Staley Cates, President of Southeastern Asset Management, provided his view on the compensation package of Aubrey McClendon, CEO of Chesapeake Energy (CHK), during an annual presentation of Southeastern on May 7. In light of our recent critique of the scandalous dealings between Chesapeake and McClendon, we believe it is appropriate to bring you the most eloquent argument to the contrary. Says Staley Cates:
Most recently, like in the last week or so, Chesapeake and Aubrey McClendon are hitting all these compensation lists for highly paid CEOs. There are two big misconceptions in the current discussion around McClendon being number one on that list. First, the payment of 75 million bucks to him is a lump sum allowance towards drilling that applies to the next five years. In other words, it should be viewed as 15 million per year, not 75 million in one year. While in societal terms, of course that’s absurd compared to what teachers make, but it’s less than all of his peers at similar companies like XTO and Devon. But the second point and the most important is the concept of pay for performance. Many of the people in the highly paid list did poor jobs in 2008 and did nothing to de-risk their companies where things, when things were good. By contrast, McClendon made shareholders about 30 billion dollars on three of his big four shale plays. He had paid 4.6 billion for three shale play land positions and last year he sold less than a third of those for 8.6 billion, which implicitly valued what they kept at 25.9 billion. In addition to highlighting 30 billion dollars of value created, these sales brough in a lot of cash to de-risk the balance sheet. Because gas prices plunged in ‘08, his stock did poorly, then it did even worse when his big margin call took him out. At no point did he endanger the company with his bad personal decision, and he certainly couldn’t control gas prices. Over the long term, his company has built the most per share value of almost any company in the world. So for this, it’s probably okay to pay him industry average, but his Board has framed this poorly, then they made smaller bad decisions on peripheral compensation that muddied the water. The bottom line is this is a fantastic company, he has done a terrific job, and if you were on that comp committee, you would have leaned towards rewarding him handsomely for his 2008 performance.
The argument Cates makes obviously does not change the very significant compensation figures involved, nor does it eliminate the company's unjustifiable purchases of the CEO's art collection, hiring of his catering company, and sponsorship of a sports team in which McClendon has an equity stake.
Nonetheless, Staley Cates makes some good points. We respect Cates and his partner Mason Hawkins and believe they are the types of investors who pay attention to the quality and compensation of management. If they view McClendon's compensation as appropriate, we are certainly inclined to soften our stance on it.
Dislcosure: No positions.