Here's a Disturbing Way to Gauge How Overpaid Some CEOs Are

×
Key Speakers At CERAWeek 2013 Energy Conference
F. Carter Smith/Bloomberg/Getty ImagesIn 2013, Charif Souki earned $141,949,280 from Cheniere Energy, which had a net loss before taxes of $554 million on $267 million in revenue.
Americans haven't found it hard to be outraged when it comes to CEO pay. Anyone -- at least, anyone not sitting in a corner office -- who looks at what the most highly compensated chief executives take home in a year has to wonder: What can a single person do to genuinely earn that much?

The answer from the defenders of those lavish paychecks, of course, is that the CEO, through his leadership, makes a lot of money for the company, and, therefore, its shareholders. Those people who landed on the recently released list, Equilar 200 Highest Paid CEO Pay Rankings? They must be worth those head-scratchingly high numbers.

But while the number that seems to fascinate most people is the total compensation figure (including salary, bonus, stock and benefits), there's another that I find similarly intriguing: CEO compensation as a percentage of the company's total revenue. For example, entrepreneur (and CEO) Kirk Maxey examined the data and concluded that one U.S. CEO took home almost half his company's gross revenue as a single year's pay package.

He was wrong. It was more than half.

That top earner, Charif Souki of Cheniere Energy (LNG), pulled down 53.1 percent of 2013 revenue with his total compensation of $141,949,280, according to public filings as reported by Google Finance. That was up 147 percent from the previous year. According to the company's proxy filings, five other corporate officers saw their pay double or more between 2012 and 2013.

Maybe Souki and his team pulled off something spectacular, though it would have had to be a victory that will only pay off in the future, as Cheniere had a net loss before taxes of $554 million on $267 million in revenue last year.

Regardless, that got me wondering how other companies would look if you compared their CEO pay to their gross revenue. So I received a data dump from Equilar, added the latest reported annual revenue for each company, did some analysis and talked to a few corporate governance experts. Although Cheniere was by far the most generous, I found a number of companies that paid a significant fraction of their annual revenues to their CEOs.

Companies avoid comparing CEO pay to revenue for a good reason. "That's like going back to the '80s, where basically CEOs were driven to expand the company and form conglomerates where there was no synergy," James McRitchie, publisher of the site Corporate Governance, told DailyFinance. It would be too easy for the top person to grow revenue at the expense of profits.

Multiple Metrics Are Used

Chief executives can just as easily build profits at the expense of necessary investment to maintain a sustainable business. Similarly, a CEO can often pump up share price, although it may happen at the expense of the company's overall health. "No one metric is the be all and end all of CEO comp," said John Roe, executive director of corporate services at proxy advisory firm Institutional Shareholder Servicese.

Looking at how much revenue is devoted to maintaining a CEO seems like a reasonable measure. That said, discussing anything as a percentage of revenue is difficult if you don't have a benchmark of a reasonable number. A company might be in an early stage of development (and therefore have low revenue) but be paying big money to an executive capable of developing it into a strong company within a few years. Under that circumstance, its easier to justify a CEO possibly getting paid multiple times his company's annual revenue. When a company has been around for a while, and brings in hundreds of millions in revenue, the dynamics for an investor are different.

Roe ran an analysis for DailyFinance of the 2,200 public companies that report their data to ISS. Remembering for a moment that investors typically give board vote recommendations overwhelming support -- the median is in the neighborhood of 96 percent -- it turns out that when CEO pay reaches 1 percent of revenue, there is a jump in shareholders voting against the compensation plan in advisory votes mandated by the Securities and Exchange Commission. Below are excerpts of the data. TDC means total direct compensation.
Source: ISS

Roe said the drop in support at 1 percent was significant in the world of boardrooms and major investors. So that seems a natural ceiling for compensation at publicly-held companies, all other things being equal. Out of the firms with the 200 highest-paid CEOs, 32, or 16 percent, made more than 1 percent, including cash and stock. Here are the top 10:

Company CEO CEO's total direct compensation Fiscal Year 2013 revenue Compensation as percent of revenue
Cheniere Energy Charif Souki $141,949,280 $267,210,000 53.1%
GAMCO Investors (GBL) Mario J. Gabelli $85,049,800 $397,560,000 21.4%
Zynga (ZNGA) Don A. Mattrick $57,814,391 $873,270,000 6.6%
Mobile Mini (MINI) Erik Olsson $24,073,209 $406,490,000 5.9%
Splunk (SPLK) Godfrey R. Sullivan $17,007,407 $302,620,000 5.6%
TripAdvisor (TRIP) Stephen Kaufer $39,014,227 $944,660,000 4.1%
Progress Software (PRGS) Philip M. Pead $13,350,959 $334,000,000 4.0%
zulily (ZU) Darrell Cavens $27,310,886 $695,710,000 3.9%
FleetCor Technologies (FLT) Ronald F. Clarke $32,858,319 $895,170,000 3.7%
Solera (SLH) Tony Aquila $29,895,611 $838,100,000 3.6%

Notice that all these companies are middle market players: between $10 million and $1 billion in size. They aren't giants, where massive revenues make compensation literally look like nothing in comparison. And, like Cheniere, not all are rewarding CEOs for stunning financial success. Zynga, for one, has been running in the red for the last several years. Mobile Mini's net income dropped 30 percent from 2012 to 2013, even as revenue was up 7 percent. There could be good reasons for such results, but it raises the question of why the CEO might get such a relatively large slice of revenue.

