Outrageous Pay Package Companies to Avoid
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There's a funny ad in the Washington Post for bespoke suits. Their CFO suit special goes for $1,299 (3 suits, 8 shirts), the CEO special is $1,699 and the Board of Directors special is $2,499. What would the average worker suit special be if it were tied to pay comparatively... $1.69. That's how much more some CEOs are making compared to their workers.
That seems way out of line but how to determine what's egregious is part of that debate. Is it pay compared to market cap? Is it pay compared to the company's average worker salary?
Several CEOs came up in lists of humongous paychecks compared to market cap or worker pay. Are they worth this pay or are they just empty bespoke suits?
Michael Jefferies is CEO of Abercrombie & Fitch (NYSE: ANF) and his name hit the newswires last year for his bizarre requests for service on his private Gulfstream, including rules that male staff wear boxers and flip flops, the playing of Phil Collins, and that "No problem" is the required answer after requests. Jefferies' requirements are detailed in a 40-page manual.
As an investor that would be a red flag right there (especially playing Phil Collins!). But then according to Bloomberg, Jefferies had the second highest ratio of executive pay compared to the company's average worker paycheck at 1,640 times. He was second only to Ron Johnson, recently ousted CEO of J.C. Penney, who received a pay package worth 1,795 times the average J.C. Penney's employee.
Jefferies also made a list of CEOs who were least valuable in terms of pay to market cap. On this list he beat out Ron Johnson with a pay package ratio of $11,450 per each million of market cap as of last November. Compare this to number one on the list of most valuable CEOs Warren Buffett, CEO of Berkshire Hathaway, who makes only $3.00 per million in market cap.
Jefferies is essentially getting paid what amounts to a founder's premium like number three on the list, David Simon of Simon Property Group, or Howard Schulz of Starbucks, both of whom make more than 1,000 times their average worker, but they are founders. Although Jefferies is listed as a founder on the proxy and in his defense was critical to turning Abercrombie & Fitch from a sporting goods outfitter to a fashion retailer, the company itself has been around for 121 years.
Jefferies' pay package is partly responsible for the company's high corporate governance risk rating of 10. Aside from the pay issue Abercrombie & Fitch isn't a bad retailing stock. At a PEG of .69 and a forward P/E of 12.15 offering a 1.7% yield, you could do a lot worse. The stock has underperformed the S&P 500, losing 2% over the last year. And an overpaid and demanding CEO isn't reassuring when a company is struggling to compete with Gap, Urban Outfitters, American Eagle Outfitters, H & M etc.
Speaking of competitor Urban Outfitters (NASDAQ: URBN), its CEO and co-founder Richard Hayne also made that same list of most valuable CEOs, making $8.00 per million of market cap. I've liked Urban Outfitters for some time and although the P/E is getting stretched at 25.58, analysts thinks it will generate over 15% EPS growth year over year.
Barclays just initiated coverage at Overweight on April 1. Seven analysts have strong buys, seven have buys and 16 have holds on Urban Outfitters. The name was also featured recently on Jim Cramer's lifestyle brands index as being"cool." The stock is up 42.8% over the last year.
While not in the top five Leslie Moonves, CEO of CBS (NYSE: CBS), also made the Bloomberg list with a $69.9 million pay package worth 1,111 employees' salaries. Compare him to CEO Vincent Forlenza of Becton Dickinson, whose pay equals 185 employees and as the company commented, 75% of Forlenza's pay was tied to performance. Or we can compare again to Warren Buffett, who is paid the equivalent of 10 employees' salaries. That's right, just 10.
Moonves has enjoyed some sweet perks in the past including a NYC apartment that Viacom paid him to sleep at to the tune of $100,000 plus in 2004. At that time his pay package was much lower at $20 million.
Moonves is not a founder like other top names -- Ralph Lauren, Howard Schultz, and Larry Ellison of Oracle, and that founder's premium has to be considered. A founder/CEO not only has an emotional tie to the company but usually has a strong tie in the form of accumulated stock. At least Moonves holds stock in the company -- 1,268,754 shares to be exact. Not tying a CEO to company stock gives no incentive to perform.
Moonves has helped CBS though, with the stock up 38% this year alone. It trades at a 19.18 P/E with a yield of 1.0% and a PEG of 1.07. This compares favorably with competitor Walt Disney (NYSE: DIS) with its 20.22 P/E, yield of 1.2%, and PEG of 1.46.
With similar numbers, does Moonves deserve his premium pay compared to Disney CEO Bob Iger's $31 million, making Iger's compensation equal to 557 employees' salaries? And whose company's stock is up 46% over the same timeframe?
Moonves has done wonders at CBS (look at the chart) and so is not an empty suit, but he seems overpaid compared to Iger. I'd rather own Disney anyway for its parks, cruise line, branding business, films, TV, ESPN, ABC, cable content, and radio.
Let's sew it up
Abercrombie & Fitch is a name to avoid. Its competitors like Urban Outfitters are outperforming them and the CEO is overpaid for what only be described as miserable stock performance (see chart below). CBS, while similarly valued to Disney, doesn't have that all-important branding business and Moonves is probably overpaid as well.
Disney and Urban Outfitters have both run big and if there is a selloff in May one could start accumulating them on pullbacks.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!