Pay Check
Does Michael Dell’s salary compute? Is Dick Cheney’s bonus defensible? Are Herb Kelleher’s stock options on course? We analyze the earnings of twenty Texas CEOs: Who’s underpaid, who’s overpaid, and who’s on the money?
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WE LEARN FROM PHYSICS that there is matter and that there is antimatter. Well, Alberthal is the anti–Michael Dell. From December 1986, when Alberthal became CEO, to December 31, 1997, the end of EDS’s last full fiscal year, he beat the S&P 500 Index. However, as the time period shrinks, his performance flags. If you look only at the past seven years, Alberthal underperformed the S&P 500. If you look at even narrower time periods—six years, then five years, then four years, and so forth—his performance becomes positively awful. In 1997 he eked out only a 3.2 percent total shareholder return, about one tenth of the S&P 500’s return of 33.4 percent, yet the EDS board rewarded him with $12.9 million in free shares of stock. From December 31, 1997, to August 6, 1998, shareholders actually lost 15.9 percent of their investment (compared with a 13.3 percent positive return for the S&P 500). Still, when Alberthal leaves, he walks away with a retirement package worth $38.6 million. EDS defended Alberthal’s astounding retirement pay by pointing to his long career at the company and the agreement he signed stating that he would never work for a competitor. A better deal for shareholders would have been to double his severance pay provided he was successful in getting the company’s primary competitor to hire him as its CEO.
CONCLUSION — NOT WORTH IT BIG TIME.
David A. Arledge
Coastal — Houston
Base salary $723,000
Salary plus bonus $1,123,000
Total compensation $2,072,000
ARLEDGE’S PERFORMANCE has been above par since taking over Coastal in October 1995: Shareholders received an 88 percent total return between September 30, 1995, and December 31, 1997, versus 73.8 percent for the S&P 500. Granted, he slipped fractionally below the S&P 500 during the one-year period ending December 31, 1997. But his pay was 21 percent below the market in salary, 50 percent below the market in salary and bonus, and 78 percent below in total compensation.
CONCLUSION — WORTH IT.
Gordon M. Bethune
Continental Airlines — Houston
Base salary $756,000
Salary plus bonus $1,693,000
Total compensation $3,007,000
TALK ABOUT A TURNAROUND. In Bethune’s nearly four years as CEO, Continental has garnered rave reviews from passengers and shareholders, two groups that are hard to satisfy at the same time. Between November 31, 1994, and December 31, 1997, Bethune delivered a 483 percent shareholder return, more than four times the 120.5 percent return of the S&P 500. Yet he is modestly paid, with a salary that is 5 percent below the market, a combination of salary and bonus that is 36 percent below the market, and total pay that is 75 percent below.
CONCLUSION — WORTH IT BIG TIME.
E. R. Brooks
Central and South West — Dallas
Base salary $700,000
Salary plus bonus $1,150,000
Total compensation $1,441,000
ON A SCALE OF 0 TO 100, WITH 0 representing the worst-performing company in terms of shareholder return and 100 the best-performing, Central and South West doesn’t fare well at all. Indeed, its shareholder return in the three-, two-, and one-year time periods was quite poor, rating only 16, 14, and 25, respectively. The only consolation was that Brooks’s total pay put him at 37 percent below the average for already low-paid utility company CEOs.
CONCLUSION — WORTH IT. YOU GET WHAT YOU PAY FOR.
Richard B. Cheney
Halliburton — Dallas
Base salary $1,100,000
Salary plus bonus $3,080,000
Total compensation $5,674,000
THE FORMER U.S. SECRETARY of Defense has been a fine performer during his short tenure at the energy services company, which began in October 1995. Between September 30, 1995, and December 31, 1997, total shareholder return was 170.2 percent, or more than twice the return of the S&P 500. His salary put him 32 percent above the market, and his salary and bonus put him slightly higher than that, but he didn’t receive much in the way of stock options or other long-term incentives. As a result, his total pay put him 42 percent below the market.
