Apple, Dreamworks, Yahoo!: Do $1 a Year CEOs Really Boost Stock Value?

The following headline piqued our curiosity: $1 a year salary CEO: Good for Stocks? The author of the posting speculated that aligning pay practice in step with stock price performance provides a sufficient incentive to the CEO to execute the financial stewardship necessary for shareholder value creation.

In support of this argument, the author then went on to analyze “the returns of six of these ‘dollar a year stocks’ for 2006"; it turns out that they were all up, with the exception of Yahoo (YHOO), and, according to the blogger, "if you exclude Yahoo from the list, the average return for the group was up 14%, higher than the return for the NASDAQ at 8 percent and the S&P 500 at 12 percent."

Aside from the statistical problem inherent in making inferences about stock performance from a finite population of six CEOs, when the 10Q Detective did its Due Diligence, we found that the purported one-dollar a year CEO was more myth than reality:

Apple, Inc. (APPL)/ 13 percent/ CoFounder & CEO Steve Jobs' current salary at Apple officially remains $1 per year, although he has traditionally been the recipient of a number of lucrative executive perquisites approved by the Board, including a $46 million Gulfstream jet in 2001 and just under 30 million shares of restricted stock in 2000-2002.

In 2003, Apple granted Messer. Jobs an additional 10 million shares (now fully vested). Oh, and remember that Gulfstream? In March 2002, the Company entered into a Reimbursement Agreement with Jobs for the reimbursement of expenses “incurred by Mr. Jobs in the operation of his private plane when used for Apple business.” During 2005, the Company recognized a total of $1,075,545 in expenses pursuant to this reimbursement agreement related to expenses incurred by Mr. Jobs (in 2005).

Steve Jobs also served as CEO of Pixar, the computer animation studio behind such animated feature films as Toy Story, Monster’s Inc., and Finding Nemo. On January 24, 2006, the House of Mouse agreed to purchase the studio, in an all-stock transaction worth $7.4 billion.

Accordingly, at the effective time of the merger, the 60.0 million share of Pixar common stock held by Mr. Jobs were converted into 138 million shares of Disney, making Jobs the largest individual shareholder, with approximately 6.3% of the outstanding shares.

Steve Jobs was ranked 49th on Forbes 400 Richest (2006), with a net worth in excess of $4.9 billion. [Ed. Note As the price of Apple shares have effectively doubled in value in the last year, Jobs’s estimated net worth is north of $5.4 billion.].

Job’s is well-compensated for someone whose salary at Apple officially remains one-dollar per year.

DreamWorks Animation SKG (DWA)/ 18 percent / CoFounder Jeff Katzenberg has served as CEO since October 2004. The animation studio, creator of hits like Madagascar, Shrek, and Shark Tale, revealed in its last Proxy Statement that Mr. Katzenberg’s annual salary is one-dollar per annum, although he did accept $17.7 million in performance (restricted) stock units and options in 2004 (which means he “earned” $5.9 million per annum, for 2003 – 2005, not $1.00 per year)!

Mr. Katzenenberg beneficially owns 36.4 million (of Class A & Class B) shares, worth an estimated $109.2 million. In addition, 618,571 shares of Class A restricted stock with performance-based vesting conditions granted to Mr. Katzenberg at the time of its October 2004 IPO will vest in the first quarter of 2009. As of January 12, 2007, these shares had a value of $18.53 million (based on $29.96 per share, the closing price of DreamWorks Animation’s Class A Stock on the NYSE on such date).

In December 2005, Messer. Katzenberg entered into an agreement at his initiative and request, which waived equity awards—in aggregate $13.0 million-- he would otherwise have been entitled to receive under his employment agreement, for the fiscal years ending December 31, 2006,2007, and 2006. Before our readers begin to believe that Messer. Katzenberg is a worthy hero right from central casting, sacrificing for the good of the many, read on:

In December 2005, DreamWorks was in financial trouble—year-over-year, sales, share-net, ROA, and the share-price had fallen 57.1%, 75.1%, 77.2%, and 33.3 percent, respectively,

Mr. Katzenberg serves on the boards of The Motion Picture and Television Fund, The Museum of Moving Image, Cedars-Sinai Medical Center, California Institute of the Arts and The Simon Wiesenthal Center. He is co-chairman of each of the Creative Rights Committee of the Directors Guild of America, and the Committee on the Professional Status of Writers of the Writers Guild of America. In addition, he helps with fundraising efforts on behalf of AIDS Project Los Angeles, which provides its clients with medical and social services.

Messer. Katzenberg had to choose between his social responsibilities or stewardship of DreamWorks. He chose the former.

