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The Rich Are Getting Richer

Thursday, 14 April 2011 04:48 By Gretchen Morgenson, The New York Times | Report

Some people say it doesn't really matter how much companies pay their executives, at least as far as the shareholders are concerned. Whether investors prosper depends on the executives' management skill, not on penny-ante items like pay, this argument goes.

To this, Albert Meyer, a money manager at Bastiat Capital in Plano, Texas, responds with a resounding "phooey."

Executive pay is not only a sign of how a company views its duties to shareholders, Mr. Meyer says, but it is also a crucial tire to kick when making investment decisions.

"When compensation is excessive, that should be a red flag," Mr. Meyer says. "Does the company exist for the benefit of shareholders or insiders?"

As investors scan corporate proxy statements this spring and prepare to vote in annual elections for company directors, executive pay is again moving to center stage. After a few years in the wilderness, top executives are getting hefty raises, according to Equilar, a compensation analysis firm in Redwood City, Calif. But while outrage over executive pay has been eclipsed in recent years by anger over the causes and consequences of the financial crisis, compensation issues still resonate among many investors.

Of course, pay is just one item that Mr. Meyer takes into account when analyzing companies. In his search for shares he can own "forever," he also hunts for companies with high-quality earnings — that is, those that don't depend on accounting tricks — as well as generous cash flows and management integrity. Companies he avoids include those that award oodles of stock or options to their executives. Such grants vastly dilute the earnings left over for a company's owners: its shareholders.

"Stock-based compensation plans are often nothing more than legalized front-running, insider trading and stock-watering all wrapped up in one package," Mr. Meyer says.

A former professor of accounting, he earned recognition when he identified a Ponzi scheme in Philadelphia that had scammed nonprofits out of hundreds of millions of dollars. It was called the Foundation for New Era Philanthropy, and it went bankrupt in 1995. As an equity analyst, he has identified aggressive accounting at Tyco, Enron and other companies over the years.

At Bastiat Capital, a money management firm he founded in 2006, Mr. Meyer oversees $25 million in private clients' capital. About $8 million of that is invested in the Mirzam Capital Appreciation mutual fund, which he manages. It is up an annualized 4.5 percent, after expenses, since its inception in August 2007. It is up 4.57 percent this year.

His interest in executive pay has led Mr. Meyer to a raft of international companies whose pay and other corporate governance practices are, in his view, more respectful of shareholders than those of similar companies in the United States. He cites as good stewards Statoil, the Norwegian energy company; Telefónica, the Spanish telecommunications concern; CPFL Energia, a Brazilian electricity distributor; and Southern Copper of Phoenix, a mining company with operations in Peru and Mexico. These and other companies he favors have performed well, while paying relatively modest amounts to executives, he says.

Mr. Meyer's favorite pay-and-performance comparison pits Statoil against ExxonMobil. Statoil, which is two-thirds owned by the Norwegian government, pays its top executives a small fraction of what ExxonMobil pays its leaders. But Statoil's share price has outperformed Exxon's since the Norwegian company went public in October 2001. Through March, its stock climbed 22.3 percent a year, on average, Mr. Meyer notes. During the same period, Exxon's shares rose an average of 11.4 percent annually, while the Standard & Poor's 500-stock index returned 1.67 percent, annualized.

According to regulatory filings, Statoil paid Helge Lund, its chief executive, 11.5 million Norwegian krone in 2010 (roughly $1.8 million at the exchange rate last year). There were no stock options in the mix, but Mr. Lund was required to use part of his cash pay to buy shares in the company and to hold onto them for at least three years.

By comparison, Rex W. Tillerson, the chief executive of ExxonMobil, received $21.7 million in salary, bonus and stock awards in 2009, the most recent pay figures available from the company. Mr. Tillerson's pay is more than double the combined $8.3 million that Statoil paid its nine top executives in 2010.

Other aspects of Statoil's governance also appeal to Mr. Meyer. Its 10-member board includes three people who represent the company's workers; management is not represented on the board. In addition, Statoil has an oversight group known as a corporate assembly, something that is required under Norwegian law for companies employing more than 200 workers. This 18-person group oversees the company's directors and the chief executive's management and makes decisions about Statoil's operations that affect its work force. The assembly members are elected for two-year terms; shareholders elect 12 and workers elect 6.

"That second layer of corporate governance protects the shareholders and the employees," Mr. Meyer says. "They are really doing it as a civic duty to oversee the actions of the directors."

