Seeking Alpha
Long-term horizon, dividend investing, long only
Profile| Send Message| ()  

I have a feeling that I'm not going to win many fans this way, but I believe that I can handle any potential push back. If you've been reading through some of the current business headlines, you might have noticed Oracle (ORCL) CEO Larry Ellison is in a bit of hot water. According to a Wall Street Journal article published on September 25th, 2013 it seems that investors are becoming increasingly displeased with Mr. Ellison's pay package. My take? It's a bit overblown. But I suppose I'll elaborate slightly.

Stemming from this argument are two basic objections and corresponding suggestions. The basic objections to Larry Ellison's pay are as follows:

1. Larry Ellison received compensation of $76.9 million in salary, bonuses and options last year

2. Despite a negative say-on-pay vote, Oracle's board decided a change in pay was not needed.

Now for starters $77 million is an absolute bucket-load of money. Compared to any average person around the world, Larry would be exceptionally well paid if he received that in the next half century much less last year. I'm not here to dispute the fact that corporate big wigs make a ton of money - they do. However, the context of the discontent was a bit off putting to me:

"Mr. Ellison received compensation valued at $76.9 million in the fiscal year that ended in May. Oracle's stock rose nearly 28% in those 12 months, but it plunged 9% on June 21 after the company reported flat sales for a second straight quarter."

It seems, at least in some manner, that the recent stock price performance has partially contributed to shareholder discontent. As if $77 million would be acceptable if the stock happened to be taking off. But to me, this weakens the fundamental argument. The last time I checked, a CEO's job isn't to make the stock price go up. A CEO's job is to grow the company and become more profitable. In essence this is what a CEO should be focusing on:


(Click to enlarge)

Now granted you can make the case that one person doesn't have a huge effect on the overall company. But given that Larry is the CEO, it makes sense to at least give him a bit of praise. After-all, if the fundamentals of the business were tanking you would surely give him his fair share of the blame. (Perhaps even more than his fair share) The above graph - in my opinion - is what a CEO should be focusing on; the quality of the business its running. Without doing much investing homework on the company, it appears that ORCL has been doing just fine as a company.

On the other hand - in my judgment - everyday price fluctuations are the precise opposite thing that a CEO should be focused on:


(Click to enlarge)

Larry Ellison doesn't have direct control over this. He can tell people how to allocate surplus funds, find new and innovating solutions or fiercely battle the competition in new markets. What he can't do is go to the market and say "hey, you know ORCL should really be trading around 17 times earnings." Despite the likely egregious compensation package, I find it difficult to side with an argument that says: "he shouldn't make so much because the stock price fluctuates." Other arguments are easy to make, but in my view this one largely discredits an opposing force.

Again, I'm not taking a stance on the legitimacy of the compensation; I'm merely commenting on the huffing and puffing surrounding it. Another argument goes something along these lines:

"Some shareholders complain that Mr. Ellison, who founded the software giant and beneficially owns a quarter of the company's shares…"

Ok, so I cut off the quote before mentioning the demands of "some shareholders." But think about what's going on here. Isn't someone with a .00001% ownership claim in the company telling someone with a 25% ownership stake what to do a bit like a kid telling his dad what do with the family car? Sure there might be an occasion where the kid could be right, but we all know that the dad's not going to be swayed by the kid's vote. Larry Ellison and Oracle are pretty much like a dad and the family car analogy, expect for the fact that - you know - he actually created the enterprise and without him shareholders wouldn't have a company in which to invest. It seems investors would just be happy that he picked them up to go along for the ride.

Additionally, I believe some context would be useful. Let's say that shareholders get their way and next year Larry Ellison does the job for $1 a la Steve Jobs or even for $100,000 a la Warren Buffett. Even if he lounges on his yacht 4 days a week, I think most shareholders would agree that those salaries would be reasonable for someone running a $150+ billion company. So what does this mean for the now victorious and beaming shareholders?

According to Oracle's most recent 10-K the company made almost $11 billion in the last fiscal year; which translates to $2.26 a share. Expressed differently, that $76.9 million number represents roughly 0.7% of ORCL's profit; which in turn would increase earnings per share by about a penny and a half.

Now I can't be certain, but I believe any upward revision of ORCL profit forecasts due to the possibility of this event would be largely exaggerated. That is, a positive market reaction wouldn't make much sense aside from the fact that shareholders are happy. It's not as if this compensation is causing a great drag on performance. But there's more. Let's say that ORCL decides to reward shareholders by paying out this extra $77 million. Note that Larry still owns a quarter of the company. So whether shareholders like it or not, he'd still be getting a handsome multi-million dollar compensation package.

Which brings us to my final point: Larry Ellison holds 1,112,434,580 shares of ORCL stock. With a $0.48 annual dividend, this equates to over a half a billion dollars a year - nearly $17 a second mind you. He could do nothing for the next century and make more money than a handful of the lowest earnings economies. But that's not why investors are upset. They're upset about a sum that's almost 7 times smaller than the amount he gets just for waking up in the morning.

Look I'm not here to defend the super wealthy - they don't need my help. But even if shareholders win this battle, I don't think Larry will be losing much sleep. On that contention, perhaps it is better to dole out the extra cent or two in dividends to shareholders; which simultaneously gives tens of millions back to the guy who you just took it away from. It could be a principal stand or something I suppose, but it's hard to get around the fact that founders and owners tend to reap the rewards of the profitable companies they own. Personally, I don't see much wrong with this: if you want to change the rules, own more of the company. By the way - to offset some of this ORCL negativity - cheers to Larry Ellison and his Oracle Team USA for "mounting one of the greatest sporting comebacks of all time."

Source: The Larry Ellison Compensation Hoopla Is Overblown