HP's Executive Comp Is Troubling in a Year of Worker Pay Cuts

Mark Hurd was brought in to take the helm at Hewlett-Packard (HPQ) in 2005.

He's well regarded by Wall Street for turning the company from a bureaucratic has-been to a market leader again. In the first 2 1/2 years of Hurd's tenure as leader, HP's stock increased 137%. For the last two years, however, HP's stock performance has been mediocre, dropping 5%. Although that was better than the Nasdaq, it tracked that index very closely over that period.

While Hurd deserves credit for turning this company around in the early part of his tenure by slashing costs and increasing focus, there are some very troubling aspects about how he, his management team and his board approach executive compensation and governance that suggest investors should steer clear of this Silicon Valley icon until it gets its act together.

Although HP's performance has hit the wall in the past two years, Hurd's pay -- and the pay of his management team members -- has dramatically increased. For 2008, Hurd's total compensation reached $43 million, which made him the fourth highest paid CEO in America for 2008. Hurd's total compensation increased 73% from his $25 million in 2007, even though HP's stock price declined 29% in 2008.

On his senior management team, the sharp compensation increases in 2008 were also noteworthy. CIO Randy Mott's total compensation went up 400% last year to $28 million. Imaging EVP VJ Joshi's total compensation jumped 83% to $22 million. Personal Systems EVP Todd Bradley's total compensation jumped 263% to $21 million. Technology Solutions' EVP Ann Livermore enjoyed a 31% bump in total compensation to $21 million. And CFO Catherine Lesjak got a 49% increase in total compensation to a more modest $6 million.

What also raises eyebrows about these sharp executive raises, aside from it happening in the face of a sharp stock price drop for the year (and the general market uncertainty which remained at the end of the year), is that 2008 was also a year in which these same leaders imposed mandatory 10% pay cuts for other executives and 5% cuts for the rest of HP's workforce. It hardly seems like this select group is shouldering the pain like the rest of the employees.

At Dell (DELL), the magnitude and the general direction of total compensation were far different than HP for 2008. Michael Dell's total comp dropped 9% in 2008 from the previous year to $2 million. Other senior executives on Dell's management team decreased or modestly increased to an average total compensation for the year of $9.5 million -- or less than half of what their HP counterparts took home for the year.

But what should be most rankling to HP shareholders -- and a very good reason to avoid the stock in the near term, as it speaks to the values by which this board and management team operate -- are the perks these executives are asking for and receiving from the board.

For example, last year HP shareholders paid $7,472 for travel expenses related to Mark Hurd's family accompanying him to business meetings. Expenses for Hurd's security service roughly doubled to $256,000. Shareholders paid $500,000 combined in 2007 and 2008 for legal fees associated with bringing over CIO Randy Mott from arch-rival Dell. All senior executives availed themselves of about $18,000 worth of financial advice in 2008 (about four times the amount Dell senior executives received that same year).

Perhaps the biggest bonus for being an HP senior executive is getting access to the fleet of corporate jets for personal use. Shareholders forked over $136,000 for Mark Hurd's personal use of the aircraft in 2008. Todd Bradley's personal use of the aircraft cost $128,000 in 2008, which was actually down from $327,000 worth of personal travel in 2007.

HP explains in its proxy filing that for "purposes of reporting the value of such personal usage in this table, HP uses data provided by an outside firm to calculate the hourly cost of operating each type of aircraft. These costs include the cost of fuel, maintenance, landing and parking fees, crew and catering and supplies."

I think it's completely unacceptable for shareholders to pay for this personal use perk. However, this explanation left me with more questions about these numbers. Who is this outside firm that provided this estimated hourly cost? What in fact was the hourly cost? How do shareholders know that the hourly cost was a fair market rate? Finally, what were these personal trips?

I'm not even sure how it's possible for Todd Bradley to have racked up $327,000 worth of personal travel in 2007. Did he have time to show up for work that year? Call me a conspiracy theorist but isn't it possible that this outside firm vastly under-stated the actual (fair market) hourly cost of using these aircraft for personal use? How will shareholders actually know unless the company releases the flight logs and numbers?

Dell and his senior executives charged no personal use of their aircraft to its shareholders.

A later footnote in the proxy filing for Hurd's personal travel says that the first 25 hours of personal travel are included and are "grossed up." Hurd owes taxes on the value of that perk, but HP's board has decided that HP shareholders should pay Hurd's taxes instead of Hurd.

The same footnote later says that if Hurd's spouse is "requested by HP" to travel with Hurd, then the company "grosses up" that amount, too. The internal process that goes on in determining the company request is not described. It could be as simple as Mark Hurd leaning over and saying to his assistant: "I'd like to go play golf in Hawaii this weekend with the CEO of one of our clients on business. Can you write me a quick email saying that, on behalf of HP, you're requesting that my wife fly with me?"

