Be direct? Fine: He’s overpaid.
If you ask Michael Dell when enough is enough, the answer you’ll likely get, based on his recent behavior, is: never.
Until the fiscal year that ended January 31, 1997, the founder and CEO of Round Rock—based Dell Computer was a model billionaire in the mold of Bill Gates and Warren Buffett. He took little pay, presumably figuring that his huge stock holdings were sufficient reward. But then something happened to fire up his greed glands—perhaps it was the sweet nothings that a lubricious executive-pay consultant whispered into his ear to the effect that he was underpaid compared with most CEOs—and quite soon thereafter his compensation inequity was more than remedied. In fiscal year 1997 he received an option on a stunning 12.8 million shares. The next year, he received an option on another 12.8 million shares. And last year the same thing: another 12.8 million shares.
To the casual observer, a steady grant of the same number of shares per year may be taken to mean that Dell’s pay has remained flat. But nothing could be further from the truth. The real test of the value of a stock option lies not in the number of shares but in the number of shares multiplied by the market price per share on the date of the grant. Because of the huge surge in Dell Computer’s stock price, the value of Dell’s stock-option grants rose by—are you ready for this?—1,137 percent in just two years.
Another way to think about the size of his option grant is to calculate the percentage of the total shares awarded to all Dell Computer employees that went to Dell himself. For his most recent grant, it was 21 percent. In other words, in a company where the tradition is to extend grants to many, many employees, one out of every five shares never made it out of the CEO’s pocket. After checking the option-granting practices of Dell’s major competitors, we could find no CEO who hogged anywhere near that many shares last year relative to his employees. Anyway, even if such a person existed, the facts of Dell’s situation are undeniable: If you add together his salary of just over $844,000, his bonus of $2.6 million, and the increase in the paper profits contained in his stock options between January 31, 1998, and January 31, 1999, his total pay last year was $1.4 billion. That is more than twice the compensation I have ever seen for a single year’s work.
Now, to be fair to Dell, it wasn’t just his outsized number of option shares that contributed to his earning $1.4 billion last year. After all, if you play the game fairly, you can’t earn a nickel from your options unless the market price of your stock rises. To say that Dell’s stock has risen in the past is a gross understatement. Nay, it has soared—higher than the highest eagle. I looked at total returns (i.e., stock-price appreciation plus reinvested dividends) at Dell Computer in eleven time periods since the company went public in June 1988 and found that the company ranked either first or second (behind America Online) among the companies making up the S&P 500 Index. So Dell’s shareholders might be forgiven for not caring just how much pay he carts away.
On the other hand, theirs may be a short-sighted view, for options cost money—and the cost shows up in dilution in earnings per share. In fact, maybe the monstrously and unreasonably large option grants given to Dell were a contributing factor in the company’s fall from grace since January 31, the end of the last fiscal year. At that time, its stock was trading at $50 per share. By July 28, its stock was trading at $42.75. The total return on Dell stock was down 14.5 percent. During the same period, the total return on the S&P 500 Index rose 7.4 percent.
Of course, Dell himself didn’t get off scot-free. Measuring from January 31—and assuming he hasn’t exercised any option shares since then—his paper profit has declined by $292 million, while the value of the nearly 400 million shares he actually owns has dropped by $2.9 billion. Still, it’s hard to feel sorry for him. He should start consulting his better angels. In the long run, he and his shareholders will be better off.