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Commentary
Paychecks for billionaire CEOs

By Graef Crystal
Bloomberg News

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I examined the share ownership of 457 CEOs running U.S. companies with current market caps of at least $3 billion. Of these, I concentrated on the 26 who had the most actual shares and paper profits in unexercised option shares. In virtually every case, the size of their holdings was $1 billion or more.

Among this group, there are two genuine pay saints: Kinder Morgan's Richard Kinder and Pixar's Steve Jobs.

Kinder earned precisely nothing over the three years that ended with 2003, while Jobs earned $53 a year. In his other day job as CEO of Apple Computer, Jobs has been decidedly less saintly, accepting, among other things, a free personal jet and, at one point, the largest stock-option grant ever made on a single day.

The evil twins of Kinder and Jobs are Viacom's Sumner Redstone ($32.9 million of pay per year) and UnitedHealth Group's William McGuire ($27.l million).

The study produced three principal findings:

First, the dispersion in pay among the 26 billionaires is awesome. Why Redstone, for example, feels the need to be paid far more than a professional working-stiff CEO earns is best left to a moral theologian. Redstone, who turned 81 recently, could not possibly spend the money he has amassed in the time left to him.

Second, the average billionaire CEO's pay is neither higher nor lower than that of the average nonbillionaire CEO. Although the average CEO among the 26 billionaires earned 7 percent less than the market rate of pay for a company the same size, that difference was statistically insignificant.

Third, the notion seems unfounded that having a CEO who owns a ton of stock and who, as Warren Buffett is fond of observing, eats his own cooking will guarantee you a superior return compared with investing your money elsewhere.

For each company in the study, I calculated a weighted-average total return in three time windows: three years, two years and one year, all ended Dec. 31, 2003.

These weighted average returns were then transformed into what I call a performance IQ score. Like intelligence IQ's, the average CEO had a performance IQ of 100. In any perfectly normal distribution (the old bell-shaped curve), 97.7 percent of scores will fall between 80 and 120 (the actual percentage for the performance study was 94.1 percent), while 99.9 percent of the scores will fall between 70 and 130 (the actual performance percentage was 99 percent).
 
The average performance IQ score for the 26 billionaires was 103. This difference was statistically insignificant when compared with the nonbillionaires.

As with pay, there is a wide range of performance, with Larry Ellison's IQ score of 86 putting him in the bottom 8 percent of performers, and Jeff Bezos beating every billionaire and nonbillionaire CEO with a score of 135. The normal probability of achieving such a high score is 20 out of 100,000.

There also wasn't a statistically significant link between the size of a CEO's shareholdings and his performance IQ score — which brings up the value of insisting that a CEO hold a lot of company stock.

It seems intuitively correct that a person whose net worth is mainly tied up in his company's stock will work harder and smarter than one who holds hardly any shares and who dumps any option shares the moment he exercises them.

That belief has prompted many companies to adopt so-called share-ownership guidelines. For example, the CEO is told that within five years, he must own shares worth at least five times his base salary at the time. And unexercised option shares don't count.

Based on this study and other similar studies I have conducted in earlier years, that intuitively correct belief isn't borne out by the stats. Eating your own cooking sometimes delivers you an extremely satisfying repast. In other times, it can cause dyspepsia. Bezos and Ellison have experienced both extremes.

One could, of course, argue that having the CEO load up on company shares, even if doesn't necessarily help matters, at least doesn't hurt, either.

Wrong. Because in companies with share-ownership guidelines, there often is an attempt to give the CEO more than the usual number of option shares and/or more than the usual number of free shares. The cost to shareholders in such cases is quite high.

How pay was calculated

Total pay: All pay statistics in this column are based on average annual total pay over the three years ended with 2003. Total pay is the sum of all elements of the package, including base salary; annual bonus; the value of free shares of stock, measured at the date of award; the estimated present value of stock options, measured at the date of grant using the Black-Scholes option-pricing model; payouts under other long-term incentive plans and miscellaneous compensation.

Data source: Aon Consulting's eComp database