Published November 15, 2012
| 24/7 Wall St.
There is a nearly endless number of criteria that measure how well CEOs perform, whether they are paid fairly, and what metrics should be used for determining chief executive compensation. One yardstick that is never used but should be, is the simple ratio of market capitalization to pay. It takes into account the entire value of the company to shareholders and weighs it directly against annual compensation.
At the one end of the compensation to market cap ratio are relatively small companies that have very highly paid CEOs. At the other, the most famous example is Steve Jobs, who worked for $1 for a number of years while Apple grew to be the largest public corporation in the world based on market value.
There is something instructive in the Jobs example. As founder of Apple, he owned enough of its common shares to become uncommonly wealthy. Several of the chief executives on the Most Valuable CEO list fall into the same category of founders who continue to hold the top job at their companies and own very large equity stakes. On this list, the founders of Whole Foods, Costco, Urban Outfitters, and Amazon continue to run the companies they established. Each is paid very little but has a tremendous incentive, based on share ownership, to turn in strong results.
Alternatively, several of the companies on the Most Valuable CEO list are professional managers of huge public corporations. Each has been a reasonably good steward, and, at the very least, has kept a very large enterprise moving forward in what has been a choppy economy.
24/7 Wall St. identified the most valuable CEOs based on executive pay relative to company market cap. We reviewed the market cap and CEO compensation for every S&P 500 company as of Dec. 31, 2011. If a company’s stock performance did not meet or exceed that of the S&P 500 Index between December 30th, 2011 and November 12th, 2012 it was excluded.
These are America’s most valuable CEOs.
10. John Stumpf
> Compensation to market cap: $137 / $1M market cap
> Compensation: $19.8 million (check $17.9 million in proxy)
> Market Cap: $145.3 billion.
> Company: Wells Fargo (WFC)
Many critics of America’s largest financial firms claim that there are no well-run big U.S. banks. Trading problems at J.P. Morgan (JPM), management turmoil at Citigroup (C), and the implosion of Bank of America (BAC) certainly seem to validate that claim. However, one of the four largest U.S. banks based on assets has remained fairly stable and successful since the recovery of the financial system from the 2008 credit crisis: Wells Fargo. It is a testament to John Stumpf’s success that he became Wells Fargo CEO in June 2007, just before the crisis began. The chiefs of both Bank of America and Citigroup have lost their jobs since then. Meanwhile, Stumpf posted a strong year last year. Wells Fargo net income for 2011 was $15.9 billion compared with $12.4 billion in 2010 and $12.3 billion in 2009. According to the bank’s statements, the improvement was the result of improved credit quality, lower operating costs, and increased deposits.
9. Randall Stephenson
> Compensation to market cap: $123 / $1M market cap
> Compensation: $22.0 million
> Market Cap: $179.2 billion
> Company: AT&T (T)
Randall Stephenson’s board had reason to compensate him well for his 2011 performance. While AT&T’s revenue rose modestly from $124.3 billion in 2010 to $126.7 billion last year, the company’s critical wireless division did unusually well. AT&T’s wireless subscriber base rose 8.1% to 103,247,000. This allows AT&T Wireless to jockey with Verizon Wireless for the lead in U.S. cellular subscriptions — a market that has recently been driven by a number of product introductions from Apple and the national changeover to 4G. Critics claim that Stephenson should take the blame for AT&T’s 2011 failed attempt to take over No. 4 wireless carrier T-Mobile for a purchase price of $39 billion. AT&T had to pay T-Mobile parent, Deutsche Telekom, a $3 billion breakup fee. But proponents of Stephenson’s recent performance claim that the FCC and Justice Department would have scuttled the purchase, and that AT&T’s management can hardly be blamed for that. In other words, regardless of the outcome, the strategy behind the T-Mobile plan was sound.