Another company whose approach to pay is commendable, Mr. Meyer says, is Telefónica. Based in Madrid, it dispenses stock options to employees but eliminates the dilution to existing shareholders by buying a call option in the amount of shares given out as compensation.

At CPFL Energia in Brazil, financial statements routinely compare the highest level of executive pay with that of the lowest-paid workers. In 2010, that ratio was 79 to 1. (Comparable multiples for United States companies range from 100 to 300, depending on the size of the company.) CPFL Energia also discloses the number of "complaints and criticisms" it receives each year — whether from customers, employees or others — and how many are resolved.

"This is an ideal for disclosure," Mr. Meyer says.

He also rejects the argument that sky-high pay is necessary to attract talented managers. "Look at some of the pay at the companies my fund owns," he says. "They prove that you don't have to pay nosebleed compensation to attract good people."

Few money managers seem to share Mr. Meyer's view that pay should be factored into investment decisions. His background as a forensic accountant made him train his eye on corporate proxy statements, where pay practices are outlined. Indeed, he says he first became interested in how executive pay affects shareholder returns during the early 1990s, when companies began issuing boatloads of stock options that they did not have to deduct as compensation costs.

The fiction that options should not be counted as a business expense finally changed in 2005, when the Financial Accounting Standards Board required that companies recognize the costs of options in their financial statements. But options had become the drug of choice for those addicted to excessive compensation, whether on the receiving end or delivering it as directors on a corporate board's compensation committee.

"Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs," Mr. Meyer says.

"There has been a massive wealth transfer from middle-class America's retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny."

Gretchen Morgenson

Gretchen Morgenson is assistant business and financial editor and a columnist at the New York Times. She has covered the world financial markets for the Times since May 1998 and won the Pulitzer Prize in 2002 for her "trenchant and incisive" coverage of Wall Street.

Ms. Morgenson joined The Times as assistant business and financial editor in May 1998. Previously, she was assistant managing editor at Forbes magazine since rejoining the magazine in March 1996. Before that, she was the press secretary for the Forbes for President campaign from September 1995 to March 1996.

She is the author of "Forbes Great Minds Of Business," published by John Wiley & Co., in 1997 and co-author of "The Woman's Guide to the Stock Market," published by Harmony Books in 1981.

She is married, has a son and lives in New York City.


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The Rich Are Getting Richer

Thursday, 14 April 2011 04:48 By Gretchen Morgenson, The New York Times | Report

Some people say it doesn't really matter how much companies pay their executives, at least as far as the shareholders are concerned. Whether investors prosper depends on the executives' management skill, not on penny-ante items like pay, this argument goes.

To this, Albert Meyer, a money manager at Bastiat Capital in Plano, Texas, responds with a resounding "phooey."

Executive pay is not only a sign of how a company views its duties to shareholders, Mr. Meyer says, but it is also a crucial tire to kick when making investment decisions.

"When compensation is excessive, that should be a red flag," Mr. Meyer says. "Does the company exist for the benefit of shareholders or insiders?"

As investors scan corporate proxy statements this spring and prepare to vote in annual elections for company directors, executive pay is again moving to center stage. After a few years in the wilderness, top executives are getting hefty raises, according to Equilar, a compensation analysis firm in Redwood City, Calif. But while outrage over executive pay has been eclipsed in recent years by anger over the causes and consequences of the financial crisis, compensation issues still resonate among many investors.

Of course, pay is just one item that Mr. Meyer takes into account when analyzing companies. In his search for shares he can own "forever," he also hunts for companies with high-quality earnings — that is, those that don't depend on accounting tricks — as well as generous cash flows and management integrity. Companies he avoids include those that award oodles of stock or options to their executives. Such grants vastly dilute the earnings left over for a company's owners: its shareholders.

"Stock-based compensation plans are often nothing more than legalized front-running, insider trading and stock-watering all wrapped up in one package," Mr. Meyer says.

A former professor of accounting, he earned recognition when he identified a Ponzi scheme in Philadelphia that had scammed nonprofits out of hundreds of millions of dollars. It was called the Foundation for New Era Philanthropy, and it went bankrupt in 1995. As an equity analyst, he has identified aggressive accounting at Tyco, Enron and other companies over the years.

At Bastiat Capital, a money management firm he founded in 2006, Mr. Meyer oversees $25 million in private clients' capital. About $8 million of that is invested in the Mirzam Capital Appreciation mutual fund, which he manages. It is up an annualized 4.5 percent, after expenses, since its inception in August 2007. It is up 4.57 percent this year.

