Corp.’s board of directors. “He has acquired a lot of potential and actual competitors and he’s built a lot of shareholder value.”
In economic profit, expenses such as research and development as well as employee training are classified as investments for the company’s future sustainability. It measures how efficiently businesses acquire and deploy financing, said Julie Gorte, senior vice president for sustainable investing at Pax World Management LLC, which manages $3 billion.
It’s a preferable metric for a company like Exxon, which is focused on making longer term investment decisions, said George, who also sits on the compensation committee at Goldman Sachs Group Inc.
Exxon CEO Rex Tillerson’s $28.9 million pay in 2013 is 0.4 percent of his company’s $7.4 billion three-year average economic profit through that year, the 13th-best ratio in the S&P 100, according to data compiled by Bloomberg based on the most recently disclosed proxy statements. Google Inc. co-founder Larry Page, who makes $1 a year in total compensation, has the best economic profit-to-CEO pay ratio in the index.
Return on Equity
“Exxon is looking at making investments that are 25-, 50-year decisions,” George said. “You’re not going to make those investments if you’re looking to optimize your one- to three-year return.”
The average economic profit-to-CEO pay ratio over the past three years at companies including PepsiCo Inc., Verizon Communications Inc. and Philip Morris International Inc. rank near the top for S&P 100 companies, according to data compiled by Bloomberg.
General Electric Co. is near the bottom. The company has negative three-year average economic profit of $5.4 billion and it awarded CEO Jeffrey Immelt $31 million last year, according to data compiled by Bloomberg. It has more than $250 billion of debt, the majority of which was used to fund its lending arm, GE Capital.
“Our investors use return on equity to measure performance at GE Capital,” said Seth Martin, a company spokesman. “This is the standard return metric for the financial services industry. GE Capital ROE is included in GE’s return on total capital, and is more accurate than economic profit metrics in measuring how we have performed in both our industrial and financial segments.”
The company’s return on equity is more than 11 percent, about double its weighted average cost of capital, according to data compiled by Bloomberg.
Pepsi shareholders are also getting a deal with CEO Indra Nooyi, who was paid $20.5 million for 2013, equal to 0.3 percent of its three-year average economic profit. The company increased revenue and profit margins since 2012 while increasing investments in research, development, marketing and advertising.
Philip Morris, which sells Marlboro cigarettes outside the U.S., has a three-year average economic profit of $7.1 billion and paid CEO Andre Calantzopoulos $12.2 million for 2013, which is also among the best for S&P 100 CEOs.
Economic profit isn’t always the best way to measure pay for performance, especially at growth-stage companies, whose investors prefer they make long-term investments at the expense of current profit, said Harper, the financial analyst.
One example is Salesforce.com Inc., whose billionaire founder Marc Benioff is a former Oracle employee. The San Francisco-based company lost about $500 million of net income during its last two fiscal years even as revenue grew about 75 percent. It has a negative economic profit, according to data compiled by Bloomberg. The company awarded Benioff $41.4 million, mostly in stock options, for fiscal 2014.
Awarded pay measures what a compensation committee intended to pay an executive, not what was reported by the company in the summary compensation table. It includes salary, cash bonuses, and stock awards received during the fiscal year that are valued as of that year end’s stock price. It accounts for changes in the value of pensions, and includes perks such as club dues and personal use of corporate jets.
Ellison’s options grant was valued at $65 million when it was awarded in July 2013. It increased to about $100 million at the end of the company’s fiscal year in May 2014. He also received a $741,384 cash bonus and $1.54 million in other compensation, including security personnel at his home.
The billionaire’s pay, as a percentage of his company’s economic profit, may be even smaller in September, when Oracle is scheduled to file its proxy statement. The company reduced his awards in July, and cut them again two months later when it announced he would step down as CEO to serve as the company’s chief technology officer. He was awarded 2.25 million options and a target of 562,500 performance-based stock units that will pay out depending on how Oracle’s revenue and operating cash flow growth compares to its competitors.
“Reducing the reliance on stock options was long overdue, but the structure of the new performance stock units is puzzling,” said Michael Pryce-Jones, director of corporate governance at CtW Investment Group, which advocates for pension funds that collectively manage $200 billion. “A single metric, such as economic profit, would provide a far clearer line of sight for executives as they seek to maximize value in a very dynamic environment.”
After shareholders voted against its pay plan for the first time in 2012, Oracle wrote in its proxy statement that significant changes to the executive compensation program weren’t warranted, and it “clearly” linked pay to performance. Last year, the company modified its wording, telling investors that executive pay is “primarily contingent on their ability to achieve our primary business objectives.”