8. Kenneth Frazier
> Compensation to market cap: $116 / $1M market cap
> Compensation: $13.3 million
> Market Cap: $115.0 billion
> Company: Merck (MRK)
Kenneth Frazier took over as Merck’s CEO in January 2011. He was the first African-American to run a major U.S. drug company. Frazier did a great deal to earn the chief executive’s role long before his eventual promotion. He was appointed general counsel in 1999. Frazier was the strategists behind Merck’s recovery from the Vioxx crisis. Following the company’s withdrawal of the pain drug from the market and the ensuing countless lawsuits, he helped defend the company in many of the lawsuits and structure a $4.85 billion settlement to resolve the remaining ones. Frazier still has the task of dealing with the ongoing merger problems with Schering Plough, a $41.1 billion deal announced in March 2009. In mid-2011, Merck disclosed another step in the process of post-merger cost cuts that would “reduce its workforce measured at the time of the Merger by an additional 12% to 13%.” Despite the turmoil, revenue rose from $46 billion in 2010 to $48 billion last year. Net income rose from $861 million to $6.3 billion over the same period.
7. Jeff Immelt
> Compensation to market cap: $114 / $1M market cap
> Compensation: $21.6 million
> Market Cap: $189.1 billion
> Company: GE (GE)
Jeff Immelt has received criticism for lackluster results and the amount of time he spends on initiatives outside GE, such as his role as President Obama’s Council on Jobs and Competitiveness. However, according to the measure of GE’s market value in comparison to his compensation, he has done particularly well. Immelt’s board can say that he has effectively balanced an extremely complex and disparate portfolio of companies. GE does businesses in almost every nation in the world, so any significant slowdown harms its earnings. Immelt’s supporters would further say that he cannot be held accountable for a drop-off in revenue in a terrible economic market like Europe. Based on net income, GE had a relatively good year in 2011. Despite a modest drop in revenue, net income rose from $11.6 billion in 2010 to $14.2 billion. Immelt can point to his management of the company’s largest unit — Energy Infrastructure — as an unqualified success. The unit’s revenue rose from $37.5 billion in 2010 to $43.7 billion last year.
6. Michael Duke
> Compensation to market cap: $89 / $1M market cap
> Compensation: $18.1 million
> Market Cap: $204.7 billion
> Company: Walmart (WMT)
Walmart is the world’s largest retailer and among the largest corporations of any kind. Walmart has over 2 million employees and had revenue of $443.9 billion in 2011. The company’s U.S. operations account for roughly 60% of sales. Walmart has stores in 26 nations outside America. During February 2009, Michael Duke took over the company that Sam Walton founded in 1962. Over the last several decades, Walmart has used its large warehouse model and “everyday low price” programs to outdistance traditional retail leaders such as Kmart and Sears. Duke has had his share of large challenges, the most recent of which was a set of accusations of bribery by executives at the retailer’s Mexican operations. Part of the accusations were that management at Walmart’s worldwide headquarters were aware of the problem.
5. James D. Sinegal
> Compensation to market cap: $60 / $1M market cap
> Compensation: $2.2 million
> Market Cap: $36.2 billion
> Company: Costco (COST)
Many investors would say almost all of Costco’s success should be attributed to its co-founder and former CEO James D. Sinegal who retired at the start of this year. Sinegal still owns over 2 million shares. W. Craig Jelinek, former COO, took the top job upon Sinegal’s retirement. Costco operates 608 of its “warehouses,” which average 143,000 square feet each in the U.S., Puerto Rico, Canada, the U.K., Mexico, Japan, and Australia. Costco has grown into one of the world’s largest retailers with sales last year of $97 billion, and net income of $1.7 billion. As an indication of the velocity of its growth, in 2007, revenue was $71 billion and net income was $1.3 billion.