CONCLUSION — WORTH IT.
Robert L. Crandall
AMR — Fort Worth
Base salary $767,000
Salary plus bonus $1,767,000
Total compensation $7,111,000
CRANDALL WAS, TO MY WAY of thinking, a genuine American hero. His presumed daily prayer—in which he asked, among other things, “Lead us not into temptation”—was answered; either that or his ever-present Vantage cigarettes overwhelmed his greed glands. Over the years, he has turned aside his board’s desire to give him pay raises, bonuses, and sundry long-term incentives. He knew that if AMR was going to return to profitability, he would have to get a handle on the company’s burgeoning labor costs, particularly the labor costs for his pilots. And he figured that the way to do that was to lead by example. A long time passed, and progress was measured in inches rather than miles, but today AMR is a healthy company, in no small measure a result of Crandall’s sacrifices. His total pay in 1997 was much higher than it had been in quite a few years. Even so, he ended up being underpaid by 38 percent. He has since retired, and he will be sorely missed—at least by me.
CONCLUSION — WORTH IT BIG TIME.
Michael S. Dell
Dell Computer — Round Rock
Base salary $788,000
Salary plus bonus $2,788,000
Total compensation $33,756,000
BETWEEN JUNE 23, 1988, THE day after Dell Computer went public, and January 31, 1998, its founder and CEO beat the S&P 500 by 33 times. If we extend the performance period to July 31, 1998, he beat the S&P 500 by 63 times. That’s better than any of the companies in the S&P 500 and almost twice as good as the number two performer, WorldCom. Face it: Michael Dell is farther out on the curve of performance than Isaac Newton was on the curve of intelligence. Until just a couple of years ago, he was content to pay himself almost nothing, à la Warren Buffett and Bill Gates. But then he decided that he ought to be paid like a working-stiff CEO. In fact, he went the working stiffs one better by taking such large option grants that his total pay in 1997 positioned him at 42 percent above the market. It would be nice if he eased off a bit, but with his performance, his shareholders presumably wouldn’t mind if he began disappearing into the company’s treasury for weeks at a time.
CONCLUSION — WORTH IT BIG TIME.
Thomas J. Engibous
Texas Instruments — Dallas
Base salary $646,000
Salary plus bonus $2,146,000
Total compensation $5,365,000
FROM MAY 31, 1996—JUST before Engibous became CEO—and December 31, 1997, TI’s total shareholder return was 62.8 percent versus 49.5 percent for the S&P 500 during the same period. But Engibous’ pay lags the market substantially: 29 percent below the market in salary, 8 percent below in salary and bonus, and 45 percent below in total pay.
CONCLUSION WORTH IT. A VERY NICE BUY.
Don D. Jordan
Houston Industries — Houston
Base salary $1,000,000
Salary plus bonus $2,080,000
Total compensation $9,058,000
AS I MENTIONED EARLIER, most utility companies pinch pennies with their CEOs, but Houston Industries is different. It pays Don Jordan generously—so generously that, even after adjusting for company size and performance, his total pay package in 1997 put him 221 percent over the market, higher in percentage terms than any other Texas CEO in this article and wildly out of sync with the rest of the industry; the CEO of San Francisco–based PG&E, a utility that has more than twice the revenues of Houston Industries, earns only $2.7 million. In terms of shareholder return, Jordan’s fares a bit better than his rivals’—26.6 percent in 1997 versus an average of 22.9 percent for other public utility chiefs in my study—but performs poorly compared with CEOs generally.
CONCLUSION — NOT WORTH IT BIG TIME. JORDAN NEEDS TO GET A 500,000-VOLT ZAP FROM HIS COMPANY’S GENERATORS EVERY TIME HE REACHES FOR MORE MONEY.
Herbert D. Kelleher
Southwest Airlines — Dallas
Base salary $395,000
Salary plus bonus $567,000
Total compensation $651,000
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