Katzenberg ‘voluntarily’ disavowed his future compensation to accommodate the hiring and compensation of Lewis Coleman, former CFO of Bank of America, appointed President of DreamWorks Animation on December 5, 2005.

Pursuant to his three-year employment agreement, Mr. Coleman earns an annual salary of $1.25 million. He was also awarded an initial performance grant of 82,998 shares of restricted stock.

Kinder Morgan (KMI)/ 16 percent/ On October 7, 1999, the Board entered into an employment agreement with co-founder Rich Kinder, pursuant to which he became Chairman and Chief Executive Officer of this energy services company. Mr. Kinder, at his initiative, accepted a salary of $1 per year to “demonstrate his belief in the long term viability” of the Company. Mr. Kinder has periodically renewed this one-dollar per year pledge.

KMI owns the general partner interest of Kinder Morgan Energy Partners (KMP), one of the largest publicly traded pipeline limited partnerships in the United States. This an energy storage and transportation company operates either for itself or on behalf of Kinder Morgan Energy Partners, L.P., approximately 43,000 miles of refined petroleum product pipelines and approximately 150 terminals. Combined, the companies have an enterprise value of more than $35 billion.

Although this poster boy for “prudent’ executive compensation pays himself only one-dollar a year, he did earn $85.0 million in corporate dividends last year.

Rich Kinder, 62, ranked #98 on Forbes 400 Richest Americans list for 2006, with a net worth in excess of $2.8 billion, is leading an investor group in a $15 Billion Buyout Offer (107.50 a share in cash).

[Ed. note. Prior to the announced deal, KMI stock was trading at $83.00 per share, down $8.00, or 8.8% year-to date.]

Yahoo! (YHOO) / -(38) percent/ Given the precipitious decline in the share price of online service provider Yahoo! Chairman & CEO Terry Semel ‘voluntarily’ reduced his annual salary from $600,000 per annum to one-dollar. No word, however, if Messer. Semel is willing to forego any of the $19.2 million he received in long-term compensation (in 2005 and 2004 –stock options and performance stock units).

Do not be fooled by Semel’s seeming humility; for, including exercisable stock options, Semel beneficially owns about 18.4 million, or 1.3%, of Yahoo!’s stock, worth an estimated $541.9 million.

And, on May 31, 2006, as an “incentive” to sign this highly touted one-dollar employment agreement, the Board granted Mr. Semel a stock option to purchase 6 million shares of the Company's common stock at a per share exercise price of $31.59 (the closing trading price that day).

For each of 2006 through 2008, too, Mr. Semel will also be eligible to receive a discretionary annual bonus payable in the form of a fully vested non-qualified stock option for up to 1 million shares with an exercise price equal to the closing trading price of the Company's common stock on the date of the to-be issued grant(s).

“The big print giveth and the small print taketh away” – Tom Waits, American singer-songwriter

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Comments

[Tommo_UK]

Ok Mr "10Q Detective," so AAPL grew its PPS 13% last year. But for the last 6 years, AAPL has grown its PPS about 1200%. Now how does that compare with the other companies you mention? I think that SJ's compensation, all extras included, compares pretty modestly in terms of compensation cost per $ increase in PPS, when compared to the others.

A 1200% increase in shareholder value. Sod the Lear Jet. Give him a 747, all trimmings included, with gold-trimmed engine cowlings, and backdate his options to 2002 for all I care. The guy is worth 10x his weight in gold.

[john olagues]

Dear Dave:

Terry Semel did better than you suggest.

He pocketed $450,000,000 net from exercises of options and sales of stock.

He still holds about $300,000,000 -320,000,000 in fair value of un-exercised options wih the stock at 29.45.

Some of those options were backdated and spring loaded. Most of he costs to Yahoo were not recorded against earnings.

If you want the details of his options grants you can go to optonsforemployees.com....

John

[stocker blog]

HI Dave

I liked your thorough analysis about how the $1 a year guys really get paid. However, when I posted my "$1 a year salary CEO: Good for Stocks?"article, it wasn't meant to be a scientific analysis, as I would need a sample of at least 30 to determine statistical significance. As you are aware, the total population of companies with $1 a year CEO's is very small.
My article was more of a general observation using the assumption that if the CEO's are compensated primarly by price performance (either options or restricted stock), then it would seem that the stock performance should be good.
If enough executives are paid this way, then it can actually add pennies per share to company earnings. National Student Marketing Corp. tried this in the 1970's with ALL their employees, and it helped the earnings and stock price enormously (before the company went out of business).

Stockerblog