4. Jeff Bezos
> Compensation to market cap: $21 / $1M market cap
> Compensation: $1.7 million
> Market Cap: $78.7 billion
> Company: Amazon (AMZN)
Jeff Bezos founded Amazon in 1994 and has been its CEO since 1996. Considering that he was only 48 when the company filed its last proxy, he will probably continue run the company for quite some time. Amazon is one of the most successful American startups of the Internet age. The company has completely transformed how people shop for products and services, which, until 20 years ago, were only available in stores. The accomplishments of Bezos has shaken retailing to it foundations. Bezos owned almost 88 million shares of Amazon, or 19.5% of the total, as of the latest proxy filing. His net worth was over $15 billion. Amazon’s revenue last year was approximately $48 billion, nearly double what it was two years earlier. Growth has continued at a phenomenal pace this year. Bezos has recently moved the company into the tablet PC and video on demand businesses. Amazon is also one of the world’s leaders in hosting e-commerce sites for companies that want to outsource the function.
3. Richard Hayne
> Compensation to market cap: $8 / $1M market cap
> Compensation: $31,000
> Market Cap: $4 billion
> Company: Urban Outfitters (URBN)
Richard Hayne, who co-founded Urban Outfitters in 1970 and has been a director since 1976, does not need a salary. He owned 19% of the company’s shares as of the filing of the company’s last proxy. At the time, his net worth was approximately three quarters of a billion dollars. Compared to Hayne’s pay, directors and several of Urban Outfitters’ executives have high compensation. Directors made $307,200 last year. David W. McCreight, CEO of the company’s Anthropologie Group, made over $4.4 million. Despite a difficult retail environment, Urban Outfitters’ revenue rose to $2.473 billion in its last fiscal year from $2.274 billion the year before. Net income, however, fell to $185 million from $273 million. The company’s three largest divisions are Urban Outfitters, which had 197 stores at the end of its last fiscal year, Anthropologie, and Free People. Most of the stores target young adult clothing and apparel buyers.
2. John Mackey and Walter Robb
> Compensation to market cap: $6 / $1M market cap (Mackey)
> Compensation to market cap: $73 / $1M market cap (Robb)
> Compensation: $78,000 and $917,000
> Market Cap: $12.5 billion
> Company: Whole Foods (WFM)
John Mackey, who co-founded Whole Foods, has been CEO since 1978. Walter Robb became co-CEO in May 2010. Whole Foods has been phenomenally successful in the grocery store sector because of its leadership in the organic and whole foods movement. Mackey has taken very modest compensation for several years. According to the latest company’s proxy, “Effective January 1, 2007, John Mackey, our Co-Chief Executive Officer, voluntarily reduced his salary to $1 and elected to forgo any future bonus and stock option awards. For fiscal year 2011, Mr. Mackey earned $1 in base salary and accrued $78,450 in paid time off during the fiscal year.” Co-CEO Robb received a restricted stock award in 2010, which brought his total compensation to $4,579,159, but his pay package dropped sharply in his first full year as CEO. As of the last proxy, Mackey owned 1.13 million shares and Robb owned 124,000. Whole Foods had 311 stores at the end of its last fiscal. Revenue in the latest fiscal year rose to $10.1 billion from $9 billion the year before.
1. Warren Buffett
> Compensation to market cap: $3 / $1M market cap
> Compensation: $492,000
> Market Cap: $189.2 billion
> Company: Berkshire Hathaway (NYSE:BRK-A)
Warren Buffett remains, in both the eyes of the general public and Wall Street, the greatest investor of his generation. At 82, he still runs the conglomerate he built: Berkshire Hathaway. The firm’s proxy states that Berkshire Hathaway’s compounded per-share book value annual gain from 1965-2011 was 19.8%, an extraordinary increase by almost any measure, particularly given the company’s size in recent years. Last year, Berkshire Hathaway had revenue of $143.7 billion and net income of $10.3 billion. In addition to its outright ownership of several companies such BNSF Railroad, one of the largest railroads in America, which employs 39,000 people, Berkshire owns large interests in, according to recent filings, American Express (AXP), Coca-Cola (KO), and IBM (IBM). Buffett ranked No. 2 on the most recent Forbes 400 Richest Americans with a net worth of $46 billion.