And don't forget the minor scandal the erupted last January, when blogger Michelle Leder of Footnoted noticed that HP had "grossed up" Hurd $79,814 for taxes he paid on meals involving his family. (Ann Livermore and VJ Joshi also got "grossed up" $10,000 apiece for meals with their families.)

Michelle estimated that, to receive a "gross-up" of this amount, Hurd and his family would have had to run up food bills during the year of more than $243,000.

HP protested, saying it had made an error in its calculations and even refiled its proxy with the SEC. Magically, Hurd's "gross-ups" for his family meals shrunk to $3,285.

HP's error and refiling could have simply been a decision on its part, based on the angry reaction of employees and shareholders, for Hurd and all executives to simply cover these meals and their taxes themselves. Let's face it: It wouldn't have been a hardship for any of them based on their compensation last year.

I don't mind pay for performance. I do mind pay for non-performance and I mind perks for breakfast, lunch, and dinner. And in a year of across the board pay cuts? Where is their shame?

The board is equally or more to blame of course. After all, they approved all this. I was particularly surprised to note that Ken Thompson has served on the HP board for three years now. Thompson is one of the most disgraced CEOs coming out of the financial crisis.

He ended up destroying the fifth largest bank in America, Wachovia, by pushing it heavily into the area of subprime mortgages. When you destroy a company with $8 billion in annual profits, you shouldn't have the right to continue serving as a director and get $300,000 a year for doing so.

It was announced last week that Web pioneer Marc Andreesen would join HP's board. I hope he can help reform the company's governance, but I don't think it's likely. In 2006, Andreesen sold his company Opsware to HP for $1.6 billion -- making him indirectly beholden to Hurd and the rest of the board for his payday. That means Andreesen will likely be another voice around the table tacitly approving whatever Hurd wants to do and pay himself.

Disclosure: At the time of publication, Jackson did not hold any positions in the companies mentioned.

This article was originally published in TheStreet.com

Comments

[Bandwagon2009:]

Bingo. Again I am not for compensation controls, but this is the type of excess which creates a populist uproar and will have the government start looking at general corporate pay practices, rather than at just banks.

Why do the execs of HP deserve more than any other $100B revenue Fortune 500 company with equivalent profit profiles? Is it harder to run HP than it is to run IBM? And come on folks do you really need to spend hundreds of thousands of dollars of my money to fly folks around in a corporate jet for personal use. I fly over 200,000 miles a year, so I understand the pain of flying commercial...but really those amounts are beyond the pale.

Sep 24 09:50 AM

[fredinsky:]

/cheer

Why don't more people notice this? Why arent shareholders up in arms about having to pay for this?

It's greed, pure and simple.

Sep 24 01:41 PM

[jedlimon:]

In a capitalist economy (and I'm not saying that our economy is in truly capitalist) the wealth will be spread unevenly. Contrast that with a socialist economy, which strives to evenly spread the misery.

Sep 24 01:55 PM

[Eric Jackson:]

Jedimon:

I'm as big a free market capitalist as you can find. But, what's going on at HP isn't free market capitalism -- it's crony capitalism, slipping by big pay and perks past unsuspecting shareholders when performance has been poor. Remember the stock is down 5% in the last 2 years.

All the credit for turning this company around 4 years ago, which revived the stock. The senior execs deserve their due and pay for their part in that. My point is that story ended 2 years ago. HP is now an average company (as far as the last 2 years go) -- which looks much better thanks to Dell's stumbles. Therefore, as a recently average performing company, its execs should be paid accordingly and perks should be ended.

Sep 24 02:05 PM

[Dudewithskillz:]

This is beyond absurd! The execs @ HP have lost sight of reality and are just criminal. Does Hurd really believe in his mind that he's deserving of a 73% pay raise over the last couple years?! Meanwhile, most HP employees are not only NOT getting raises for years but even receiving 10% pay deductions. HP used to be a great company to work for and I commend Hurd for how he turned the company around the first year or so at the helm. What we have now, however, is an extreme abuse of power and a blatant trampling on employees as benefits are continually reduced or taken away and shareholders' are lied to. This used to be a great company to work for, but talent is leaving left and right only to be backfilled by starving college grads and off-shored (er..."right-shore" is what HP execs like to call it nowadays) workers willing to work for little pay. Someone please return HP to the admired company that it once was.

Sep 24 02:09 PM

[fredinsky:]

But isn't this how it works, one hand washes the other? All the board members approve outlandish pay/benefits, as most of them are members of multiple other boards, and/or have been/may well be CEOs of other companies. What is the incentive to 'stand up' against the large packages, when that could be cutting into your own payday in the future? The more you 'raise the bar', the better your chances are in the future.

Also, at a greater level, where is 'effective' corporate governance with the consolidation of the Chairman, President, and CEO roles? I submit it limited and the Board merely rubber stamps the wishes of the holder of the three roles.

