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Summary

  • CEO compensation reached a milestone in 2013, despite investor backlash over high-priced CEO pay.
  • Much compensation has shifted to stock instead of cash.
  • A handful of companies give investors return on investment that justifies their CEOs' high pay packages.

CEO compensation reached a major milestone in 2013, with the median pay for a CEO of an S&P 500 (SPX) company surpassing $10 million for the first time in history, according to a joint study from the Associated Press and research firm Equilar. The study attributed the record breaking increase in salary to a widespread adjustment in pay packages that feature more stock rather than cash and stock options.

The new approach to compensation was developed in response to criticism that executive pay wasn't an accurate reflection of performance, and shareholders have expressed disapproval when the two don't match up. Abercrombie & Fitch's (NYSE:ANF) CEO Mike Jeffries knows this firsthand as the retailer's continuing struggles have slashed his compensation by 95% over two years. Mr. Jeffries' pay was reduced from $8.16 million in 2012 to $2.24 million in 2013. Back in 2011, he was paid $48.1 million.

While Mr. Jeffries suffered from shareholder backlash to pay packages, many CEOs benefited heavily from the change. The S&P 500 rose 30% in 2013 - its best year since 1997 - driving up the stock portion of pay packages by 17% to $4.5 million. As a result, the AP reports that a CEO's salary was roughly 257 times that of the average worker.

The S&P 500 has continued to perform exceptionally well this year, passing 1,900 for the first time on May 13 and logging a record closing high of 1,911.91 on Tuesday. And if you agree with Goldman Sach's (NYSE:GS) David Kostin, the index will reach 2,100 in 2015 and 2,200 in 2016, meaning even more money for those at the top.

Since much of the debate surrounding CEO pay centers around a discrepancy between compensation and results, we wanted to see which of these companies with top-earning CEOs are leaders in delivering returns to investors. We began with a list of 49 companies with the 50 highest-paid CEOs [Chipotle (NYSE:CMG) had two] as determined by the AP/Equilar study. We then screened that group for stocks with a return on assets (ROA) above the industry average and a return of equity (ROE) above the industry average.

ROA measures a company's ability to use its assets to generate earnings. Assets are debt and equity, and a company can use both to finance operations. To calculate ROA, you divide net income by total assets. If a company has a high ROA, it shows that the firm is skilled at using its assets to make investments that generate considerable amounts of money. Because ROA can vary greatly between industries, it's best to compare those of similar companies.

ROE is another profitability metric, but it shows how much profit a company can generate with the money it has received from shareholders. It's expressed as a percentage of shareholder equity and is calculated by dividing net income by shareholder's equity (excluding preferred shares). A high ROE indicates that management is effectively increasing the company's value. Again, variation between industries is standard, so you should only compare similar companies.

We then decided to narrow down our list by screening for stocks that are undervalued with a price-earnings (P/E) ratio below 18.00 (the S&P 500's P/E is around 18.04) and have a P/E ratio below the industry average. This valuation ratio shows what a company is trading in relation to its earnings. It's calculated by dividing share price by earnings per share. We were left with six stocks on our list.

1. Aetna Inc. (AET, Kapitall snapshot): Operates as a diversified health care benefits company in the United States. Market cap at $27.66B, most recent closing price at $77/40.

ROA at 4.16% vs. an industry average of 2.26%.

ROE at 15.08% vs. an industry average of 11.58%.

P/E at 13.43 vs. an industry average of 21.32.

Aetna's Mark Bertolini was the 11th-highest paid CEO in 2013 with a salary of $30.7 million, up 132% from 2012.

2. AT&T, Inc. (T, Kapitall snapshot): Provides telecommunication services to consumers, businesses, and other service providers worldwide. Market cap at $182.74B, most recent closing price at $35.21.

ROA at 6.56% vs. an industry average of 4.82%.

ROE at 20.59% vs. an industry average of -2.15%.

P/E at 10.27 vs. an industry average of 16.01.

AT&T's Randall Stephenson was the 32nd-highest paid CEO in 2013 with a salary of $20.7 million, up 10% from 2012.

3. Discover Financial Services (DFS, Kapitall snapshot): Operates as a credit card issuer and electronic payment services company primarily in the United States. Market cap at $27.08B, most recent closing price at $58.08.

ROA at 3.09% vs. an industry average of 2.95%.

ROE at 23.53% vs. an industry average of 20.52%.

P/E at 11.6 vs. an industry average of 14.41.

Discover's David Zaslav was the 8th-highest paid CEO in 2013 with a salary of $33.3 million, down 33% from 2012.

4. Freeport-McMoRan Copper & Gold Inc. (FCX, Kapitall snapshot): Engages in the exploration, mining, and production of mineral resources. Market cap at $35.27B, most recent closing price at $33.96.

ROA at 3.98% vs. an industry average of -9.85%.

ROE at 12.24% vs. an industry average of -2887.97%.

P/E at 14.05 vs. an industry average of 0.

Freeport-McMoRan's Richard Adkerson was the 3rd-highest paid CEO in 2013 with a salary of $55.3 million, up 294% from 2012.

5. Gap Inc. (GPS, Kapitall snapshot): Operates as a specialty retailing company. Market cap at $18.32B, most recent closing price at $41.00.

ROA at 15.45% vs. an industry average of 11.34%.

ROE at 38.59% vs. an industry average of 18.39%.

P/E at 15.7 vs. an industry average of 19.62.

Gap's Glenn Murphy was the 45th-highest paid CEO in 2013 with a salary of $18.7 million, down 24% from 2012.

6. Wells Fargo & Company (WFC, Kapitall snapshot): Provides retail, commercial, and corporate banking services primarily in the United States. Market cap at $266.25B, most recent closing price at $50.55.

ROA at 1.44% vs. an industry average of 0.75%.

ROE at 13.94% vs. an industry average of 9.26%.

P/E at 12.48 vs. an industry average of 15.24.

Wells Fargo's John Stumpf was the 42nd-highest paid CEO in 2013 with a salary of $19.3 million, up 4% from 2012.

Source: The Highest-Paid CEOs Are Making Millions, But What's Happening With Their Companies' Stock?