If you don't restrict the analysis to the top-paid CEOs, the number making 1 percent or more of revenue jumps. ISS found that 400 out of the total 2,200 companies it tracks, or 18 percent, were in the super pay category.

According to Gary Hewitt, managing director and head of research for GMI Ratings, CEO pay at most companies ran between 0.1 percent and 0.4 percent of revenue. "For a mature company, more than 0.75 percent would seem to be excessive except potentially in a very high-margin business," he told DailyFinance. "The companies that have a big percentage of revenues are typically smaller companies with smaller revenues."

The takeaway is that when you're investing in smaller companies, pay attention. More shareholder value than you realize may be going directly into a single person's paycheck.

Increase your money and finance knowledge from home

Forex for Beginners

Learn about trading currencies and foreign exchange transactions

View Course »

Introduction to ETFs

The basics of Exchange Traded Funds and why ETFs are hot.

View Course »

Add a Comment

*0 / 3000 Character Maximum

55 Comments

Filter by:
crazy ray

It would be MUCH more informative if you listed compensation as a percentage of profit, not revenue.

June 30 2014 at 7:40 AM Report abuse rate up rate down Reply
jktkw

just how long are we 99%ers goibg to put up with this???

June 30 2014 at 7:34 AM Report abuse rate up rate down Reply
libertyca9

I wonder how much of this revenue is from the taxpayer-subsidizeded bail-out? The executives get to laugh all the way to the bank while the rest of us get less and less for our efforts. It pays to be politically connected...by an embilical chord to the Treasury Department.

June 29 2014 at 10:55 PM Report abuse +1 rate up rate down Reply
leontherat

this is why america is going broke and the working class is getting further behind. what will all these companies do when the average joe can no longer buy the goods or services from these companies. they will have rewarded excessive payouts right to the poor house. it is these same fellows who are exporting jobs and headquarters over seas to avoid taxes here in this country along with leaving unemployed behind. we have virtually abandonded manufacturing that made our country successful and how we won 2 world wars. we are being tested on many fronts as it is and we cannot continue to go down this road of corporate greed at all costs . america needs to wake up and realize we need to stop giving money away we do not have and secure our borders and provide for americans what their jobs used to but are now gone. americans are generous people but we need security at home before charity abroad.

June 29 2014 at 10:34 PM Report abuse +2 rate up rate down Reply
nflamingo

Will any of them repay us, for losing $250,000, we lost in our 401, in early 2000? We lost themoney, my husband also lost his. Trying to find a job at 63 was fruitless. Retirement sucks for us, while these have more money they could spend in 10 lifetimes. We were once living, now we are in surviving mood.

June 29 2014 at 11:39 AM Report abuse +1 rate up rate down Reply
1 reply to nflamingo's comment
trewliberal

For the year 2000 as a whole, the DJIA declined 6.26%. Of course, when you add dividends back in, it was closer to half that much. If you really lost $250,000 in the market that year, you either started out very wealthy, or you're a card carrying member of the dumbest 1%.

Moreover, given annual contribution limits, anyone who managed to lose $250K in a 401K in 2000 had to have been investing in such a vehicle for many years. During the 20 years ending 12/31/2000, the DJIA rose 734.46%. Again, that's not including dividends, which made the total return significantly more.

My guess is that it's not just retirement that sucks for you. Life in general must be pretty damn miserable.

June 29 2014 at 3:28 PM Report abuse rate up rate down Reply
buknekkid

Interesting there's no women on that list.

June 29 2014 at 10:57 AM Report abuse rate up rate down Reply
njenel

i have said for years, some peoples income can choke countries, and some can't choke a family of mice!!

June 29 2014 at 8:31 AM Report abuse rate up rate down Reply
njenel

now, tell me why ??

June 29 2014 at 8:29 AM Report abuse rate up rate down Reply
Sonny

The article failed to disclose that these CEO's own a large percentage of the stock of these corporations. It is mostly their money or stock, that they are being paid with.

June 28 2014 at 10:30 PM Report abuse -1 rate up rate down Reply
h.ecdag

This whole exercise is pointless. Unlike you two, I came from a good family. Educated, affluent, respected. I attended some of the best schools in the country, both for my secondary and higher education. I was pretty much destined to be successful.

You two, not so much. It's apparent you kids barely eek out a middle class existence. You are both obviously not well educated.

Guys, angry, ignorant and conservative, is no way to go through life.

June 28 2014 at 9:47 PM Report abuse rate up rate down Reply