One of my favorite pastimes at Morningstar is collecting stories about the dumb things companies do with shareholders' money. Former Tyco International CEO Dennis Kozlowski was not alone when he bought that $6,000 shower curtain. Read on for my favorite recent examples of corporate excess, courtesy of our analyst staff. You'd think that well publicized cases of corporate malfeasance in recent years would lead to more prudent compensation practices, but as these examples show, there are still plenty of egregious practices out there.
Mark McDade, the CEO of biotech firm Protein Design Labs , doesn't make much more in salary than biotech execs at similarly sized firms, but he did receive a $500,000 relocation bonus last year--even though his old and new offices were a whopping 33 miles apart. Either those were some really expensive movers, or Protein Design's board just decided to give McDade a thinly disguised bonus. I'd bet on the latter.
Verizon Communication's (VZ) former chairman and co-CEO, Charles Lee, became a "consultant" for the firm when he retired last year. In addition to the standard goodies, like office space, a staff, and use of an aircraft, he's receiving a consulting fee of $250,000 per month. (That's not a typo.) You'd think after getting paid $4 to $5 million in salary plus bonus over the past few years, and $27 million in options in 2002 alone, he'd have enough to retire on. Guess not.
In its calculation of CEO Michael Dell's 2002 option grant, Dell discounted the theoretical value of the options by 25% "to reflect the probability of forfeiture due to termination of employment." Since the likelihood of Mr. Dell getting fired from his own company is pretty close to zero, I'd say that's a pretty baseless discount. In fact, it's almost as baseless as giving Mr. Dell options at all, since he already owns 11% of the firm.
General Motors(GM) currently pays its directors $200,000 per year in stock and options, which hardly gives them the incentive to take actions that might make them unpopular. Directors should be paid an amount that compensates them for the time they spend attending board meetings. They’re not supposed to be riding a gravy train that pays more than most full-time jobs.
AT&T(T) paid former CEO Michael Armstrong a $2.5 million "transaction bonus" late last year when the deal to sell the firm's cable networks to Comcast(CMCSA) closed. This occured after Armstrong spent billions trying--and failing--to make AT&T a cable powerhouse. Essentially, the board paid him a big fat bonus for exiting a money-losing strategy, which seems rather odd to me. In general, paying managers for doing deals is the worst kind of misguided incentive I can think of.
In early 2002, Ciena's (CIEN) board of directors gave executives 2 million stock options exercisable at $10 per share because their old options were worthless. But Ciena's share price kept falling, so the board decided that "executive officers still lacked meaningful long-term incentives" and gave management another 2 million options exercisable at a low strike price of $4.53 per share. Even worse, the board did this at a "special meeting" just before the release of strong December-quarter earnings. Two weeks after the grant, Ciena's stock was up 60%. Talk about the fox guarding the henhouse.
Every single one of these examples was pulled straight from the company's proxy statement, listed as form DEF-14A on the SEC's EDGAR service for financial filings. Check out the companies you own--you might be in for a surprise when you see what's buried in there.
A version of this article appeared in the August 2003 issue ofMorningstar StockInvestor, Morningstar's monthly print newsletter on stock investing. Each month, StockInvestor brings you two exclusive Morningstar Stock Portfolios--The Tortoise and The Hare--as well as bulls vs. bears debates on high-profile stocks, "red flag" stocks to sell, and in-depth commentary on issues affecting the market. Also included is a monthly review of Morningstar's Bellwether 50, a watch list of 50 large companies with wide economic moats. For a free sample issue of StockInvestor call 800-735-0700.
Pat Dorsey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s