His interest in executive pay has led Mr. Meyer to a raft of international companies whose pay and other corporate governance practices are, in his view, more respectful of shareholders than those of similar companies in the United States. He cites as good stewards Statoil, the Norwegian energy company; Telefónica, the Spanish telecommunications concern; CPFL Energia, a Brazilian electricity distributor; and Southern Copper of Phoenix, a mining company with operations in Peru and Mexico. These and other companies he favors have performed well, while paying relatively modest amounts to executives, he says.

Mr. Meyer's favorite pay-and-performance comparison pits Statoil against ExxonMobil. Statoil, which is two-thirds owned by the Norwegian government, pays its top executives a small fraction of what ExxonMobil pays its leaders. But Statoil's share price has outperformed Exxon's since the Norwegian company went public in October 2001. Through March, its stock climbed 22.3 percent a year, on average, Mr. Meyer notes. During the same period, Exxon's shares rose an average of 11.4 percent annually, while the Standard & Poor's 500-stock index returned 1.67 percent, annualized.

According to regulatory filings, Statoil paid Helge Lund, its chief executive, 11.5 million Norwegian krone in 2010 (roughly $1.8 million at the exchange rate last year). There were no stock options in the mix, but Mr. Lund was required to use part of his cash pay to buy shares in the company and to hold onto them for at least three years.

By comparison, Rex W. Tillerson, the chief executive of ExxonMobil, received $21.7 million in salary, bonus and stock awards in 2009, the most recent pay figures available from the company. Mr. Tillerson's pay is more than double the combined $8.3 million that Statoil paid its nine top executives in 2010.

Other aspects of Statoil's governance also appeal to Mr. Meyer. Its 10-member board includes three people who represent the company's workers; management is not represented on the board. In addition, Statoil has an oversight group known as a corporate assembly, something that is required under Norwegian law for companies employing more than 200 workers. This 18-person group oversees the company's directors and the chief executive's management and makes decisions about Statoil's operations that affect its work force. The assembly members are elected for two-year terms; shareholders elect 12 and workers elect 6.

"That second layer of corporate governance protects the shareholders and the employees," Mr. Meyer says. "They are really doing it as a civic duty to oversee the actions of the directors."

Another company whose approach to pay is commendable, Mr. Meyer says, is Telefónica. Based in Madrid, it dispenses stock options to employees but eliminates the dilution to existing shareholders by buying a call option in the amount of shares given out as compensation.

At CPFL Energia in Brazil, financial statements routinely compare the highest level of executive pay with that of the lowest-paid workers. In 2010, that ratio was 79 to 1. (Comparable multiples for United States companies range from 100 to 300, depending on the size of the company.) CPFL Energia also discloses the number of "complaints and criticisms" it receives each year — whether from customers, employees or others — and how many are resolved.

"This is an ideal for disclosure," Mr. Meyer says.

He also rejects the argument that sky-high pay is necessary to attract talented managers. "Look at some of the pay at the companies my fund owns," he says. "They prove that you don't have to pay nosebleed compensation to attract good people."

Few money managers seem to share Mr. Meyer's view that pay should be factored into investment decisions. His background as a forensic accountant made him train his eye on corporate proxy statements, where pay practices are outlined. Indeed, he says he first became interested in how executive pay affects shareholder returns during the early 1990s, when companies began issuing boatloads of stock options that they did not have to deduct as compensation costs.

The fiction that options should not be counted as a business expense finally changed in 2005, when the Financial Accounting Standards Board required that companies recognize the costs of options in their financial statements. But options had become the drug of choice for those addicted to excessive compensation, whether on the receiving end or delivering it as directors on a corporate board's compensation committee.

"Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs," Mr. Meyer says.

"There has been a massive wealth transfer from middle-class America's retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny."

Gretchen Morgenson

Gretchen Morgenson is assistant business and financial editor and a columnist at the New York Times. She has covered the world financial markets for the Times since May 1998 and won the Pulitzer Prize in 2002 for her "trenchant and incisive" coverage of Wall Street.

Ms. Morgenson joined The Times as assistant business and financial editor in May 1998. Previously, she was assistant managing editor at Forbes magazine since rejoining the magazine in March 1996. Before that, she was the press secretary for the Forbes for President campaign from September 1995 to March 1996.

She is the author of "Forbes Great Minds Of Business," published by John Wiley & Co., in 1997 and co-author of "The Woman's Guide to the Stock Market," published by Harmony Books in 1981.

She is married, has a son and lives in New York City.


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