Today’s DO is about big corporations and executive compensation: the good, the bad, and the ugly (since this is The Outrage we’ll focus on the ugly).
For those readers who have recently emigrated from Central Europe, graduated from Harvard Law School, or are otherwise ignorant of the workings of free markets, we’ll first explain how the system is supposed to work.
Ideally, an impoverished young man or woman starts with nothing, suffers through years or decades of hard work and rejection, eventually creates a better widget, shopping mall, or philosophy and is abundantly rewarded for his/her success. (They then work hard at intelligently giving all that money away.) Examples of the above strategy are too numerous to count, but include peoplelike Tom Monoghan of Domino’s Pizza, Soichiro Honda of HondaMotors, and Nolan Bushnell, founder of Atari.
The often vilified Bill Gates is a good example of the way corporations are supposed to work. Gates dropped out of Harvard to co-found Microsoft with Paul Allen. They built the company from nothing into the dominant global software powerhouse it is today. Along the way, not only have Gates and Allen become two of the world’s wealthiest men, but everyone who has followed in their wake has also done very well. More than 2,000 employees of Microsoft are now millionaires, thanks to the company’s stock option plans.
Investors in Microsoft have also been richly rewarded as the company’s stock has climbed to dizzying heights. Gates and Allen are the biggest shareholders in Microsoft, and almost all of Gates’ billions are derived from the value of his ownership interest. His annual salary as chairman of Microsoft was just over $500,000 in 1997.
Competitors and the Justice Department criticize Microsoft — long-term shareholders love the company. Harp about monopoly all you want, here at the DO we have just one thing to say to Gates– go boy, go!
Let’s now skip the bad and go straight to the ugly, and visit a company of which shareholders are not so fond.
You probably haven’t heard of Ray Irani. Part of the reason you haven’t heard of him is that he hasn’t done anything terribly notable. Irani hasn’t invented any product, and he certainly did not create Occidental Petroleum, the company he now runs.
But Ray Irani is notable in one regard — he may win the hotly contested title for most overpaid CEO.
Recently the distinguished directors of Occidental Petroleum decided that Mr. Irani needed a contract that more closely tied his compensation to the company’s performance. Fine idea. The only problem was that Irani already had a contract. No problem –the company would just buy out the existing contract. And they did. For $95,000,000.
Now, it may seem strange to you that a company would try to incentivize an employee by paying him 95 million dollars — in advance. Here at the DO, as dedicated as we are, we might find it kind of tempting to just buy Bermuda and spend our time sipping pina coladas if we had that kind of money. The whole arrangement may seem even stranger if you examine the details of Irani’s contract, and then compare them to the company’s performance.
According to Fortune Magazine, Irani’s old contract guaranteed him $7.5 million in annual salary, plus various stock options and other benefits. He even managed to arrange things so that Occidental shareholders paid the taxes on his lavish compensation package.
Irani received this compensation regardless of whether Occidental made money or lost money, which of course begs the question — how has Oxy been doing? Since Irani took the helm of Occidentalin 1990, the company’s stock has risen by about 50%. That may seem okay at first, unless you compare it to the performance of other large companies. The value of the companies that make up the Dow Jones Industrial Average has risen about 200% during the same time period.
Irani’s performance has been terrible. Based on the performance of the company’s stock, Fortune calls Irani “a champion wealth destroyer.” But while he’s destroying wealth for the owners of the company, he’s busy accumulating it for himself. In fact, it appears as if he’s simply transferring the wealth of the company he runs to his own private bank account — with the full consent of the company’s board of directors, who have approved his outrageous compensation agreements.
Irani’s compensation package is so mind-boggling that it bears further examination. After paying him $95 million to buy out his existing contract, Occidental shareholders are paying him all over again as part of the new agreement. His new agreement guarantees him a million dollar plus annual salary, plus a bonus of course, as well as the usual candy mountain of sweeteners.
We’re not sure exactly what drug Occidental’s compensation committee was on when they “negotiated” this deal with Irani –must be the same thing that juries take before they award damages in civil cases. Occidental stockholders may want to take the same drug — but as a pain killer; the contract buy-out for Irani and Oxy’s other top officer will cut the company’s third quarter earnings by 29%.
Other compensation aside, a reasonably conservative investment of the contract buy-out payment will yield Irani an annual income of between $5 and $10 million dollars a year unless, of course, he invests that money in Occidental Petroleum stock — in which case he could be in trouble.