On Sep 24 02:05 PM Eric Jackson wrote:

> going on at HP isn't free market capitalism -- it's crony capitalism,
> slipping by big pay and perks past unsuspecting shareholders when
> performance has been poor.

Sep 24 02:36 PM

[lets just f...:]

HP's exec compensation just does not fit the company's overall scheme to behave as a good world citizen. This is old-fashioned, cynical capitalism, disguised behind a nice, smooth image and brand. By the time the market backfires, these execs will have retired with money on the bank.

Sep 24 02:48 PM

[User 491320:]

Why do people equate corporatism to capitalism? According to Korten's When Corporations Rule the World, Adam Smith in his capitalist manifesto The Wealth of Nations mentioned corporations a dozen times - each time in a critical light.

He saw corporations as anti-thetical to capitalism.

Socialism transfers ownership of assets from the individual to the government. Corporatism (what people ignorantly call capitalism today) transfers ownership of assets from the individual to the corporation. In pure capitalism, ownership of assets is predominantly held, and kept by, the individual.

It just really irks me when people equate corporatism to capitalism. Seeing corporate parks and realizing a creation of man owns all manufactured goods - I swear, it's like being in The Matrix.

Sep 24 04:43 PM

[friend of a...:]

You are correct, these execs, who have chosen to completely forget their own roots, will retire with more exorbitant compensation -- unlike those long-term employees they have shoved out the door just short of retirement.


On Sep 24 02:48 PM lets just face it wrote:

> HP's exec compensation just does not fit the company's overall scheme
> to behave as a good world citizen. This is old-fashioned, cynical
> capitalism, disguised behind a nice, smooth image and brand. By the
> time the market backfires, these execs will have retired with money
> on the bank.

Sep 24 07:59 PM

[lookingforf...:]

Agree with above comments that it is outrageous and unacceptable that HP management has excessively raised their own compensation and perks (travel and meals) when employees have to take mandatory pay cuts.

How does a stock holder and former employee that recalls the integrity of HP under David Packard, Bill Hewlett, John Young and Lew Platt, and others, let the current board know that we are disgusted and demand rollback of their compensation. What can we hope to achieve?

Sep 24 09:57 PM

[Mike from NYC:]

Another pack of pigs gorging themselves to death, especially after seeing how much it costs to feed these pigs and their piggy families.

Have you no shame?

Sep 25 08:59 AM

[Houston Mom:]

I want to send this link to Mr. Hurd and ask him for a comment. I'm an HP employee, working in my position for the past two years under paid because the salary I was told that I would get suddenly couldn't be provided because of a salary freeze, and on top of that I had my 5% taken away as did all of my co-workers in May. And still, because I take pride in my job performance, I work as if I am receiving the initial pay I was told that I would get... if not even harder because in this economy I'm grateful to have a job. I suppose that's what the board is hoping we all feel. Grateful. I wonder if I can make a grateful sandwich for my son who wonders why his mom can only afford bologna sandwiches for his lunch.

Sep 28 12:05 PM

[estasny:]

The bottom line here is, that stockholders do not ever approve these compensation decisions. They are decided by either the Board or the CEO themselves. Alan Greenspan has a really great chapter in his book about the amount of power that the CEO now has and how little power the stockholder has. Corporate law should be changed to ensure that these people are not autonomously self-governing their own compensation. It's greed, its disgraceful and it's unethical. I don't know how these people came to think its ok to make huge personal gains on the backs of their employees.

Oct 01 08:32 AM

[Retired0216:]

This is the beginning of the end of HP. As soon as the economy improves and jobs open up, these frustrated employees who got pay cuts will be fighting each other to get to the door. The best ones will go first followed by many others. The morale must terrible around there. The talk is likely about Mr. Turd's compensation and not work issues as it should be.

I bought my last HP product now that I read this.

Retired0216

Oct 07 02:53 PM

[Ideal:]

Wealth without conscience...

- Mahatma Gandhi

Oct 09 09:08 AM

[Disgruntled...:]

Cost cutting has gone even further at HP: Home workers (Tele workers) are no longer being reimbursed for Internet connection AND telehone subscriptions/usage for buisness telephone lines installed at home. HP finds it ok for homeworkers to use the private home phone to make business calls with the use of an AT&T card. The fact that incoming business calls could be anwered by family members or that conference calls from home will leave other family members at home without a phone, seems not an issue for HP. Just another topic that will negatively affect the Voice of the Workforce results for HP (which are already bad).

Nov 12 11:56 AM

[GIANTWEED:]

This is the reason why a top management job is aspired for. These guys have earned it. Mark Hurd, in particular has made HP sexy again. I'm sure Eric Jackson has a vested interest in spreading poisonous nonsense like this
(Full disclosure: I am an HP employee and my salary has been frozen, cut and frozen again since Feb 2008, inspite of getting excellent performance appraisals and a promotion)

Nov 29 08:40 AM